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Progressive Corp  (NYSE:PGR)
Q3 2018 Earnings Conference Call
Nov. 01, 2018, 1:30 p.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to The Progressive Corporation's Third Quarter Investor Event. The Company will not make detailed comments related to quarterly results in addition to those provided in its quarterly report on Form 10-Q and the letter to shareholders, which have been posted on the Company's website and will use this event to respond to questions after a prepared presentation by the Company. This event is available via a moderated conference call line and a live webcast with a brief delay. Webcast participants will be able to see the presentation slides live or download them from the webcast website.

Participants on the phone can access the slides from the Events pages at investors.progressive.com. In the event, we encounter any technical difficulty with the webcast transmission, webcast participants can connect through the conference call line. The dial-in information and passcode are available on the Events page at investor.progressive.com. Acting as moderator for the event will be Julia Hornack.

At this time, I will turn the event over to Ms. Hornack.

Julia Hornack -- Investor Relations

Thank you, Shanaou, and good afternoon to all. Today, we will begin with a presentation on industrial leading segmentation. After that presentation, we will have Q&A with our CEO, Tricia Griffith; our CFO, John Sauerland; our guest speakers today Pat Callahan and Sanjay Vyas; and Bill Cody, our Chief Investment Officer, will join us by phone for Q&A. This event is scheduled to last 90 minutes.

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 to differ materially from those discussed during the event today. Additional information concerning those risks and uncertainties is available on our 2017 annual report on Form 10-K, where you will find discussions of the risk factors affecting our businesses, safe harbor statements related to forward-looking statements and other discussions of the challenges we face. These documents can be found via the Investors page of our website progressive.com.

It is now my pleasure to introduce our CEO, Tricia Griffith.

Tricia Griffith -- President & Chief Executive Officer

Good afternoon, and welcome to Progressive's third quarter webcast. We have a terrific session for you today. Before we go into the topic on segmentation, I didn't want to reiterate a couple of the milestones that I talked about in my letter. First and foremost, we surpassed $30 billion in net written premium on a trailing 12 month period. That is phenomenal for us. What's more phenomenal is the fact that less than three years ago, Glenn Renwick, John Sauerland and I toward the country celebrating $20 billion in net written premium. So to put into perspective, it took us nearly 80 years to get to $20 billion and less than three to get to another $10 billion (ph) celebrating $30 billion. Phenomenal job for everyone progressive and we couldn't be happier with those results.

In addition, we just surpassed $20 million in overall policies in force and $13 million in auto policies in force. Why they are significant is the fact that we are growing at a very rapid pace on Robinsons in both the agency and direct channel. And part of that is (ph) you want influx of future Robinsons, so those auto policies in force that growth is really important, because they are our future Robinsons. Having that two-pronged point of reference to be able to grow Robinsons is important, and that's why our policy growth is important. We always talk about unit growth being a very important measure.

And lastly, we had an internal goal of getting to a million Robinsons and we surpassed that as well. So a couple of more milestones, I won't go into, but a lot of excitement around the momentum we've had over this past couple of years and we're ready to kind of wrap up 2018 and have great plans for 2019.

Let's start with our four cornerstones, who we are, why we're here, where we're headed and how we're going to get there. Who we are, our core values. That is really the underpinnings of everything that we do. We have five core values and all of them work together to make sure we have a successful company. Our goal is to win, but we want to win in the right way and our core values guide us there.

Who we are, why we're here, our purpose statement is true to our name Progressive. And when I think about that, I think of the first eight letters Progress, always thinking differently, always questioning, what we've done yesterday. So we do it the same way tomorrow, listening to our customers, listening to our employees and our shareholders and understanding how to always be forward thinking. Our vision where we're headed. We want to become consumers number one choice and destination for auto and other coverage. For us, this is just a great thing to be able to try to achieve. We got a little bit closer there this year. We know there's a lot of room that we need to get there, but we're ready for it.

And our strategy that is really how we're going to able -- how we're going to be able to achieve our vision. Our strategy as we've been talking about in the past several webcast are really based on four different pillars. And you've seen all of these and what we spent the time doing is really dissecting each of the pillar, so you can understand our business model, again in order to understand how we are going to achieve our vision. In fact, in the next quarter, we'll have our Chief Human Resource Officer, Lori Niederst talk about our people and our culture, which is so key to everything we do.

Today, we're going to do a little bit deeper dive in the pillar you see with the blue background. So, if you recall in the first quarter, we had Kia Berglund and Mike Esposito come up and talk about the balance of operational efficiency and claims accuracy. Always trying to get that near-perfect balance of cost and quality. Today, our guess they're going to be talking about offering competitive prices driven by industry-leading segmentation.

Let's start with our overarching goal, our operational goal for the company, and this is something that we've had in place for as long as I can remember. But nearly 50 years since has been written about in every one of our annual reports since we went public in 1971. Our goal is to grow as fast as we can at or below 96 combined ratio. The only caveat to that is we won't grow as we don't think we can service our customers in the way they have come to expect. The great news here is that with our tremendous growth in this last three years, we have been able to hire higher and advance of need specifically in the CRM and claims organization. And I can tell you the talent that is coming in to the doors of Progressive -- through the doors of Progressive is phenomenal. So I'm excited about our future.

For us. The 96 isn't a software variable, it's a constant, and it sets the direction for the whole company and everything that we do, it's a great balance of consumer competitiveness and attractive margins and it helps us in certain situations, because it is something very specific and it provides zero ambiguity. As an example, in the quarter three of 2016 right after I took over as CEO, we over 96. We had more cats then than we had the year before and our commercial lines business. We have put some rates, but they hadn't earned in yet, because it's annual policy. We are spending on advertising, really spending a little bit more across the board. And literally that zero ambiguity was so helpful to the entire organization, because we all got together and said, OK, what levers are we going to pull to make sure we get under that 96. And in fact, when we talked about expenses, it cost us all to say let's question everything we do as far as expenses, and we've changed since then. So even that particular exercise was a valuable one when we went over 96. Again, as you know, the end of the story is we got under 96 by the end of the year.

Probably the most important part of the 96 is it is truly ingrained in our culture. It's so core to everything that we do. In fact, as I speak to you on this webcast. I'm standing in studio 96. We developed an in-house marketing agency several years ago that we refer to as 96 octane that's just a couple of examples of how embedded 96 is in our culture.

Why, frankly because it works. This slide you're looking at now are a couple of results. You'll see results from 2015, 2016 and 2017 and then on a five-year and 10-year basis. So obviously growth and profitability, when we look at underwriting margin and this is us compared to private passenger auto. We've outpaced industry substantially in every single time period. And as a matter of fact, if you look at our 10 year results, we -- our results are on average of 6.5 points, well, better than our 4-point margin that our goal is.

And if you look at the industry, they haven't made money in every single time frame. We profit is one of our core values, we are going to make at least $0.04 do everything we can to make at least $0.04 at every opportunity in every time frame. Net written premium, we have grown outpaced the industry twofold and again in every one of these timeframes, so growth and profitability are you talked about our other measure policies in force. So like I said last time, we are firing on all cylinders and this is really an exciting time.

And lastly, what these results ends up being is double digit comprehensive return on equity for our shareholders. So it's a great balance for everyone. We've been able to grow the company for our employees service our customers and grow, grow the whole company for our equity holders. So let's get to today, I really want to have a deep dive in the segmentation, why because it's really important to all these measures that you see. We have two guests. Sanjay Vyas has been with us 15 years. He has been a product manager for eight of those years in multitude of states, and then his last seven years, he is a general manager leading product managers. He is going to give you a front-row view of how important that product roll is for Progressive. Owning your own state's P&L, really understanding it and then looking at the aggregate, how it all fits together.

In addition, and I wrote about this in the latter, we just recently have done a cross-functional job swap, and Sanjay is a recipient of that. So just recently he took over as the Claims Controller and I'm so excited for Sanjay as well as the others to be able to get to know different parts of the company. Job swaps at Progressive is the hallmark of what we do. We want to have talent across the company, a really good bunch of people that have both depth and breadth. So I'm really excited to see what Sanjay brings to clients.

