Earnings Call Transcript - PGR Q2 2024

Doug Constantine, Director of Investor Relations

Good morning, and thank you for joining us today for Progressive's Second Quarter Investor Event. I'm Doug Constantine, Director of Investor Relations, and I will be the moderator for today's event. The company will not make detailed comments related to its results in addition to those provided in the annual report on Form 10-K, quarterly reports on Form 10-Q, and the letter to shareholders, which have been posted to the company's website. This quarter includes a presentation on a specific portion of our business, followed by a question-and-answer session with members of our leadership team. The introductory comments and the presentation were previously recorded. Upon completion of the previously recorded remarks, we will use the balance of the 90 minutes scheduled for this event for live questions and answers with the leaders featured in our recorded remarks as well as other members of our management team. 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 today's event. Additional information concerning those risks and uncertainties is available in our annual report on Form 10-K for the year ended December 31, 2023, as supplemented by our 10-Q reports for the first and second quarters of 2024. We will see discussions of the risk factors affecting our business, safe harbor statements related to forward-looking, and other discussions of the challenges we face. These documents can be found via the Investor Relations section of our website at investors.progressive.com. To begin today, I am pleased to introduce our Personal Lines President, Pat Callahan, who will kick us off with some introductory comments. Pat?

Pat Callahan, Personal Lines President

Thanks, Doug. Good morning, and thank you for joining us today. I'm Pat Callahan, Personal Lines President, and I'm pleased to introduce the topic of today's presentation: direct acquisition. Our vision is to become consumers', agents', and business owners' number one destination for insurance and other financial needs. To achieve that vision, we strive to be available where, when, and how consumers want to shop for their insurance and to optimize our experiences to meet the needs of individual consumers. A foundational element of this optimization is to understand the differences between our agency and direct channel customers. Agency customers often choose that channel because they value the professional local counsel, ease of shopping, breadth and depth of product, and carrier options available through independent agents. These customers often have more complex insurance needs, and as such, the expertise provided by an agent coupled with the personal relationship agents build with their customers gives the customer peace of mind. The direct channel customer frequently places higher value on the convenience and ease of access afforded through self-service 24/7 shopping and servicing. They often have less complex needs and feel comfortable making insurance decisions after educating themselves through the tools that we provide online, supplemented by the knowledge of our trained and licensed direct consultants. The customers, segmentation, and economics of these two auto insurance distribution channels are fundamentally different, which is why we've developed, deployed, and optimized distinct personal auto products for each channel. The result of these distinct products is not necessarily higher or lower rates in one channel versus the other, as we target similar combined ratios but instead, delivers products that better align our rates with the different indemnity and expense characteristics of each channel. There are three primary distribution channels for U.S. auto insurance: captive agents, independent agents, and direct-to-consumer. We write through both independent agents where we're the market share leader and through direct where we're the number two writer, enjoying over 25% and growing market share. The independent agency and direct channels make up the majority of the U.S. personal auto insurance market and continue to grow faster than the captive market. The current hard market has distorted some long-term channel trends as certain large competitors in these channels either shrink significantly or grow rapidly amid large underwriting losses. These dynamics have presented an opportunity for us as prospects have been released to the market and rate increases from less well-segmented carriers have driven competitors to be adversely selected. On the right side of the screen, you'll note just how critical our dual-channel strategy has been to achieving our continued market share growth. But today, we're going to spend time focusing on what drives our success in the direct channel. Insurance is a trust-based business and we build that trust and take share from competitors within the direct channel through the strength of our brand, the power of our segmentation, the breadth of our media presence, and the experiences we deliver to our customers. Our presentation will focus on two aspects of the direct channel: media and customer experience. We think about direct customer acquisition has a funnel with a virtuous cycle, similar to what we've previously shared from a product segmentation perspective. Media sits at the top of this funnel, where our online presence and award-winning advertising are deployed and optimized by our world-class in-house media team. Our advertising delivers billions of impressions every year, which in turn brings more than 100 million visitors to progressive.com annually. The experience on progressive.com turns those initial touches into tens of millions of quotes and ultimately, millions of sales annually. As we put more prospects through our funnel, we obtain the data to optimize the experience which in turn improves the media economics at the top of the funnel, which again, leads to further optimization. Our scale means this cycle is difficult for competitors to replicate, which has helped to continue to feed our market share growth. Today, our direct media business leader, Jay VanAntwerp, a 20-year Progressive employee, will provide insights on how we optimize our media spend and why investors should feel confident that when we invest a dollar in media, it's a dollar well spent. After Jay, Dave Krew, our acquisition experience business leader, will join us. Dave has led our acquisition experience team for 12 of his 34-year Progressive tenure. He will walk us through how progressive.com has evolved from a basic Web 1.0 site back in the 1990s to become the number one ranked insurance website today. And how his team enables us to continue to increase the complexity of our rating and our products while simultaneously improving yield through our acquisition funnel. Thanks again for joining us today, and I will now hand it over to Jay.