But before then I'm going to ask Pat Callahan to come up. Pat Callahan, as you know, is the Personal Lines President. He is going to give you an overview of the product strategy, specifically segmentation and pricing and how we match rate to risk.

Pat Callahan -- Personal Lines President

Thanks, Tricia.

Let's get started by jumping back to Tricia's last slide. And if you focus at the upper right-hand corner of this slide and look at Progressive versus industry, profitability and growth, you'll notice that growing twice as fast as the industry, while simultaneously delivering profit margins 8 percentage points to 10 percentage points wider. These results don't happen by accident. They are the direct result of our deliberate investment and increasingly fine segmentation and matching rate to risk.

Thrilled to spend a little time sharing with you our investments we are making to continue to advance this segmentation and widen this mode (ph) around our personal lines franchise.

Our vision is to grow Progressive and pursue to becoming consumers' number one choice and destination for auto and other insurance. We all know that growing an insurance company is frankly not that difficult if you don't care about making money. And making money in insurance is not all that hard if you don't worry about growth. We are laser focused on both and as a result, it's absolutely critical that we have high operating efficiency, great claims accuracy and industry-leading segmentation.

So I'll now share a little view that we've talked about previously that breaks down the US auto and home market by distribution channel in the columns and by Progressive segment across the rows.

For decades, we've been heavily focused on growing share within the simpler needs auto insurance marketplace. The $90 billion row represented by the Sams and Dianes (ph) in the chart that you're looking at. And while these simpler needs customers were our bread and butter for a long time, they trained us and honed our segmentation skills, primarily because of the shorter policy life expectancy it was critical for us to get our prices right given they weren't with us for all that long. Now with our expansion to focus on the broader $230 billion plus opportunity that the bundled home and auto marketplace represents, this pricing discipline is serving us well.

As number one, it ensures that we understand our lifetime cost to serve for these new customers and ensure that we don't have subsidization as we expand our market focus. But number two, it also enables us to bring incredibly disciplined segmentation skills to disrupt the property insurance market much the way we did with auto insurance over the past several decades. And finally, it enables us to leverage the advantage position we have with younger simpler needs auto insurance customers to continue to build products and services to enable them to grow with us throughout their insurance lifetime.

We support this product expansion strategy within larger market opportunities with five key tactics. The first is to continuously invest to improve our matching of rate to risk. The second is to build and deploy highly competitive and stable products to meet the needs of these preferred customers. The third is to leverage verification to ensure accuracy of our rating models.

The fourth is to continuously expand and enhance segmentation by leveraging third-party data, both our snapshot, usage based insurance data and other third-party data sources. And the last key tactic here is to ensure that while we invest to improve the accuracy of our rating models, we're also keeping an eye on ease of use to ensure that as complexity of our product models expands we continue to deliver simple to use products for our agents and ultimately for all consumers.

These five key product tactics are the foundation of what we call the virtuous cycle of risk selection. So the US auto insurance market is highly competitive. There's many players, very similar products, high information transparency and relatively low switching costs. Given the dynamics in this market, it's absolutely critical that we have a highly segmented and accurate product model. I'll walk you through this cycle starting at the top, step one, where we design and deploy these highly segmented models and leverage our pricing discipline to have highly competitive rates in market.

Following around clockwise, step two is these highly competitive rates enable us to drive up conversion and retention from our preferred segments. Which takes us to step three, where less well segmented competitors experienced adverse selection as their better customers are finding more competitive offers from Progressive, which leaves these competitors ultimately with adverse trend.

Their book looks to be increasing in loss costs and they respond rationally by raising rates. But they raise base rates given the lack of segmentation. And that takes us to step four, where higher base rates create shopping across their entire book of business and a greater shopping rate with all their customers results in their better, more preferred customers finding more competitive rates with carriers like Progressive.

And that leads us to step five of this cycle, where ultimately we grow premium to support fixed costs, which lowers our overall cost structure and brings us more loss experience and more data on which we feedback to the top of the cycle, which enables us to be more finely segmented and offer more accurate pricing. Now the sub-cycle that you see between steps three and four at the bottom of this is what we call that cycle of adverse selection. And that's where our competitor raises base rates because they don't necessarily know which segments are underperforming, but by raising base rates they cause shopping among our entire book and only their best profitable customers leave, creating adverse selection and require an even greater rate increases.

Today, we're going to be focused on that top entry point of this cycle and talking about deploying our highly segmented product models, really with two sections to the conversation. I'm going to cover product design and then Sanjay will cover product customization and deployment. And for purposes of this conversation, we're heavily focused on the auto insurance market. We'll talk a little bit about property and destination but heavily focused on the auto market.

When we think about our product models, we build highly complex engineered and architected product solutions to deliver two objectives. Number one, match rate to risk better than other carriers, and number two, deliver on our strategic goals of having competitive rates for our core customers, while simultaneously offering competitive and stable rates for more preferred customers.

We liken this to a high-rise building where not only are there foundational and structural elements to the model, but there is a significant number of operational systems that are all designed to work in concert as we attack the strategic growth opportunity. And we'll start with the core foundational indemnity models. These are the models where we collect information about our customers in order to predict future loss costs. And our core indemnity models are honed and built on top of prior product models such that we are constantly evolving and improving our segmentation over time.

We layer on new rating variables that might be outside our internal variables, more finely segmented pricing through analytical methods or potentially tapping good ideas that we see in the marketplace. But ultimately, when we look at our product segmentation, we often see competitors who try to replicate it, where they may copy the data that we use, they may copy rating elements that we use. They may even copy analytical methods in order to deliver similar segmentation. But frankly, doing this would be similar to me buying the same shoes that LeBron James plays in. And frankly, it wouldn't change my basketball game.

Our core structural advantage is in decades of rate-making segmentation and culturally our relentless pursuit of matching rate to risk. Now we know that there is far more to the cost to serve a customer than just the indemnity or loss costs, and that's why we also layer in segmentation for acquisition expenses, operations expenses and billing and bad debt. And on top of this loss and expense segmentation, we then layer on our uses based insurance program, which is an optional program but highly predictive of future loss costs.

And then finally we have state specific versions of these product models. Given we operate in 51 different jurisdictions, which Sanjay will cover in more detail but we tailor our product model to the required coverages, permissible or prohibited rating variables. But the best segmentation and the most highly predictive rating model is only as good as the data that you input into the model. And as a result, we focus on ensuring that the data we get from customers at inception is absolutely accurate. You can think of our customer on-boarding process similar to joining an interstate toll road. And every year, millions of new customers get on the progressive highway and most continue on unabated their destination. More than 90% pass through what we might refer to as easy pass lanes, you get on the highway and you continue on to your destination.

However, there is about less than 10% for there's mismatching data at inception and we ask those customers to stop at the cash pay lane, so that we can confirm the accuracy of the information that they're providing. And that's what this is all about, accurate information, so that our models can predict accurate future loss costs, which ultimately delivers fair pricing for all of our customers. This verification really happens in two steps, mostly focused on new customers. Were at inception, a new customers filling out a form and we may find data that doesn't match with what we pull from third-party sources. We'll stop the quote ask them to call at that point. For other customers, again, a very small percentage of our customers during the first 60 days or what we refer to as a free look period, we are able to run additional reporting against the data the customers provide in order to ensure that we have the most accurate data to price that policy on a going forward basis.

This accuracy enables us to avoid subsidization across our book of business and ultimately to continue to invest in a more accurate and complex product model, while concentrating the expense associated with manual follow-up on a very small sub-segment of customers for whom the pay-off is much higher. So, when we think about our product model, I want to share a little bit more about our most recent development around (inaudible), our latest auto product.

Insurance is a highly competitive and winner-take-all place. And that the carriers who have low operating costs, high claims accuracy and industry-leading segmentation can offer the most competitive pricing, while also delivering their target profit margin. And we know, given the competitive nature that nothing is standing still. So it's incumbent on us to continue to invest to improve segmentation constantly. We do this through multiple sources, we may find new sources of external data that are predictive, we may find new ways to analyze internal data. Or frankly as I mentioned before, we may see a disruptor, insurtech or an incumbent carrier actually have different segmentation that we are not too proud to copy and frankly to improve upon when we layered into our segmentation (inaudible).