Jay VanAntwerp, Direct Media Business Leader

Thanks, Pat. Today, I want to begin by talking about our Media Group and why we believe it is a competitive advantage for Progressive that would be incredibly challenging for our competitors to replicate in the near to medium terms. One of the distinct things about Progressive is that we buy almost all of our media using an in-house team. The media channels we buy include mass media like TV and radio, programmatic display, paid social media, direct mail, and paid search. Virtually any type of advertising or demand generation that is purchased, our media team buys. We believe that this makes us unique, not just in the insurance industry, but the advertising industry overall. This is not a new development. The decision to buy media in-house was made almost at the very beginning of our efforts in the direct channel in the mid-1990s. At that time, our demand generation efforts were focused on television and direct mail. But since then, our Media Group has evolved with the media landscape. As digital channels like programmatic display and paid social media have become more prominent, our media team has given appropriate focus to those areas. And using Progressive's risk learn, grow philosophy, we develop viewpoints on how to buy those media types efficiently. So our current capabilities are the result of an evolution of over three decades. Given how long we have been doing this and how ingrained the Media Group is within the company, it would be very challenging to assemble a team from scratch that would be able to efficiently deploy spend in all media channels and at our current scale. What are some of the advantages that having an in-house team gives us? Our focus relative to an external agency is very important. We focus on one brand and one small set of products. This allows for a level specialization that an external agency would be challenged to match. We are able to leverage one of Progressive's core strengths, which is analytics. Progressive has a very strong history and track record of analytical innovation. We draw on those capabilities and building our analytical team. Another advantage our in-house team has over an external agency is product knowledge. Our analysts typically come from other areas of the company. They understand our product. They understand the dynamics of the auto insurance market. They're able to bring the insurance context to how they look at media in a way that no external agency would be able to replicate. If you combine the focus with the analytics, the result is custom models built specifically for Progressive using first-party data we would never make available to an external third-party. All of our models are proprietary, using our data to evaluate only our brand and the products that we sell as opposed to a one-size-fits-all model for multiple clients that you might get using an external agency. This has been incredibly impactful. We have leveraged our analytical horsepower and first-party data to dig into all of our spend and determine the relative efficiency and lifetime value of all the different media channels. This then gives us a guide for the optimal places to spend more when adding budget and when reducing the budget, so we can optimize for Progressive specific needs. Progressive is a leader in segmentation for auto insurance pricing; it is similarly powerful when we bring these skills to how we buy media. Another advantage is the ability to quickly flex the budget. Our budget is flexible within controls, which I will talk about later in the presentation. We are willing to increase the budget if there is efficient opportunity and available margin within our calendar year 1996 combined ratio target to fund the additional spend. Also, if there is a need to reduce the expense ratio in order to hit our target for 1996, we can do that quickly as well. Our analytics show us how to optimize sales, both when adding and when cutting. Furthermore, we are able to flex our budget up and down extremely quickly. Another advantage is that we have aligned incentives. Like other Progressive employees, our media teams are on our gainshare annual bonus program. So they benefit from the success of Progressive in a way that a media agency that is compensated on commission wouldn't. A media agency is primarily incentivized to encourage clients to spend more on media in order to increase commissions. Our media team is focused on the core strategies of Progressive, primarily profitable growth. We also have lower overhead costs than an equivalent program that relies on external media agencies. So not only are we buying the media smarter, but we are also doing it at a lower cost. A 5% commission on $2 billion in spend, which is about what we spent at our peak in 2020, would be $100 million. Our team is less than 100 people with the total annual cost for this team considerably lower than $100 million. Finally, and really cannot be overstated, our team has very strong relationships within Progressive that no external agency would be able to develop. While we work closely with our marketing team in the way most agencies would, we also work directly with state product managers and general managers as well as many other areas of the business. We also have a very firm understanding of the business that allows us to credibly show how what we do in the Media Group benefits Progressive. As I talk more about some of the accomplishments of the last decade, I think it would be unlikely that an outside agency would have been able to make the case to be as aggressive as we were leading up to our peak spend in 2020 and could an outside agency move as quickly to make cuts as we did in 2023. To summarize, we feel that our Media Group and the capabilities that we have built over 30 years have contributed greatly to Progressive's success. I will talk specifically about the last decade and how we have been able to support Progressive's goal of growing as fast as possible at or below a '96. Before talking about Progressive specific spend over the last decade, it is worth providing context about the insurance industry ad spend over the last 30 years because it has shifted significantly over time. Progressive Direct and other directors became more aggressive in the mid-1990s, with the emergence of the direct-to-consumer business model for auto insurance, which spurred strong growth in insurance and advertising spend. From 1996 to 2003, we saw a 10% compound annual growth in Media spend. This is a high rate of growth, and yet that rate of growth increased about 50% from 2003 to 2011, with the compound annual growth rate rising to 15%. Between 2011 and 2017, industry ad spend slowed to only 2%, largely driven by agency distributed companies whose economic models didn't allow them to keep pace with the direct-to-consumer companies who continued to have double-digit growth rates during this time period. Starting in 2017, growth in advertising ramped up again from 2017 to 2021, with the industry compound annual growth increasing five times from the previous period to 10%. We will talk about some of the dynamics happening at that time that may have spurred the next round of growth. But there is a strong argument to be made that Progressive was the catalyst as we started spending more at that time and competitors followed suit. As we know, overall industry profitability issues in 2022 and 2023 led to a contraction in ad spend as the compound annual growth rate for those two years was negative 20%. That was the overall industry landscape. Now, let's talk about Progressive specifically. Prior to 2017, Progressive's media spend was under $700 million and we were consistently around 10% of total industry spend. In 2015 and 2016, we really hit our stride in using analytics to generate insights for how to buy media more efficiently. We were able to come up with a common metric between all media types that allowed us to better evaluate where our spend was efficient and where it wasn't. Also during this time, we were coming out of a hard market. Similar to today, we reacted in advance of the industry and aggressively raised rates, such that our loss ratios were trending below our '96 combined ratio target. As such, we had available margin to fund a higher level of spend as a percentage of premium, while keeping our combined ratio below '96. Starting in 2017 and continuing for the next three years, we were able to operationalize the advances in media efficiency, which allowed us to spend significantly more while still maintaining our target economics with the increased spend funded by available margin. We went from $650 million in spend in 2016 to almost $2 billion in 2020, a tripling in just four years. You will remember from earlier slides that during that four-year period, there was also an increase in industry spend, which I hypothesized was spurred by our increase in spend. When we started to spend more, competitors noticed and also began spending more. This resulted in that period of growth from 2017 to 2021 for the industry. While our competitors did spend more during that time, we increased our media spend much faster than the industry. Resulting in an increase in our percentage of total industry spend from 11% in 2016 to 20% in 2020. To summarize, we tripled our spend in four years and almost doubled our share of the industry spend. When our losses are higher than target, we look to cut expenses with the goal of meeting our '96 combined ratio target until we have adequate rate. One of the largest and most flexible ways we can control our combined ratio is through the media budget. As severity trends rapidly steepened starting in 2021, we cut the Progressive media budget three years in a row from 2021 through 2023. Prior to this period, going back 30 years, we had never cut the budget two years in a row. So this was an unprecedented time as was the increasing size of the cuts. We went from almost $2 billion of media spend in 2020 to about $1.3 billion in 2023. These cuts happened at a time when the overall industry was cutting as well. So even with the significant cuts, the statutory data shows that we were the biggest vendor in the industry in 2022 and 2023. And our share of the overall spend within the industry was almost flat, going from 20% of spend in 2020 to 19% in 2023. All of these dynamics would have been impossible to manage without the capabilities of our in-house team. Our insights, analytics, and relationships with the business allowed us to make the case for the increase in spend up to 2020 and then quickly cut significant amounts particularly in 2023 to support the overall company goal of hitting 1996. I've talked about the efficiency of our spend, but have not necessarily defined what that means. We do have a number of controls on our spend. The primary one is that our cost per sale has to be at or below our target acquisition cost. If that is the case, then we would say that the spend is beneficial. Cost per sale is our total acquisition costs divided by direct sales. That is the largest part of our total acquisition costs. Other costs include the expenses related to running our call centers, development of our creative, maintaining and improving our online quote experience, the compensation of our marketing and media groups, among other things. Targeted acquisition cost is how much we charge customers for acquisition expenses over the life of their policy plus margin adequacy. It's the amount we price into the policy for acquisition. This amount is adjusted up or down based on where our margin is relative to targets. We need to make sure that the sales we are bringing in are at or below the acquisition expenses we price into our policies. That's the primary control in our spend, but there are others. Another constraint is that the direct auto lifetime combined ratio has to be at or below 96, meaning we have to be confident that the new business we are writing in a state is going to meet our profitability target over the life of the policy. As we talked about in our second quarter 2023 Investor Relations call, direct channel policy acquisition costs are expensed in the first term of the policy and every subsequent term of the policy is collecting the premium necessary to cover the initial acquisition expense. If the acquisition expense is too high, such that the premium collected over the average lifetime does not cover initial acquisition expense, indemnity expense, and other expenses, we shouldn't be spending money to acquire those policies. We need to be able to service our customers well. This is primarily for claims. There are times when the growth in the state is greater than our claims staffing can keep up with. So we will turn media off in order to slow demand and allow our staffing to catch up. Another constraint is our focus on achieving an aggregate company-wide calendar year combined ratio at or below a 96. We will not spend additional media dollars if our calendar year 96 target is under threat. Even if there may be opportunities for efficient media spend. And the final control on our spend is an efficient incremental cost per sale. That is a relatively new constraint. Incremental cost per sale is our measure of whether our spend is bringing in a quote or a sale that is over and above the ambient shopping rate. We are able to measure that at a pretty granular level. And we are able to use that metric to evaluate efficiency within a channel as well as between channels. This chart shows the relativity of actual cost per sale versus the target acquisition cost. We want this metric to be at or below zero. At zero, it would mean that our actual acquisition cost is equal to our target acquisition cost. You can see that even during the run-up in spend from 2016 to 2020, that we kept cost per sale below the target in some years by as much as 15%. Even as we deployed three times the level of spend, we brought in enough sales to hit our target economics and for that extra spend to be completely paid for with the premium that was generated. 2023 was certainly an outlier given the size of the cuts. When we cut spend, we cut the least efficient areas first. After the cuts in 2023, we were left with only the most efficient spend as well as a relatively high level of ambient shopping due to the hard market. So cost per sale was significantly below the target acquisition cost in 2023. Even with a significant rise in spend 2024, the ratio has increased, but is still well below our targets. This means that so far in 2024, we are adding policies very efficiently. And this is true for two reasons. First, year-to-date, many of our competitors have remained at depressed levels of media spend. This means that we are able to get a large amount of media impressions for less. Additionally, when those impressions turn into quotes, we're converting them at a good pace, suggesting cost competitiveness. Another view of efficiency is to look at the upfront acquisition expenses as a percentage of the lifetime earned premium that is expected from the sales. From 2016 to 2020, our acquisition expenses as a percentage of premium went up but stayed in the 7% to 7.5% range. As with the cost per sale versus target acquisition cost, this metric did fall as we made cuts in 2023 and is up in 2024 as we've increased spend. Again, this suggests that in 2024, even as we have significantly increased our media spend, we're still bringing in prospects at very high efficiency. We have shown cost per sale versus target acquisition cost in order to illustrate that even with the run-up in spend, we hit our target economics. This chart illustrates the benefit that we got from increased spend a little more clearly. This chart shows an index of media spend anchored to 2015 as a 1.0 on the horizontal axis and an index of direct auto sales anchored to 2015 on the vertical axis. Each dot represents a different year. You can see that even with the increase in spend, we were able to increase sales commensurately. As with the other charts, 2023 is an outlier. In previous calls, we were often asked about ambient shopping and how we gauge it. The 2023 number is a clear indication of the elevated amount of ambient shopping last year. Despite spending below 2019 levels, we sold more direct new policies than in any year in our history. This is because rates were rising across the industry, prompting customers to shop at and eventually purchase from Progressive. We have talked about how the budget cuts were a key tactic in helping Progressive hit the 1996 combined ratio in 2023. This chart shows acquisition expenses as a percentage of direct auto earned premium. You can see the increase in acquisition expense as a percentage of earned premium going from under 9% in 2016 to almost 13% in 2020. I had mentioned before that one of the keys to our ability to increase the spend the way that we did was available margin to be able to pay for the extra spend, while still hitting profit targets. As we reduce spend starting in 2021, the acquisition expense ratio dropped from 13% to just over 6% in 2023. This cut reduced the company-wide combined ratio by about 2.8 points in 2023 and was a big factor in our ability to exceed our 1996 calendar year target. Year-to-date 2024 we have increased spend, so now our acquisition expense ratio is back to about 10%. Note that the 2024 ratio on the chart is a year-to-date number. The first-quarter acquisition expense ratio was below that of the second quarter. As margins continue to be strong, we will look for opportunities to grow the business as much as possible. While we only get statutory spend data annually, we do have some ways to gauge Progressive's spend in relation to the rest of the industry during the year. There are a number of third parties that provide a measure of what individual competitors are spending in select media channels. This chart shows an index created using iSpot data as a proxy for year-to-date TV spend and SensorTower's Pathmatics data as a proxy for year-to-date programmatic display and paid social media spend. We have set the Progressive spend at a 1.0 index and show the next four largest spenders in the insurance industry. You can see that based on this data, Progressive Media spending is considerably higher than others. Though this is only a partial picture of all the advertising done in the industry, it does provide a useful data point suggesting Progressive is outspending competitors by a significant margin. That increased spend is paying off as we are delivering the necessary sales to pay for that spend. This chart of spend versus sales is the same as the one I just showed, but each dot represents only the first half of the year. You can see that 2024 is above the historic trend line with record spend and record sales. This chart suggests we are getting a strong return on our media spend to date. In conclusion, Progressive's in-house media team is a unique competitive advantage that has driven significant value for Progressive since the inception of the direct business. In the last decade, the media team has been instrumental in increasing media spend efficiently, which has resulted in greater market share. This team also plays a huge role in managing to our 1996 combined ratio through expense management and cutting spend to support the goal of a company-wide 1996 combined ratio. Today, the team is laser-focused on profitable growth and is deploying record spend amounts in the first half of 2024, and this has produced the largest first half direct sales volume in our history. While we focus on the relationship between sales and media spend as a measure of efficiency, it is important to point out that many other areas of the company work in conjunction with our media team to deliver sales. Everything from the award-winning creative produced by our marketing team to industry-leading product and pricing make our jobs easier. Another key area is the team that receives the online traffic we generate at the top of the funnel and converts it into quotes and sales. That team is the direct acquisition experience team, which has ownership of progressive.com and the online quote funnel. In the same way that the media team has evolved over decades, the acquisition experience team has been a competitive advantage for Progressive since we sold our first policy online over 25 years ago. My colleague, Dave Krew, leads that group and is going to speak to their part in the funnel. Dave?