So, let's talk a little bit more about a couple of those key sources of segmentation that we're in the process of deploying. The first one I'll talk about is coming with our 8.5 (ph) product which is deploying to market currently and that's for refined segmentation based on prior insurance. So when we are building 8.5, one of the objectives was we wanted to improve the accuracy of the rating model without increasing the complexity for our customers or our systems. And in pursuit of that, we started looking at prior insurance which has been a predictive rating variable for a long time for us and most other carriers. We found sub segments or more finite and granular information in the prior insurance data we were already pulling about applicants for insurance that enabled us to segment the market and discover that even now our 8.4 product was performing really well in market.

As you can see on the screen, the yellow bars were segments that were overpriced, the red bars were segments that we're underpriced in our 8.4 product. So you can imagine, leveraging this pricing insight in our segmentation enabled us to lower prices on the yellow segments, ultimately becoming more competitive there. And frankly to raise prices on those red segments to deliver the target profit margin, while slowing down growth in these underpriced segments.

Second area that I'd love to share, just a little more detail on finding new insights from existing data. With the increasing digitization of customer interactions and experiences, we collect billions of customer interactions and we were able to mine those customer interactions in order to identify segments and combinations that are predictive of future cost to serve. And by identifying this segmentation and predictive power, we were then able to look at our incoming customers and in any point in time about 10% of the new customers to Progressive aren't really brand new to Progressive. At some prior point in time, they had a Progressive policy, but also had a lapse in judgment and left us to buy insurance elsewhere. Now when those customers come back to Progressive, see there ways and come back looking for protection, we are now able to price more accurately on those customers which enables us also to avoid segmentation -- or avoid subsidization across the book and to ensure accuracy for every single one of our customers, which we believe is just a fair way to run the business.

The final source of segmentation that I'll touch on is, within the usage-based insurance. And it's been almost two decades now since we pioneered this rating segmentation. And as we brought it to market, it has continued to be our single most predictive rating variable. Given that, it's our goal to continue to invest in usage based insurance to drive up the accuracy and ultimately the adoption of UBI or snapshot within our product suite.

Customers up until about two years ago would opt into the snapshot program, we would send a hardware device that plugged into the OBD port on their car. That hardware device would collect vehicle operation data, transmit it to us and we would use it in pricing the policy. Now in pursuit of increasing adoption, in the fall of 2016, we launched an app-based version or a software-based version of UBI, which collected all the same valuable data on how the vehicle was operated, but also for the first time gave us an incredibly rich data set based on how the vehicle was being operated at the same time as the mobile device was being used. And over the past two years, we've been able to collect more than 1.5 billion miles of data, where vehicle operation and mobile device operation have happened simultaneously.

And spoiler alert, not surprising, distracted driving does drive up insurance loss cost. With this rich data set, we have started using it in pricing, because despite the academic surveys or studies, this for the first time gave us a direct correlation between vehicle operation, device operation and insurance loss costs. And we're pricing on it now in just one state, but in the process of rolling that out and in that state we're using how much the device is used, how the device is used and ultimately why the device is being used. What's really exciting here is not only do we have a pricing model that includes this distracted driving, but that enables us to use some economic leverage to potentially curtail or slow, this pretty risky driving behavior.

Finally when we talk about increasing adoption of UBI. Because we currently offer both the device-based and software-based, we're able to optimize our presentation to get more customers to opt in to the app-based or software-based usage presentation. And we do that to take advantage of the advanced segmentation that I just mentioned. Given a choice, more customers up for the app-based version and we are investing right now to continue to increase both availability and ultimately eligibility of all customers to get the app-based version. So as you can imagine, this segmentation has incredible predictive power and we're rapidly deploying 8.5 to market. Today, we're in 16 states that represent about 40% of Progressive premium, and by year-end we'll be in 23 states representing about two-thirds of our premium.

To-date, we've been monitoring performance of 8.5. And while we were thrilled with how it performed in market, 8.5 is outperforming across all key performance indicators. And one of those that we look at regularly is, is our product model advancing our Destination Era strategy. And for that, we look at preferred customer conversion, pre-8.5 and post-8.5.

And on the slide, you'll see significant lift in conversion across a wide variety of preferred customer metrics, whether it's prior insurance, home ownership, better credit, clean drivers, multi-car across the gamut we are converting better. And that delivers value in three primary ways.

Number one, longer policy life expectancy, number two, greater propensity to bundle with Progressive, better credit, future homeowners or current homeowners. And number three, fueling that virtuous cycle of risk selection by enabling us to collect more data on these preferred customers that we can use to price our policies and out segment to competition going forward. So the key for us at this point, is to get this segmentation to market as fast as possible. I'm not a patient guy, and when I talked to you a few years ago, we talked about accelerating our speed to market through a we call our pace initiative. And at that point, we had cut the time to deliver our model upgrade to market just about in half. And we continue to invest to do it quicker.

As an example, for 85, which we are currently deploying, we were able to reduce the model build cycle time and significantly increase our deployment capacity in pursuit of getting their segmentation to market faster.

But what I get really excited about is additional investments that we've been making to ensure that we can develop and deploy product models almost in parallel. 85 (ph) is rolling out. 86 (ph) is in development and test for launch next year and 87 (ph) is already being built from a requirements and expectation perspective. So we're still phenomenal about not only our current segmentation, but there's robust pipeline of future segmentation to fuel that virtuous cycle of risk selection.

So let's take a look at how our product models are performing in market. We'll look at loss and LAE for Progressive in the orange line and for the industry in the black line, and this is over the most recent four, four and a half year period. You will note that we are out-segmenting the competition by about 5 points from loss and LAE perspective back in 2014 and our investment in product development and risk selection widen that gap to 13 or 14 points as we got into '16 and '17.

And while you note the industry has been seeing a lower loss and LAE recently due to both extreme rate take and some benign trends, the gap persists. Now what we really like to see when we look at selection and what we're doing in the marketplace, we look at rate take. So the rate change for Progressive is the blue line, the rate change for the industry is purple. During the same period of time, while we are deploying 83, 84 and 85, we've had to take half the rate increases that the industry has. That means current Progressive customers retain better through more competitive rates and new customers coming in the door, find more competitive rates relative to alternatives in market.

So we feel great about the segmentation and how it's helping loss and LAE, but let's take a broader look to understand what it's doing to drive Progressive growth by looking at a 15-year history of Progressive's auto policies in force. And this is a period of time when we more than doubled the business from about 6 million policies to more than 13 million. And if we zoom in on the period that we just talked about, that more recent period of time when we were deploying 83, 84 and 85 or the period when we grew from about 9 million to beyond the 13 million policies we're at today.

If we look at how this growth has accelerated using our million PIP growth milestones as a benchmark, you will see that it took us 30 months to go from 9 million to 10 million policies in force. Yet after deploying 83 in the middle of 2015, it took us half that time to go from 10 million to 11 million. Deploying 84, it took us half the time again to go from 11 million to 12 million. And our most recent million policies from 12 million to 13 million, we did it in about six months' time frame.

Now if we zoom back out to look at how that acceleration overlays with our product deployment, it is absolutely clear to us that investing in segmentation and speed to market for product upgrade is creating growth and driving growth for the Company. Now what's particularly rewarding is when we overlay our combined ratio during the same period. And for the past from 2017 on, we've been rock solid within 92 to 95 combined ratio. So our operational goal of growing as fast as possible subject only to that 96 is absolutely being delivered by our investment in risk selection and segmentation.

Now with that said, competitive auto is one piece of our destinationary strategy. But we also know we have to have highly competitive property insurance offerings in order to meet the needs of the Robinsons. And that's why, since taking the majority stake ownership within ASI or what we call Progressive Home, we've invested to ensure that we are leveraging the property insurance expertise from the Progressive Home division in concert with the pricing and segmentation discipline that Progressive has honed over 80 years.

This combination of property expertise and pricing segmentation is enabling us to leverage new solution methodologies, identify and deploy new variables and ultimately have much more accurate and competitive property insurance products. But competitive property and competitive auto, on their own, are not the only benefit of making the property insurance investment.

There is a strategic benefit of having a holistic data set that for the first time for us merges auto rating elements and loss experience with property rating elements and loss experience and having this holistic data set enables us to look across products and is that cross product segmentation that we fully expect will drive our segmentation into the future.