Dave Krew, Acquisition Experience Business Leader

Thanks, Jay. Once Jay and his team get prospects to engage with Progressive, the direct acquisition experience team works to turn digital touches into productive experiences for the consumer and then profit for Progressive. My team is focused on progressive.com and our personal lines auto and recreation aligned direct sales funnels. There are parallel roles that focus on property and commercial lines applying similar concepts. Our goal is to deliver incremental lifetime underwriting profit each year by optimizing our digital experiences and periodically delivering breakthrough step functions in the evolving digital education, quote, and purchase process. The term lifetime underwriting profit or LUP for short refers to the sum of expected profit dollars generated from the incremental sales we produce. I'll touch more on why that's important later. To do what we do requires very close collaboration with adjacent organizations: IT, product, CRM, and marketing in particular. It also requires a diverse set of subject matter experts on our central team. We work to connect the dots between deep insurance knowledge, the digital agency mindset, data analytics, data science, and process management. Another way to say this is a real balance of right and left brain disciplines come together. And in my opinion, that's where the value has had. Like the media team, we've been at this for several decades. Let's start with the origin story. There have been a number of digital firsts in our history. We were online in 1995 and started quoting and selling online soon thereafter. We started planning for scale, had segmented operational data and tracked results all before the turn of the century and 15-plus years prior to the coining of the term insurtech. Taking the timeline a bit further and deeper, as I said, we were online in 1995. We first showed comparison rates online in 1996, sold our first fully digital auto policy in 1997, and expanded our online footprint from auto to recreational lines in 1999. As we grew, we set out to innovate in the user experience space with several end market innovations, such as Name Your Price. We also invested in our mobile quoting capabilities. Starting in 2017, we began to leverage advanced technologies to personalize user experience and increased funnel throughput. We also continued investing in other value-adding educational content and a chatbot. Which leads us to today selling millions of policies untouched by human hands each year plus a substantial number of digital-assisted sales that quote online and purchase over the phone. While over half of those digital sales happen on mobile devices. Here's a look at today's digital funnel. There are over 100 million visits to progressive.com annually. These leads to tens of millions of quote starts and ultimately, millions of digital sales. The screenshots on the right of the slide are representative waypoints as a prospect navigates from our homepage into an auto quote in this case, and ultimately a purchase. A 1% movement in throughput generally contributes sales lift that equates to tens of millions in profit dollars. To that end, we invest significant talent and resources in the user experience, technology, and optimization. These incremental sales are high margin given the media team already gets the prospects in the door. To be clear, we often count sales for ease of communication, but the underlying analysis of lift generally contemplates contribution of lifetime underwriting profit or LUP as noted earlier, given all the policies are not the same and trade-offs can present themselves. Optimizing motorcycle versus auto lift in a multiproduct experience is one example of such a LUP-based tradeoff. I'll now transition from our digital history and scale to some of the how of what we do. Our digital experience is, in effect, the front end of our highly segmented product. Our product continues to evolve and move faster, which is a very good thing but using the metaphor on the slide requires our digital customer acquisition train to stay sync with an accelerating product train. Our product requires a complex interview for infrequent transactions with many options. We have decades of experience delivering an accurate online quote and optimizing the user experience simultaneously. Along the way, we've evolved a set of tactics and principles that help us make informed trade-offs. We often run pilots ahead of product changes to assess the best way to gather a given rating input. And by best, we mean most accurate and easiest for the consumer. We've also evolved a living analytical framework to assess and target abandoned points as our user experience and product evolve together. As stated a bit earlier, there is much value to be had at the interface of deep insurance knowledge and deep user experience knowledge. To be clear, the fastest quote is not our goal. Optimal use of the consumer's time is. An instant or quick quote generally implies assumptions in downstream rework. Not to say we don't experiment, in fact, we have a motorcycle quick quote pilot in market in several states as we speak, as well as embedded rates with automotive and financial partners. But the science needs to include rate accuracy in a total end-to-end look at the customer experience from quote to purchase to onboarding. Regarding that science, our scale affords lots of data to optimize new experiences via A/B testing. As part of that testing, we look for sales and LUP lift, as one might expect, and also come full circle to look at the impact of user experience on product mix. How you ask and display the question can matter. To conclude this slide, keeping up with a fast-moving product, while simultaneously improving user experience and sales throughput necessitates that we have deep connections and frequent collaboration with our product and IT partners. Another way to state our objective function is to stay on and ultimately stretch the efficient frontier of customer ease and segmentation fidelity. As the final topic in our acquisition experience section, I'll touch on our approach to personalization and the digital funnel. We know that delivering the right content to the right consumer in the right context drives substantial value. As I pointed out before, we have been delivering personalized content to enhance customer experience and drive increased sales associated LUP since 2017. We've built a number of points of user experience personalization throughout our digital funnel. Personalization use cases have led to cumulative benefits in the hundreds of millions of dollars proven via A/B tests in the marketplace. Before breaking down our approach to real-time digital personalization on the next slide, I'll also mention another point of advanced technology deployment. Since 2018, our quoting and progressive.com chatbots have delivered millions of conversations and replaced millions of dollars in human support costs. While I won't get into detail on the specifics since this is a fast-moving space that provides real competitive advantage, I'll break down our approach. Delivering personalization at scale in a digital sales funnel in real time requires a set of balanced capabilities. We continue to evolve our capability set along four dimensions. Every year, we work to make sure we advance along each of four key elements, represented on what we call the personalization wheel. While not in a particular order, I'll start with context data. We continue to evolve the data we can access in a real-time digital funnel to drive decisions. We take great care around annuity and privacy as we use the data to drive better user experience. Working clockwise on the wheel, we come to content. Delivering the right content to the right consumer in the right context is at the heart of our digital personalization work. We constantly work to add new use cases to our road maps, think stars on the prior slide. A close connection with the marketing team is important here. Next is Decision Science. We continue to add new models and evolve existing ones. Context data is the input, a content decision is the output. Last and absolutely not least, is the delivery system. We need an infrastructure that delivers the content decision and the content itself in milliseconds where the value of optimized content is lost. We also need a nimble environment for our data scientists and engineers to test and evolve new models. We have a strong partnership with our IT team to ensure we leverage and influence the latest enterprise-wide developments while meeting more current in-market objectives. We work advance on all four of these dimensions each year as a means to drive a road map of short, medium, and longer-term end-market tests and ultimately, sales and LUP lift. That was a very brief overview of our direct acquisition experience world. To summarize, we've been at digital sales funnel growth and optimization for a very long time. We have a lot of data that we learn from and advance in a progressive fashion. A tight coupling with product is not only necessary but we believe a source of significant advantage that Insurtech startups will likely never have. We continue to advance our personalization capability set in this space. And last but not least, we've been evolving at the junction of insurance and technology for decades to help fuel the direct customer acquisition virtuous cycle.