Here's a quick example just of auto rating elements that are highly predictive of property loss experience, if we are in the process of building data feeds to ensure that we can get to market. So in aggregate, when we think about combining Progressive's expertise and segmentation with the Progressive Home division expertise and property, we fully expect this will enable us to not only run highly competitive rates, but to fuel that risk selection growth that we know ultimately creates adverse selection for our competitors and will drive profitable growth for Progressive into the future.

With that said, I'll turn it over to Sanjay Vyas for some more details on product deployment.

Sanjay Vyas -- General Manager, Personal Lines

Thank you, Pat.

My name is Sanjay Vyas. As Tricia mentioned, I've been in the product role for 15 years and just recently moved to claims. Given my experience in product, I wanted to add some additional context to what Pat just shared. Specifically, I wanted to touch on three points.

First, states are complex. I'll discuss how that affects, how the product is implemented. Second, I'll cover what does products -- what product managers decisions are across the 51 jurisdictions. And last, we'll see what product managers do more than just crunch numbers.

So to the first point, state deployment is complex because of the legislative and regulatory diversity across the US. I'll unpack this with a personal example. Recently my wife was at Whole Foods here in Ohio, and she was parking in a pickup truck backed into our vehicle, our relatively new vehicle.

So this could happen in any state. In most states, this is simple. Now the driver is liable and her insurance company would pay for the repairs. But to highlight how things can be different across different states, in Michigan, the neighboring state of Michigan, my insurance company would pay for the claims, not the other driver's. That's of course Michigan laws emphasize first party for physical damage. You can appreciate then that our data should be solved from Michigan differently than for other states.

And just to round that out and the grocery store accident, thankfully, nobody was hurt. But had there been injuries to any drivers, the jurisdiction would matter. In about 20 states, drivers may be eligible to get their medical bills paid for from personal injury protection coverage or PIP, as it's known. The amount that PIP coverage varies across states. In some states, it's really small dollars and others it can be as half a million or even more. By contrast, in the other 30 states, there's no PIP. It will be covered through health insurance or through the auto policy, if med pay had been purchased.

One last point, highlighting the complexity that exists at the state level. Some states like California, North Carolina maybe New York goes on that list. These states more prescriptive about how the products should be structured and those were some large markets. Those states required different models than the ones found in other jurisdictions. So you can see that the states vary by as much as the type of yogurt that you will find in Whole Foods and those differences are meaningful for the product design.

The decision maker who tailors the product at a state level is the state product manager. A product manager or PM has one to two states under her or his responsibility. For example, during my PM career of eight years, I had responsibility for Arkansas, Mississippi, Alabama, Kentucky and then finally Florida and somewhere along the way, I appeared to have lost my hair.

The PM runs the state. They are measured first on profit, and second on growth. The first day I joined Progressive, I was told that the number 96 was important. 96 is our combined ratio target. In hitting the 96 improve the odds that my badge would work the next day. I had started on Arkansas and Mississippi. This was in 2003 and we weren't making money in Mississippi.

By contrast, we are making the target margins in Arkansas. 50-50 odds of the (inaudible) would work, did not sound great, so I started working on fixing the issue. Just to give you some context for my thinking, I saw too facets of the problem. Looking forward, how do we get Mississippi back to a 96 from almost over 100 CR? And second, how did we get here? If I look backwards, did the segmentation in the state fail or whether conditions in the state, such that all the carriers were losing money. So we'll cover segmentation later.

First, we will talk about the rate level. So back then I worked with our actuarial staff to assess the indicated rate need. Next, we filed the proposed rate increase within the State. It's a state where prior approval is needed, which is true in about half the states. The state approved the rate increase after asking a few relevant questions. So we implemented the rate changes. And then I spent the next six months monitoring the results. It takes about six months for customers to pick up on the higher rate level.

In any given month, some customers will be at the old lower rate level and some at the new higher rate levels. Each day, each month that mix changes, and that makes measurement a little tricky. And during that same time the environment also continues to change. Frequency at state level can change due to seasonality like weather, changes in gas prices and then there is severity. Severity can be influenced by changes to medical costs, changes to labor rates, tears on (ph) parts, interpretation of results is complex at a state level, which is where the PMs focus. Of course thankfully, some of the state level variation gets washed out at the country level.

To share an analogy that you might have heard before, setting rates is like surfing. We're trying to ride the wave. Now you can get ahead of the wave and crash, if the assumption about historical and future loss trends are too low. On the other hand if the assumption of trends is too high, will inadvertently overprice the book and come in well under 96, and choke off growth. That's like not catching the wave at all.

So working on Mississippi, I spent time reviewing numbers to see what course correction, if any, would be needed. I also viewed our competitors' filings to ascertain whether or not the problems were associated with the general market or my particular business. So that's the pricing of the book, it's what we call setting the base rate. It's also -- the job also involves segmentation. Segmentation is the most significant part of what we call product. As the job title implies Product Manager, product management involves advancing the segmentation. So Pat spoke about the countrywide support that drives the product. As a PM it will be my job to adopt our product to the local market.

So for example, I elevated the auto (ph) product in Florida in 2011. So I'll share three examples of modifications I consider. Before I jump in I'll point out I'm using some old examples of mine in lieu of some more recent examples from current product managers. I want to be mindful of sharing too much information about their great work with competitors. So the first thing I needed to do was to modify the product to ensure it complies with state laws and regulations. So for example in Florida points for speeding tickets may not be assessed against in force policy. That's the rule. That's different than a lot of states.

I had to alter the product to ensure compliance, but there's no more to it than that. I also needed to assess what other parts of the product needed to be modified to make up for this loss in segmentation. For example, if you can't charge for speeds, the speeds are more likely for 20 year olds, then for 55 year olds, then it might be more accurate to modify the driver age factors to pick up on the segmentation loss for not being able to charge for speeds. This will make for a different than the countrywide solution, but possibly more accurate.

The second part of consideration for the PM is the territory model. The rates for Miami should be different than those for Tallahassee, pretty smart. But we don't price cities, we price at a more granular level, and at adapt by line coverage. So they can get pretty thin. So right there, you see a value we get from our scale. I'll contrast that with what a smaller carrier will be able to do. A smaller carrier has two choices. First, they could use less data to derive their territory vectors, it's not great. Or they can use an industry solution, which provides no advantage over the other carriers in the marketplace. And if this small carrier has an innovative product based on maybe new segmentation, then there is a question about the relevancy of that industry territory model to their product, so back to Progressive.

Our Progressive, our product managers will look at the historical data and take into account previous model changes. The goal is estimate the factors at the territory level while accounting for all the new product changes being made. A third aspect is local market considerations. For example, I had seen a decade ago that customers in Florida, who had many prior tips had very high prospective loss costs. At that point in our company history, we had a policy to offer a rate for every risk. So I raised rates on the segment but the loss ratio did not improve, it did not meet targets.

Now I could see that competitors were not writing this business. We frequently review our competitor's filings and saw that the -- to see whether those insights are applicable and in this case it was. So I filed a rule for the department (ph) saying that under those conditions, we could not offer rate for customers with multiple prior bips. Since then we've added back some segmentation, and so that the choice changed and we do accept business in that segment. So to summarize, state level details such as unique laws, territory pricing, local market considerations are significant for the product. Those three examples, undergo our assessment that focus at the state level is necessary.

To describe our system, I borrow a chart from past presentation. We start with data at the country level and at our size, the amount of data, we have creates a scale benefit over smaller competitors. Being bigger is not the same as being better. We want to be nimble too. To get that we have a diverse group of individual PMs identifying local insights and we feed those insights back into R&D. It's very possible those state specific insights are relevant to other states or even countrywide. We knowledge and reward PMs who contribute outside of their own states to the broader product development.

I'll close with a comment about the product manager role. It's an awesome job, I loved it. It's numbers plus a whole lot more. Let me share a profile of the types of people we hire into this role. We have a combination. So we start with home-grown talent. These are folks who've grown up with the data, who have connections across the company. We also have folks with professional degrees. For example, we have someone with PhD in robotics from Stanford. So we make sure we source the best and we want to have diversity in the range to ensure that we're thinking about our business problems broadly.