Doug Constantine, Director of Investor Relations

This concludes the previously recorded portion of today's event. We now have members of our management team available live to answer questions, including presenters Jay VanAntwerp and Dave Krew. We will now take our first question. Marvin will...

Operator, Operator

Our first question comes from the line of Bob Jian Huang of Morgan Stanley. Your line is now open.

Bob Jian Huang, Analyst

Good morning. I'm trying to connect several quarters of presentations here. To start, you're likely signing up about 2 million new auto policies year-to-date. Even if I assume there are no additional new auto policies, that's still a record. From that perspective, typically, the combined ratio for the first year is elevated due to acquisition costs and estimates. If we look ahead to 2025 and beyond, considering you already have a very efficient acquisition cost, shouldn't that policy cohort's combined ratio be relatively low? Consequently, this would give you more flexibility on the combined ratio side to acquire additional customers. Is that the correct way to view this? If not, how should I understand the currently artificially low combined ratio and its expected evolution going forward?

Tricia Griffith, CEO

Thanks, Bob. And yes, you're exactly right, with 2 million additional auto policies and 2.6 million additional policies overall for the company, there's so many inputs that go into a combined ratio that it's hard to discern exactly how the future will go. But here's what I would say. We're very efficient, and there's been a lot of ambient shopping, as you've seen in our presentations and I've written about we've talked about. And so we're able to have our cost per sale well below our targeted acquisition cost. Now the fact is we want even more growth. So we want to grow from a premium perspective, but I've talked a lot about our preferred method of growth is a unit of growth. So we're going to continue to do that. And we're sitting in really great position. So we will spend more if we think we can continue to grow policy units because, frankly, our premium kind of goes up and down, as you've seen in the last four years based on our trends. It's been a high inflationary trend that's abating, which is great for our customers. So while I'm not going to be able signal what our combined ratio will be, know that we're going to spend as much as we can from a media perspective if we think we can get it in an efficient cost with, again, calendar year and lifetime 1996, we're going to continue to drive down non-acquisition expense ratios, we’re going to continue to work on our accuracy and efficiency as well as customer service and work environment, our claims organization, which we have seen just a lot of really great momentum as we've gotten staffed and more tenure in there, and we're going to continue to evolve our brand. So if you look at that, I can't tell you in your model what to put in for our combined ratio, but know that we're looking at all levers at all times, but we feel like we are finally in a really good position to be able to do what we've always said we wanted to do and take small bites of the apple and continue to grow. And whether that's small bite a little bit upward, a little bit downward, really be in a position to grow and take even more market share than we've taken in the first half of this year.

Bob Jian Huang, Analyst

Thank you for your response. My next question is about investment income and the changing competitive landscape. In recent years, many insurers have used investment income to support their underwriting in light of inflation. As we consider our growth opportunities and the potential for interest rate fluctuations, if interest rates decrease and the equity market stays unpredictable, will that impact the overall competitive environment, especially since some of your main competitors focus more on return on equity rather than the underwriting combined ratio? How can we approach this broader investment dynamic in relation to competition?

Tricia Griffith, CEO

Yeah. We really try to separate the operational with our capital management. So, obviously, our net investment income has improved because we've had some bonds maturing, we have a lot of money from the operations, so we can put that into bonds with higher yields. But really our job, at the Progressive Capital Management, we actually just got back from a business review last week is to protect the balance sheet. We're going to continue to grow as fast as we can. We're not going to change the dynamics of our overarching objectives that we've had since 1971 probably before that, but that is to grow as fast as we can at a 1996 combined ratio, or making at least $0.04 of underwriting profit, but making sure that we take care of our customers. So we look at the competition and competitors have just different models. We're going to continue to have the motto we have had for a long time because we think it's a winning one.

Bob Jian Huang, Analyst

Great. Thank you.

Tricia Griffith, CEO

Thanks, Bob.

Operator, Operator

Thank you. One moment for our next question. Our next question comes from the line of Elyse Greenspan of Wells Fargo. Your line is now open.

Elyse Greenspan, Analyst

Hi, thanks. Good morning. My first question, just given the ramp-up in ad spend that we've seen this year, are you guys doing this with the expectation that the year-over-year PIF gains that you guys see in the second half of the year will accelerate versus the first half of the year? When we think about relative to that $1.9 million that we've seen added through June?

Tricia Griffith, CEO

We certainly hope so, Elyse. We plan to continue on this path. I would say that our confidence in our rates is reflected in our media spending. You'll see that we are quite confident in the significant changes we've seen over the past year. Our goal is to keep moving forward and fully leverage our competitive position from both media and brand perspectives, along with competitive pricing. We aim to maintain this approach throughout 2024 and beyond.

Elyse Greenspan, Analyst

My second question is a follow-up on that. In your slides about competitors returning to advertising, how do you view the current advertising opportunities compared to the past year?

Tricia Griffith, CEO

Yes, we are still observing a significant amount of ambient shopping, and some of our competitors are generating a notable rate, which will sustain shopping as we discussed, both with our prospects and conversion. We feel very positive about where we stand, although different companies measure it differently. The key factor is what Dave and Jay mentioned, which has been in development for decades, building on prior work. Collaborating with our product team, claims department, and marketing group creates that unique advantage. We are optimistic about our efficiency and, more importantly, about having the right rates available. While there may be minor adjustments, the last four years have shown a lot of fluctuations, giving back $1 billion to customers and reducing rates during the pandemic, followed by inflation. It is reassuring to see some stability at this point, which our customers deserve, while making slight adjustments. That's where we can really excel in our advertising, media activities, and customer care.

Elyse Greenspan, Analyst

Thank you.

Tricia Griffith, CEO

Thanks, Elyse.

Operator, Operator

Thank you. Our next question comes from the line of Mike Phillips of Oppenheimer. Your line is now open.

Mike Phillips, Analyst

Thanks. Good morning. Looking at the changing consumer landscape, particularly among younger generations who are increasingly online and engaged with social media, how do you perceive the future size of the direct-to-consumer channel in relation to the overall personal market? What percentage do you anticipate it will represent in the next five to ten years? I ask this because we are noticing a significant rise in competitors entering this space, including both new startups and established traditional agencies transitioning to direct models. Could you provide your thoughts on the challenges of entering this market, especially considering your company's long-standing success? Thank you.

Tricia Griffith, CEO

Yes, I mean, I think that the generation, I think I've shared with you before, I have six children that everyone wants to buy online, that makes more sense. It's easy. I remember when we first started prog.com, it was called something else, Auto Pro. No one thought anyone would ever buy auto insurance online, and we made a bet. And it was difficult. And it was an uphill battle. It was an expensive battle, and it took us 10 years before we made money. As if you go back into this presentation, you look at what Dave Krew said, we were in SureTec before that, it was never coined a name. So, I think we feel pretty proud that we're going to continue to innovate. That's so important in our DNA. So, we're going to continue with the integrated marketing campaigns. I think for us, it's really about choice for consumers. So, I am still an agency customer. It works for me; it doesn't work for my children. So, I think to answer your question, it's hard to get into, but even as we watch the competition, it really boils down to competitors and all of us making sure that we have the right choices for our consumers. And that's really where we want to be. And we believe that we can compete really effectively in both the direct and agency channels, and we have been.

Mike Phillips, Analyst

Okay. Thank you. This is a little more specific to your recent Q. You mentioned a lot about growth in renters. And I guess I'm curious, is there anything concerted effort on your part that's caused that? Or where is that coming from? And are there growth opportunities in your auto that come from that growth in renters? And are there things in the renters customer base that you can learn that would make the auto growth a little bit more profitable? Thank you.

Tricia Griffith, CEO

Yeah. I mean, I think renters is oftentimes required; we have an easy, really quote flow for renters. We do like to have the auto renters bundled. We also know that renters can often turn into homeowners. And of course, we have to make sure that those homes are ones that fit our risk profile as we move forward and de-risk that book a little bit. But yeah, anytime we see that bundle happen, whether it's auto and renters and then any other product you add that also causes stickiness, and that's really where the rubber meets the road is making sure that consumers we have what they need and when we do, they stay for a long time. Thanks, Mike.

Operator, Operator

Our next question comes from the line of Gregory Peters of Raymond James. Your line is now open.

Gregory Peters, Analyst

Good morning, everyone. For the first question, I want to focus on Jay's comment about staffing. Jay, during your presentation, you mentioned that there are times when staffing in certain areas doesn't keep pace with growth, leading you to reduce advertising. I have a few questions about that. How often has this situation occurred? Have there been specific areas where this has been a challenge? Additionally, could you share some of your strategies to address the substantial growth you're reporting, especially in a tight labor market?

Tricia Griffith, CEO

Great question, Greg. Occasionally it happens, and we monitor it closely, especially since we aim to grow as fast as possible while ensuring we meet our customers' needs. I remember an instance in the early 2000s when we had to inform the state of Texas that we needed to slow our growth. That experience has stayed with me, even though I wasn't in a leadership role at the time. In my previous position in claims, I collaborated closely with our claims President and his team to assess our staffing levels. The advantage of hybrid work now allows us to redistribute work across different states. If one state has staffing shortages while another is overstaffed, we can train employees to fill those gaps. Essentially, what we're saying is that if we need to limit local media spending, as we did in previous years due to insufficient rates or staffing, we can take that step. After the pandemic, in 2022, we experienced more turnover than we preferred in both claims and customer relationship management, but we are in a much better position now. We are currently hiring ahead of our needs and feel confident about our staffing levels, the quality of our teams, and our operational accuracy.

Gregory Peters, Analyst

Okay. I guess for my follow-up question, I'm going to pivot. And as part of the advertising presentation and advertising expense, you really didn't talk about multilingual strategies, and we don't really see it in the PowerPoint presentation yet the Hispanic community is a growing percentage of the population inside the United States. So I'm just curious if you could spend a minute and talk about how you're approaching your digital advertising and all the other advertising levers and targeting multilingual cohorts of the population.