So in summary we hire business people into the PM job. We don't focus exclusively on actuarial skills or industry knowledge, rather we hire quantitatively minded business people. We do that because the state profit and loss rolls up to the product manager. As you know we are one of the few companies that reports out results on a monthly basis. That's true, countrywide and also at the state level. I was a product manager for eight years and a General Manager for seven, and over those 15 years, once a month I usually had a hard time sleeping. Because the next day, the monthly income statement would come out. Once a month Sunday was just a little tense.

I view myself as the owner of the business, seeing whether we hit our 96 mattered a lot, seeing whether the segmentation played out the way I thought it would mattered a lot, a great deal goes into going as fast you can at or below 96. It's more than pricing and segmentation. There are many structural elements to our business that also influence the profit and growth. To that end, as a PM I'd be involved in many facets of the business.

I'll share a couple of examples. First, seven years ago as the Florida product manager, I was driving around the state. As I recall, I was visiting agents in the state and we were rolling out the new products. So I wanted to make sure I knew about the new rate level or perhaps new questions on the quoting platform. So we had just finished meetings in Miami. We were driving up to Jacksonville and we drove through a toll booth. And I saw a competitor had put ads at the toll booths. I'm guessing the toll authority -- tolling authority was selling advertising space around toll booth. So I saw their ads and I was irritated.

We have a great brand and I wanted that smart targeted advertising for Progressive. So I work with our media team. We bid for those toll booth ads, making sure we were under our targeted acquisition costs, and we won those bids. Progressive ads started being displayed at toll booths throughout Florida.

Here's another example being involved with all facets of the business. This one time I was the GM. The PMs and I would meet with claims leaders. The goal, to understand how the product actually afforded coverage. There's a lot of complexity. We want to make sure we get to what we call ground truth, that's what my claims bearer (ph) would say, how are claims actually being settled. Here's a relevant sample. The PMs and I drove to our claims wing.(

This was in New England, and we were talking with members of the Connecticut claims team. We had to review a file, where the Connecticut guys had been driving in New York City, and they had a claim. And unfortunately the insured was injured. And we pay out on PIP coverage, which is established by New York Law. There is a catch. Connecticut doesn't have pip coverage. So we don't charge premium for a coverage that we don't offer. But as we've just seen we do -- there are instances where we do pay out a pip. As a astute business person I realize that having a coverage that we paid out on, but one thing we didn't collect premium on could present an issue. (inaudible), this wasn't an issue with our controls. We weren't losing money per se because of this. There are losses we're tracking back to the Connecticut income statement. So we are rate adequate, but there are implications to the product. As a point of reference in a perfect world, I'd charge only the customers traveling to New York over the next six months at higher rate, because that's when exposure emerges in New York. But I don't know that perfectly, and I certainly don't think that our customers know for sure whether they can be traveling to New York in the next six months. So how do we handle it? Well, we have a few options.

We could rate on this indeed liability line coverage, bodily injury. And that's what we have been doing I learned (ph). That would have all the customers in the state pay for these claims and that's not unreasonable at all, but there are alternatives. One is to focus this cost on a territory. That would make sense if the exposure was localized to policies in the southwest part of the state. So what I was trying to do is to match rate the loss costs. This insight about PIP exposure in a non-PIP state caused us to improve our segmentation. That's the value of ground truth of working all facets of the business.

So those are two examples of where driving around the field, we learned about advertising opportunities in Florida and about unique segmentation opportunities in Connecticut. And it's really complicated and we'd love that. We are driven to tailor the product to our state out segment on (ph) our competitors. We are driven to hire and develop product managers who are entrepreneurial, curious and passion about winning the right way by following our core values. And we are driven to go deep on every facet of the business, because we know that important insights happened locally. The point is PMs (ph), we're driven to grow as fast as we can at a 96 combined ratio or better in every single jurisdiction.

With that, I'll bring Pat.

Pat Callahan -- Personal Lines President

Thanks, Sanjay. Having spent about half of my Progressive career as a Product Manager and General Manager, I can absolutely attest to the significant benefit that the combination of local market knowledge, customizing our countrywide segmentation brings to the company overall. So to wrap up, we talked a little bit about how we build and deploy highly complex countrywide product models, and Sanjay shared with you how we customize those product models to the opportunities in front of our product managers in order to deliver profitable growth across the country.

The combination of both our countrywide product models and local product customization in concert with accelerating speed to market is fueling this virtuous cycle of risk selection, which ultimately creates profitable growth for Progressive and delivers against our strategic objective of growing more preferred business and expanding into a much larger Robinson addressable market. The combination of investments we continue to make against this target market is absolutely delivering on our vision to become consumers' number one choice and destination for auto and other insurance.

With that, if you can give us a couple of minutes, we will set up for Q&A.

Julia Hornack -- Investor Relations

(Operator Instructions) And with that, Shanaou, please introduce our first participant from the conference call line.

Questions and Answers:

Operator

Our first question comes from the line of Michael Zaremski of Credit Suisse. Your line is now open.

Michael Zaremski -- Credit Suisse -- Analyst

Hi, thanks for the call. My first question is regarding your competitive advantages relative to peers. I'm curious if you feel they're materially stronger today versus just let's just say a couple of years ago. And if the answer is yes, if you could kind of boil down what are likely a lot of reasons down to maybe the one or two underlying reasons you think are having the most impact?

Tricia Griffith -- President & Chief Executive Officer

I would say, absolutely, that we continue to try to drive a greater gap between our peers. It's really a lot of what we talked about today. It's hard to actually talk about too, but segmentation and what we talked about today with matching rates to risk is critically important, especially to achieve our operational goal. There's a lot of other things that go into play. So our cost structure, we think is really important. We know that people can shop, it's easy to change and having a competitive cost structure is very important to be able to have competitive prices. And then I think if I only had to do two, I would say those, but again our service, our local footprint, our brand, there are so many other things that come into play. It's all those things in the aggregate that we believe chips away of being able to have a competitive advantage.

Michael Zaremski -- Credit Suisse -- Analyst

Okay, great. And my last my follow-up is regarding -- thanks for mentioning 96 Octane, which is your in-house marketing agency. And I have a quick moment to go to its website. So just curious a lot of advertisers are speaking openly about trying to better understand and manage their digital ad spend given the tectonic shift toward digital consumption. It's getting a lot of press. So I'm just curious if I'm by barking up the right tree or not. And is this one of the reasons Progressive has grown faster than many expected?

Tricia Griffith -- President & Chief Executive Officer

Well, we -- from an advertising perspective, we tried to be out in about where anyone wants to shop. So lot of that has to do with demographics. 96 Octane was really born from us. Understanding and being able to do a lot of things in-house that frankly we are paying a premium on for doing outside. That was a little bit different. On the media side, a couple of sessions ago, we had our guest talk really about understanding efficiency of ad spend, whether it is on social media, on Instagram or on mass media. We do believe that we have an advantage here and that's one of the reasons why we buy, majority of our advertising in-house, because we believe we have an advantage. We've talked a little bit about that I won't share great details but, yes, we think that's the competitive advantage.

So that 96 Octane is a little bit different. That's more on the creative side, but our in-house media buy an understanding of making sure that we only spend to our allowable costs I think has a competitive advantage.

Sanjay Vyas -- General Manager, Personal Lines

To that I would add the digital space is obviously highly measurable and we spent a lot in the digital space and have for quite some time. Dan Witalec in the session that Tricia mentioned also tried to convey the level of understanding we have now in advertising attribution in the mass media space. So increasingly, we think we are able to buy shows, day parts and understand exactly what the cost per sale is for those purposes. That obviously allows us to buy very efficiently, but also to negotiate very effectively with the media channels.

Michael Zaremski -- Credit Suisse -- Analyst

Thank you.

Julia Hornack -- Investor Relations

Shanaou, can we take the next caller from the conference call line please.

Operator

Our next question comes from the line of Elyse Greenspan of Wells Fargo. Your line is now open.

Elyse Greenspan -- Wells Fargo Securities -- Analyst

Hi, good afternoon. My first question, I just wanted to get a little bit more color I guess on the PLE disclosure that you guys have in your Q. The growth slowed in the agency channel and is actually down in direct channel and for three-month basis this quarter. I was just wondering if you could talk to a little bit about what you're seeing there, and is that being driven by what's gone out maybe some of your competitors taking less rate and pushing for growth?