Tricia Griffith, CEO

That is a great question, and we've been working on that for some time. We had a little setback with some litigations in law in Colorado. I won't go into the details because it's out there. But it really caused us to pause because it's really difficult for us when we want to do national advertising to control who's seeing in any given state. So we paused on that. Now we have done a couple ads, one in particular, really sweet one. If you go through it, it's a deer talking to the dove and a dad talking to the new driver. And there are some nods obviously to Latin X, which we think is important. And I totally agree with you. So we have a strategy and a whole team working on our multilingual, a sort of ability to grow. We can grow both in the agency channel, and we have a huge group of what we call Sagora reps here that handle our Spanish-speaking customers. We believe that this is a big opportunity. Again, we had to pause a little bit because of something that happened in Colorado, but we talk about this a lot. In fact, we're getting an update in one of my upcoming direct report meetings on where we're going with our multilingual strategy.

Gregory Peters, Analyst

Thank you for the answers.

Tricia Griffith, CEO

Thank you, Gregory.

Operator, Operator

Our next question comes from the line of Josh Shanker of Bank of America. Your line is now open.

Josh Shanker, Analyst

Yes, thank you for taking my question. I was listening to Jay's presentation, and he mentioned that you made a significant investment in advertising, which prompted the industry to follow suit. Tricia, you pointed out that there were doubts about whether people would purchase auto insurance online, yet they did. I'm curious about what caused that shift. Additionally, I want to know when you anticipate a similar change for homeowners' insurance. How large do you believe the online direct-to-consumer market for homeowners' insurance can grow, and do you think we are close to that transformation?

Tricia Griffith, CEO

Yes, that's a lot of questions. To start, we will always strive to grow across all channels using innovation. Jay's significant emphasis on advertising is noteworthy. We analyzed our past efforts, especially from the mid-2000s, when we successfully advertised and had a recognizable brand, even if it wasn't fully established. We made a substantial investment when we gained brand recognition, focusing on choice and savings. I vividly recall when I joined in mid-2016, we encountered challenges in my first quarter, and shortly after, Jay and his team proposed a fantastic strategy that I fully supported. Jay frequently approaches me to advocate for increased spending and explains the rationale, and I have never disagreed with their judgment. They have also been sensible in scaling back when necessary. Currently, about 25% of our business comes from direct homeowners' insurance. We aim to expand this because we believe there is a strong desire for online purchasing. I'm not sure when it will reach a 50-50 balance with auto insurance, but we plan to keep investing in this area since it's crucial. Given the volatility of home insurance and the potential issues during storms, we will collaborate with reliable partners to ensure mutual benefits for all involved.

Josh Shanker, Analyst

And then looking a little more on the rate and homeowners. If you look at some of your competitors provide renewal pricing data in that their rate increases are much higher than yours, of course. Some of your pricing is related to your growing faster in non-coastal non-cat states, which is causing your numbers to be lower due to diversification geography. But still, your numbers seem to be lower. Is homeowners nationally being priced adequately not so progressive, but the industry in general? Is the industry overpricing too much, do you think creating an opportunity for Progressive take share here? Or does Progressive also need to take some action here to get current with what others are doing?

Tricia Griffith, CEO

We saw a growth in renters, which results in a smaller average written premium, taking about 4% this quarter and approximately 10% year-to-date on a trailing 12%. We've implemented significant rate increases, along with other non-rate actions to reduce risk in our portfolios. Our priority remains on de-risking our book as previously stated. We identified 115,000 non-renewals in Florida that were unprofitable and collaborated with the state to offer options for those consumers. We will also focus on enhancing our segmentation. We have rolled out our new 5.0 product in eight states, aiming to refine our pricing and segmentation at a detailed level similar to how we've successfully managed auto insurance. This process takes time, but we're committed to it. I mentioned in my letter that we plan to be even more aggressive in our approach. Ultimately, once we stabilize, we expect to capture more market share. Meanwhile, we are continuing our growth in what we consider non-volatile states. Weather remains a constant factor in our considerations. Our immediate goal is to de-risk our property segment, and once we believe we are positioned correctly with appropriate rates, we will expand in areas that are critical for the overall health of our portfolio.

Josh Shanker, Analyst

Very helpful answers.

Tricia Griffith, CEO

Thank you.

Operator, Operator

Thank you. One moment for our next question. Our next question comes from the line of Robert Cox of Goldman Sachs. Your line is now open.

Robert Cox, Analyst

Hey, thanks for taking my question. First question just on cost per sale. I'm just curious, as peers have continued to improve their margins year-to-date. Are you expecting increased competition on the cost per sale in the back half of the year? And also curious how you anticipate the election will impact costs for advertising?

Tricia Griffith, CEO

Yeah. To answer the last part, I have no idea. The first part, we might feel some pressure on cost per sale, but it is so much below TAC that we feel really good about the efficiency.

Robert Cox, Analyst

Okay. Got it. Thanks. And just maybe going to the 10-Q, some of the business mix shift impacting accident frequency. When you think about pricing going forward, how much of this favorable frequency environment are you considering as sustainable versus weather related or other nonrecurring benefits?

Tricia Griffith, CEO

Yeah. So if you look at our frequency being down about 8%, the majority of that is really – it's always hard to discern exactly. I would say, the two factors right now for us is our preferred mix and some of the non-rate actions. So we've unwound or continue to unwind the non-rate actions. The preferred business; our motto has always been that we want Sam, Dianes, Wrights, and Robinsons. We want every customer as long as we can make a lifetime in a calendar year, 1996 combined ratio. So we made to pressure on that. But again, it's really hard to discern and really put together exactly what makes frequency. We watch it closely. As well as we do, obviously, frequency and then react to that accordingly. But like I've said, I feel like we're in such a better position in terms of stability around those trends. And if we can now start to do what we do best, and that is thoroughly look at every product, every state, new and renewal and take a little bit up, a little bit down, a little bit up, a little bit down, make those rates stable for our consumers. That's really the winning proposition for us.

Robert Cox, Analyst

Thank you.

Tricia Griffith, CEO

Thanks.

Operator, Operator

Thank you. One moment for next question. Our next question comes from the line of Meyer Shields of KBW. Your line is now open.

Unidentified Analyst, Analyst

Hi. It’s Jen on for Meyer. Thank you for taking my question. My first question is on the rates in the shareholder letter, you mentioned taking some small rate cuts for eight states. Just curious on what your thinking behind it? And how should we think about rates going forward?