Tricia Griffith -- President & Chief Executive Officer

Hi, Elyse. So yes, in terms of growth, we still feel positive. The measure we use internally is trailing 12. We've talked about trailing three being an indicator. So we obviously always look into that. We have seen from a rating perspective, less aggressive rate taking. So if you go back a couple of years, there was a lot of rate. It's smoothed out a little bit for the most part. There are some competitors still taking a little bit of a rate and some actually reducing some rate. So that will put some pressure on PLE.

That said, we continue to think about the nurture part in the ways of making sure that we take care of our customers, whether it's on the CRM side or the claims side. In addition, and I'm the executive sponsor for our retention team. There are times where we might make a decision for -- and knowing that might affect the PLE negatively on a process change. I won't go into the details, but we might look at our process changed where we know it might cause customers to not stay as long, but we want to balance PLE with lifetime underwriting profit. So occasionally, we'll make those trade-offs, because it's right thing to do for the business. But again, we are very dedicated to continue on our path of retention. And I don't have a crystal ball, but we look at really everything from rate to service to nurturing our customers.

Elyse Greenspan -- Wells Fargo Securities -- Analyst

Okay, great. And then my second question is on the severity trends, which also did go up based on the disclosure in your Q, if you could just talk to what you're seeing there. And then as you think about pricing for -- frequency is still negative but if severity continues to drift up, can you talk about how that might impact the prices that you plan to take?

Tricia Griffith -- President & Chief Executive Officer

Yeah. So as far as frequency, it's been -- we're pretty much in line now with the industry. We were a little bit -- it was a little bit lower in past quarters. So it's since fairly benign now. As far as severity we do price to those trends. So the trend you saw this quarter was really the increase was based mostly on collision and PIP. And PIP has a lot of volatility. So I'll talk more about collision. So our collision severity trend this quarter was just shy of 9%, about 8.7%. For the year, year-to-date it's still like 6.7%, but we're seeing more frequency and severity on total loss vehicles. So newer vehicles becoming total losses.

So if we continue to see that trend, of course we'll price to it and we don't price, overall we will price when we look at certain states and the channel, et cetera.

Elyse Greenspan -- Wells Fargo Securities -- Analyst

Okay, thank you very much. I appreciate the color.

Tricia Griffith -- President & Chief Executive Officer

Thanks. Elyse.

Julia Hornack -- Investor Relations

Shanaou, can we take the next question from the conference call line please?

Operator

Our next question comes from the line of Amit Kumar of Buckingham Research Group. Your line is now open.

Amit Kumar -- Buckingham Research Group -- Analyst

Thanks, and good afternoon. Just going back, I guess to the discussion on higher severity and Allstate said the same thing this morning in terms of the newer vehicles showing the higher severity component. Are you surprised by this change in trend, which we are seeing and I would have intuitively assumed that all of that ADAS (ph) it would have actually helped the trend somewhat in terms of collision warnings and all that stuff. Maybe just talk about, has anything changed over the last three quarters, because if I look at the older collision trends it was flat and even if I go back to '14, '15, '16 it was up in the 4% range or so. So what has changed recently.

Tricia Griffith -- President & Chief Executive Officer

Well, very specifically, like I just talked about with the lease, it's the total loss, both frequency and severity. And remember even though ADAS is more and more prevalent in vehicles there is still a large fleet out there of cars that don't have that safety equipment, and there are a lot of people that have that equipment and turn it off. So it's -- that's really hard to measure. From the word surprise, we just look at data. So when we look at -- when we see the data we react to it, we watch it very closely. I tried to get away from being surprised at anything I see, since we've been in this industry a long time, we always follow the data.

Pat Callahan -- Personal Lines President

Yeah. I think the important thing to note is that our average premium has kept up or actually in this case outpaced the pure premium growth of frequency times severity or average loss cost. So I think by that fact, you could assume that we don't have it exact down to line coverage. We can't predict the future, but in aggregate, our pricing has been keeping up or actually outpacing the loss cost trends.

Tricia Griffith -- President & Chief Executive Officer

And we often talk about that and Pat hit on that when he showed the chart of the delta. It's really about staying ahead of that trend. And we've always talked about small bites of the apple. We don't want to rate shock our customers and we do think that influences POE as well. So we'll continue to do that.

Amit Kumar -- Buckingham Research Group -- Analyst

The other question, the only other question I have. And this 85 is actually very -- it's fascinating and very helpful. I don't know if this question is for you or Pat or someone else. When I look at the 85 deployment on slide, I think it's 14 or 15, I can't see the page number, the today versus the footprint by the end of the year. Is there any method to that launch. I guess what I'm trying to understand is, was there something that you noticed in those states, which are being cast upon initially, and then the -- it's being rolled out into other states, or is that -- just the usual how it sort of -- it's how the process evolves.

Tricia Griffith -- President & Chief Executive Officer

I'll -- if Pat wants to come up he can, but I don't think there is a huge amount of rhyme or reason. Obviously we want to get it out, we believe it works. We want to get it out in high premium stays if that makes sense. Right now we're in 15 states, 40% of the premium. They're also -- there are states where we still have to get up to date, four to get today, five. So sort of a whole map and blueprint of how we're going to do things. And frankly, how we can go through our IT department as well. And so that's -- that would be my --

Pat Callahan -- Personal Lines President

Yeah, and half the states are currently performing on the 84 model, the regulatory environment can also affect the schedule. So we have a schedule, it's fairly dynamic, but those are the considerations that go into that.

Amit Kumar -- Buckingham Research Group -- Analyst

Okay, thanks for the answers, and good luck for the future.

Tricia Griffith -- President & Chief Executive Officer

Thank you.

Thank you.

Julia Hornack -- Investor Relations

Shanaou, can we take the next question from the conference call line please.

Operator

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

Joshua Shanker -- Deutsche Bank -- Analyst

Yeah, thank you for taking my question. I want to talk about the new business penalty. You have been growing very aggressively we also talked about telematics and also about customers who've been customers before who are coming back. Over time does the new business penalty diminish for you in terms of taking on new business?

Tricia Griffith -- President & Chief Executive Officer

Well, I think -- and you can add a little bit on this. I think on the new penalty, a lot of that comes from new business, but also from the advertising. But also that's balanced with retention. So as our retention has grown that had equaled out a little bit. We're going to continue to spend a lot on advertising. So that will be expensive on the direct side, but again we only do that if it's efficient. You talked about telematics. That's a huge variable for us and part -- and in terms of not just understanding the ultimate loss costs to those customers. And now, especially as we evolve into more distracted driving, but our preferred customer base as well.

And then you talked about customers coming back. That's just us to understand, both how to underwrite and understanding more about customers who have come before. So lot of times if it's a new customer we don't know anything about them. We learn along the way. We've actually already known this person. So like if you dated somebody, and you broke up and you start dating again, you already know that he didn't put his shoes away. So you got to figure that out and we know a little bit more. Not a great analogy, but the best I can come up with.

Joshua Shanker -- Deutsche Bank -- Analyst

And along those lines, do you have a vast sort of collection of people who were customers or not -- maybe they weren't customers, they were hi and bye type people, who you never got around to dating or is that really negligible?

Tricia Griffith -- President & Chief Executive Officer

So customers that quoted and didn't buy?

Amit Kumar -- Buckingham Research Group -- Analyst

Or -- actually you were talking -- you said that people can try out a snapshot and see what their discount is and if they like the price afterwards, then they can come and when you get to see how their driving is before you've actually taken on the risk.

Tricia Griffith -- President & Chief Executive Officer

No, we had tested something we called test drive a while -- years ago, and it was a little bit -- it was like that. But no, we -- when you're with -- now you are with snapshot, you are a customer and we have other variables as well.

Amit Kumar -- Buckingham Research Group -- Analyst

Okay, thanks very much.

Tricia Griffith -- President & Chief Executive Officer

Thanks.

Julia Hornack -- Investor Relations

Thanks, Shanaou, can we take the next caller from the conference call line please.

Operator

Our next question comes from the line of Kai Pan of Morgan Stanley. Your line is now open.

Kai Pan -- Morgan Stanley -- Analyst

Thank you, and good afternoon. So just want to be more specific on the pricing versus the loss cost trend. If you look at frequency, up 6%, frequency is down 3%, so less loss cost trend, like up 3%. Your average premium per policy is up 4%. So you still have a little bit, like 1% room to sort of improve your margin. But my question is really -- is that going forward, how quickly are you going to react to the potential rising cost trends on the pricing side? You try to catch up with it to maintain the margin? Or you could let dribble a bit higher, because now you are in the 90% away from the 96% target.

Tricia Griffith -- President & Chief Executive Officer

From the reaction perspective we are rate machines. So we can react, I think quicker than anybody in the industry. So that to me is something that's a really big strength of ours. We will react if we continue to see trends, whether they go down or up and it really depends on -- we can look at our conversion and we might do things differently if our conversion changes. Right now we feel really great about where we are rate wise. And we are not going to react to again one line coverage code in one quarter of severity.

Pat Callahan -- Personal Lines President

I'd also highlight what Sanjay was talking about which is our product management structure, that's very local and down at a pretty low level in terms of product analysis and product action. So if the product management believes there is benefit to using that 1.4 at certain segment where they can get more competitive, perhaps it's Robinsons (ph), and grow more, again subject to that 96 combined ratio, they'll make that decision. So this really comes down to very smart and very motivated local folks who are figuring out how best to deploy that margin. It could be advertising, it needn't necessarily be rate level. We can say we want to advertise more that marketplace to again grow as fast as we can subject to that 96 ceiling.

Tricia Griffith -- President & Chief Executive Officer

Yes, it's so important to have that balance of having a really healthy margin and growing. And if you make that decision, because you think you can grow. We really want to make about that you can grow and not just throw away that margin.

Kai Pan -- Morgan Stanley -- Analyst

Okay, great. My follow-up question is that, since you're so fixed on the 96 number, I'd imagine you probably cannot wait for your segmentation model from 8.5 and going out to 9.6. My question is that way from 8.5 to 9.6 is some -- is there a phenomenon like call it diminishing marginal returns of that you get a lag (ph) as you move further and further. What I really try to get at is that, are there other opportunity for example in the Robinsons which you'll probably just started this progress, you could put more effort in that -- making that bigger marginal impact. And with that helping accelerate the growth in Robinsons segments as well as improve the margin of that target market?

Tricia Griffith -- President & Chief Executive Officer

Sure. And we've shared over the years sort of those (inaudible) curves where you get incrementally better. And obviously, there's, -- there are big segmentation variables that kind of give you that leapfrog. Think of credit and especially for us usage-based insurance. Where I think our biggest opportunity as -- and John, feel free to weigh in, is the fact that now we own a homeowners company and to be able to share the data of losses that happened in both home and auto and have that deep segmentation on the home front and the auto front and combined those. So to me, there's so much to do there and that's what's so exciting about our ownership our eventual full ownership of Progressive Home ASI.

John Sauerland -- Vice President and Chief Financial Officer

Yes. And we did start that product version 1.0. So there's been a lot iterations. And they've all been far incrementally better than the prior version. We think there are a lot of other opportunities, you both head-on and talking about the Robinsons and pricing the household more effectively over time, even beyond auto and home is an opportunity for us as well. But we absolutely as Pat showed have 86 (ph) in the R&D lab and will be out soon with that. We even have 87 (ph). So we look at the opportunities that are in front of us figure out which we want to deploy in which product model and invariably, we have many more opportunities on our list that we actually roll to market and may just go to the next product version. So we are not yet seeing any diminishing returns in terms of product model upgrades.

Kai Pan -- Morgan Stanley -- Analyst

Thank you so much.

Julia Hornack -- Investor Relations

Thank you. Shanaou, can we take the next question from the conference call line please.

Operator

Our next question comes from the line of Paul Newsome of Sandler O'Neill. Your line is now open.

Paul Newsome -- Sandler O'Neill -- Analyst

Good morning, and thanks for the call. You talked about the importance of prior companies, prior insured. Has the type of company that you get your customers for -- I'm assuming it has changed. Maybe you could talk about how it is changed over time in the last year or so in terms of where you're -- what type of competitor are you getting your typical customer today versus before?

Tricia Griffith -- President & Chief Executive Officer

Yes, I mean, I think there's obviously a lot of big players. So we focus on the bigger players as I'm sure they focused on us. A lot of it has to do with rates. So if you get behind in rate and you have to take a lot. Those customers are going to shop and they will likely come to another company that has a well-known brand like Progressive. And so I won't necessarily name competitors, but we've seen a lot of from some of the major competitors. And I think that had to do with just rate and it's a easy to shop auto insurance in both the agency and the direct channel and we see that when people raise their rates.

Paul Newsome -- Sandler O'Neill -- Analyst

What about cross distribution, I mean obviously direct is taking share in general. But could you talk little bit about any changes in how people are -- I mean people going straight from agency to direct? Or the agency be independent to direct, or how does that process evolved in recent years?

Tricia Griffith -- President & Chief Executive Officer

It's hard to say, I think for years people thought every moment go direct. We have a very healthy robust agency business. We have P&L 30,000, 40,000 independent agents, and they're growing and we're really happy about that. So I think it really is an individual thing. For us, we want to be where, when and how customers want to shop. So we've got the direct channel. We continued to grow in that across the board. But more specifically, on the homeowner side. So I think years ago people said, I wouldn't shop for auto online, that's crazy. A lot of people do it now, actually -- obviously, a lot of people. And from homeowners perspective, the same thing and we are seeing a lot of people shopping through our HomeQuote Explorer. So really for us it's about the individual comfort level of how you shop. So it's hard for me to look at data across there. But I would tell you we are growing in both channels, obviously, as you see substantially, but very happy with that. And we'll watch trends as they change, but so far, we really do focus on what the customers want to do.

Pat Callahan -- Personal Lines President

And while we've seen an aggregate trend toward more direct, what we see with in channels is generally people are shopping within the channel. So if you look at the distribution of our customers, new customers, it would pretty fairly reflect the companies and their market share within those respective channels. The direct channel actually in aggregate over the past few years has been actually taking more share from captive agent companies and from independent agent companies, share for independent agents has actually stayed fairly constant and we've seen captive share drop a bit and direct increase. When we talked about prior insurance in our rating, we're talking about a lot more than just from where you came most recently. We're looking at a longer history of how many different carriers you are with, how long were you with them. It's a combination of a lot of similar attributes like that we're looking at the segments. What was previously a fairly binary rating variable of do you have prior insurance or don't you, we've now segment of that far more -- more fine.

Tricia Griffith -- President & Chief Executive Officer

Thanks, Pat, I wasn't catching that. I think on the captive side it makes sense, because you only have one choice. And so for us, that's why we really love to working with independent agents, because they do have choices, and I think people will demand now.

Paul Newsome -- Sandler O'Neill -- Analyst

Thank you very much.

Unidentified Speaker --

Thanks, Paul.

Julia Hornack -- Investor Relations

Shanaou, can we take the next caller from the conference call line please.

Operator

Our next question comes from the line of Marcos Holanda of Raymond James. Your line is open.

Marcos Holanda -- Raymond James -- Analyst

Good afternoon, team 96. Thanks for taking my question.

Tricia Griffith -- President & Chief Executive Officer

I guess we got that message across.

Marcos Holanda -- Raymond James -- Analyst

So in the context of the two milestone of $30 billion in premium, I was hoping you guys could discuss the balance between capital demands and growth and how that could potentially affect your annual variable dividend? And if you could discuss the formula that dividend, that would be great. Thank you.

Tricia Griffith -- President & Chief Executive Officer

Yes, I mean, obviously we want to grow as fast as we can. And this is a fairly capital-intensive business. We know we're not buying things. We have to have regulatory capital and then contingent capital. So it has taken demand (ph), we obviously just went to the debt market for another $550 million. And we believe that will allow us to continue to grow throughout this year and next. The variable dividend is based on a percentage of after-tax underwriting profit. It is a formula that the Board approves every year. So -- and that's changed over the years, used to be 20%, that was 25% this year, it's 33.5%. We multiply that times the gain share factor within the company. So right now, our gain share factor is 1.91. It varies from zero to a maximum of 2 point. So if you do that math across that multiplication, that's how we come up with the variable dividend. The only caveat to that with the variable dividend is if our after-tax comprehensive underwriting, I mean, comprehensive earnings are less than our after-tax underwriting profit then we don't panic and we pay zero. That's happened once and that was in 2008 during the financial crisis.