Tricia Griffith, CEO

We are starting to return to more normal operations. On the auto side, our combined ratio is around 88%, although this varies by state and market area. If our ratios fall significantly below 88%, which is beneath our 1996 goal, we will consider reducing rates to attract new business, alongside our media spending and adjustments we’ve made that aren't related to rates. It’s important to approach these changes cautiously. Even though we made an 8% rate cut in some areas, we also increased rates by 13% in others, which reflects a much different approach than we’ve had in recent years. We will consider rate cuts as a strategy to maintain healthy margins, promote growth, and ensure stable rates that ultimately benefit our consumers.

Unidentified Analyst, Analyst

Got it. Thank you. My second question is on the conversion rate. So in your presentation, you mentioned expanding significantly more than competitors. Conversion rate has come down due to the schedule shopping behavior. How is Progressive from thinking about dealing with the conversion rate?

Tricia Griffith, CEO

I believe the question was about the conversion rate. We aim to be on the short list for consumers and convert that interest. Our prospects are currently strong because we are active in the market. However, our conversion rate is lower due to the volume of inquiries. While we cannot directly control this, we recognize that many people are shopping around due to fluctuating rates. We will continue to work on aligning our conversion rate with our expectations across all products and states.

Unidentified Analyst, Analyst

Thank you.

Operator, Operator

Thank you. Our next question comes from the line of Jimmy Bhullar of JPMorgan.

Jimmy Bhullar, Analyst

Good morning. Most of my questions have been addressed, but I was curious about the competitor behavior regarding pricing and marketing expenditure, particularly how it differs across channels. It seems that the mutuals as a group haven't been very aggressive in increasing prices, so I would appreciate any insights you could provide on the various channels and what you are observing.

Tricia Griffith, CEO

The channels are distinct because, as we discussed, the direct channel involves more fixed spending, while the agency side has a more variable expenditure based on new and renewal business, along with industry trends in commission rates. I've noticed that our competitors are generally acting in a rational manner. There is still a significant amount of rate activity in the system, and it appears to be getting more competitive. If that trend continues, we can expect increased spending. Regardless of whether the target is 96%, 95%, or 105%, at some point, it's important to be rational and align pricing with risk. I believe we are witnessing that shift. Each of us has our own models, and I am naturally inclined to think ours is the strongest due to its balance of growth, profitability, competitive pricing, and importantly, our people and culture. The next couple of years should be intriguing, and I observe some rational shifts among many of our competitors.

Jimmy Bhullar, Analyst

And then your margins have obviously been pretty good for the last several quarters, but most of your peers' margins are improving as well. So wondering if you see an environment where in a few quarters, you start to see regulatory pushback on prices since they have gone up a lot or just the excess profit you're earning get eroded because of an uptick in competition on prices?

Tricia Griffith, CEO

I don't want to overcorrect because there are still around 10% of states where we don't have the right rates from our perspective. We have reduced rates in eight states and will keep monitoring that. Our focus is on growing unit growth, which is why we continue to advertise and ensure we are available for our customers, especially during volatile weather. Building strong relationships with regulators is crucial to ensure we have adequate rates and competitive pricing. If we lower our rates, others are likely to follow since competitiveness is essential, and it's easy for customers to switch carriers. It's vital to maintain competitive pricing, influenced by various factors like segmentation and claims efficiency. Additionally, we know our customers prefer stable rates, and we'll persist in working on that with our industry partners. I want to avoid any significant shifts because we've seen stability for a few quarters now. While I don't anticipate any unforeseen changes, we've certainly experienced unexpected events in recent years. Therefore, we will continue to let things evolve, do the right thing, and strive to be competitive to grow our unit growth, which remains our primary growth metric.

Jimmy Bhullar, Analyst

Thank you.

Operator, Operator

Thank you. One moment for next question. Our next question comes from the line of Michael Ward of Citi. Your line is now open.

Michael Ward, Analyst

Thanks. Good morning. I was curious about the high engagement with your mobile app for auto policies compared to your competitors. Do you have any insights on why that might be? It doesn't appear to be solely due to telematics; are you perhaps encouraging the use of digital ID cards and paperless options, or is there another reason?

Tricia Griffith, CEO

I believe this touches on the evolution of technology. Many of our new applications are coming through mobile platforms. When customers engage through the app, they are more likely to remain engaged. Therefore, we continuously invest in enhancing the user-friendliness of our mobile app, which includes features like access to the ID card and streamlined payment options. We have committed significant resources to our mobile app over the past decade and will keep doing so. One of our strategic pillars is broad coverage, and mobile app usage is a crucial aspect of that. When users access our app, they want to stay and accomplish multiple tasks, whether it's accessing services, making purchases, or obtaining information. Your observation about this trend is accurate, and it reflects our ongoing investments and the desire of customers to engage in this manner.

Michael Ward, Analyst

Okay. And then just expanding on the comments about direct home sales. Wondering if you can kind of elaborate on that in the context of the acceleration in Robinson growth indirect trying to square those two. I guess, are Robinson customer wins taking place more online or more over the phone? And how should we think about your Robinson share expansion going forward?

Tricia Griffith, CEO

Our growth in Robinson is happening across all areas, particularly in the agency segment, as it was essential for us to offer a homeowners product to reach those auto customers through independent agents. We initiated HomeQuote Explorer many years ago, aiming to have a reliable network of carriers, so if we decline a risk, we can refer it to another carrier. This approach is part of our strategy to understand and meet customer needs. We want to increase the availability of Robinsons through HomeQuote Explorer, which serves direct home customers, though they don't necessarily have to be Robinsons. On the commercial front, we have BusinessQuote Explorer, where clients can purchase our commercial auto along with possibly a general liability policy from other carriers, and the same goes for AutoQuote Explorer. Our focus is on making the experience convenient for customers who come our way through our media investments. If we can't secure the business ourselves, we're happy to assist them in finding another carrier that will. I believe this growth will continue as we aim to reduce risk in our product offerings. I'm proud of our investment in HomeQuote Explorer, which I view as a sustainable solution for our direct offerings.

Robert Cox, Analyst

Tricia Griffith, CEO

Yeah. To answer the last part, I have no idea. The first part, we might feel some pressure on cost per sale, but it is so much below TAC that we feel really good about the efficiency.