Pat Callahan -- Personal Lines President

And that is as we say in the Qs and the Ks, it's subject to board discretion. So the board could choose even if that criteria attrition that Tricia just mentioned of comprehensive income having to be greater that after-tax underwriting income is not met. The board could choose to pay a dividend nonetheless. And if the board chose to pay less than the formula is under their discretion as well. We do have a lot of capital needs, given our growth. We're on track for almost as an additional 6 billion in premium this year. We think of our surplus needs as three to one for auto and around half that for home. So a blend that's in the 28, (ph) 29-ish (ph) kind of range right now. And obviously, we want to continue to grow and that's why we did access capital markets recently, again to ensure that we've the capital we need to support the operating business.

If you look at our financial policies, I think you'll find it is all about supporting that operating entity, because that is how we consistently drive shareholder value. So we think we're in a pretty good position going into the next year. Depending upon how much growth we have next year, we may find ourselves in need of incremental capital that will remain to be seen. Margins obviously right now are very good, investment returns could be better is the way I would characterize it. So we'll see how that plays out going to the next year. But right now we feel great about our position.

Julia Hornack -- Investor Relations

Thanks for the question, Marcos (ph). I'm actually going to take a question from the webcast now. Please discuss your ambitions, and I think that this is because multiple times in the past, we've talked a lot about the different sizes of the property and casualty market, the personal lines segment versus commercial lines segment. Please discuss your ambitions in the commercial lines insurance business. Do you envision in 10 years that Progressive will be a significant underwriter of such lines as Workers' Compensation, commercial property, commercial liability, et cetera.

Tricia Griffith -- President & Chief Executive Officer

So we talked a little bit -- I talked a little bit about this in our -- my letter, and we obviously just rolled out what we call BQX, BUSINESSQUOTE EXPLORER. So that is insurance for small business, think of GL and business owner policy. That is something that we believe we have a lot of opportunity. It's just getting started there. I'm not going to venture out and talk about 10 years from now. What I'll say is this that we're the number one commercial auto writer.

We have a brand and we have the availability to -- I think really we have a lot of runway I should say to really grow in that space, because of our brand, because of our knowledge of that area, and whether we write it all on our paper or use partners which we will be using, I can assume it will do -- it will be like we did with home -- with our Advantage Agency on the personal line side.

We see this whole destination for commercial, and that's what we have been building. We started building it last year. We just rolled out, had a soft launch this quarter. So all I can say is, I'm not going to talk 10 years out, lots of opportunity. We're very excited about it and we believe it will be something really significant.

Pat Callahan -- Personal Lines President

Yeah, we've noted before, the commercial lines space in property and casualty is in excess of 300 billion and we play in a slice of that commercial auto historically and today really it is probably 10% of that. And we are aspiring to move into a broader offering on our own paper as well. So the BUSINESSQUOTE EXPLORER offering today is predominantly third-party carriers, for coverages outside of commercial auto. We have filed with the first state, a general liability and business owners policy and we hope to be out in that state early next year.

Julia Hornack -- Investor Relations

All right, thanks. Shanaou, can we take another question from the conference call line please.

Operator

Our next question comes from the line of Meyer Shields of KBW. Your line is now open.

Meyer Shields -- Keefe, Bruyette & Woods -- Analyst

Thanks. I'm trying to understand whether the increasing sophistication of the pricing that you're talking about, does that make your near-term results more or less subject to exogenous variables like gas prices?

Tricia Griffith -- President & Chief Executive Officer

I'm not sure if I understood the question. You mumbled a little bit in the front, I didn't really hear the first part of it.

Meyer Shields -- Keefe, Bruyette & Woods -- Analyst

I'm sorry, I mumbled. I just want to understand, given the reliance on data, and obviously it's working out really well, I don't mean to sound critical, but does this make your result, your underwriting result more or less dependent on external realities. If you think gas prices as an example, how that will affect our overall mileage?

Tricia Griffith -- President & Chief Executive Officer

Right. I mean I think from that perspective, when we look at macro-economic data like gas prices and unemployment, those normally end up affecting frequency, and we sort of -- we don't price for frequency. We really price for severity. So I would say it's always important. So we always look at it, we follow it very closely to determine trends. I would say -- I wouldn't say it necessarily changes, but you differ.

Pat Callahan -- Personal Lines President

I really don't think, having greater sophistication in your pricing puts you at any -- in any different position relative to loss cost trends that are driven by gas prices, other economic changes, I really don't. So those other economic changes might affect segments of customers, more or less than others. And to that degree, we might see changes in trends, more so say if unemployment increases over the past, we have seen changes in claiming behavior and coverages such as personal injury protection. So the extent your segmentation drives your mix of customers to one end of the spectrum or not you might be at greater risk in terms of economic changes, but in aggregate I would say it's really not an issue.

Meyer Shields -- Keefe, Bruyette & Woods -- Analyst

Okay, and then the second question, I'm trying to understand the elasticity of price within homeowners compared to auto. My superficial assumption would be that there is less elasticity, typically a smaller dollar policy, but I don't know if that's accurate.

Tricia Griffith -- President & Chief Executive Officer

I think that would be accurate, I'm not --

Pat Callahan -- Personal Lines President

So shopping for auto insurance is a lot easier than shopping for homeowners insurance. So I think there is some greater stickiness. The fact is that for a lot of homeowners, that homeowners premium is bundled within their mortgage as well. So it's not quite as obvious when the rate changes. So I think if your hypothesis is elasticity is greater in auto than home. I think that would be a fair assumption.

Meyer Shields -- Keefe, Bruyette & Woods -- Analyst

Okay, thank you very much.

Tricia Griffith -- President & Chief Executive Officer

Thanks.

Julia Hornack -- Investor Relations

Shanaou, can we take the next question from the conference call line, please.

Operator

Our next question comes from line of Gary Ransom of Dowling & Partners. Your line is now open.

Gary Ransom -- Dowling & Partners -- Analyst

Yes, good afternoon. I wanted to ask about UBI and its Houston segmentation. I assume it's still an add-on at the end of the various other variables, and you can correct me if I'm wrong on that, but do you envision a time when that actually might begin to be more infused in the rating plans and become more of a primary variable, one that replaces other variables. I just would like a view of how you're looking about the UBI portion of sophisticated segmentation.

Tricia Griffith -- President & Chief Executive Officer

Yeah, I mean I think for us the UBI is obviously so powerful that we would love to have it in every single auto quote, I think the issue is, obviously, it's a voluntary -- sort of voluntary perspective. At some point, the car could be--the car could be the place that actually tells you how you drive and if we have that technology and the infrastructure to be able to understand that driving behavior. So right now, it's one of many variables.

We think it's -- we -- no, it's really powerful. We want to be able to give good drivers great prices and so we'll continue to advertise on that. I wouldn't say that -- I would (ph) even say it's necessarily an add-on, but it's not something that everyone has. So it's not like everyone has -- we're going to have everyone's proof of where their garaging address is. So I don't know if I call it add-on or not, it's a variable, we think it's important for people that want to get great rates they're going to actually mean obviously do UBI, and if not wherever they go and they don't get great rates, they will leave and go to another competitor, which is OK with us.

Pat Callahan -- Personal Lines President

So Gary, I'm guessing you're thinking from your actuarial point of view, and in terms of solving for the efficacy in terms of increasing the accuracy of the rate, it is actually solved last because not all of our customers take UBI, we want the greater program to be accurate for all those customers then we solve incrementally, and it has a lot of incremental power. We saw that last. Would we prefer that everyone take it, as Tricia said, absolutely yes. Will there be a day when that is the model, it very well could be. Certainly as data comes from vehicles directly going forward and even today the data coming from handhelds increasingly. So I think there could be a day, it wasn't been the very near future where it is all solved simultaneously and that would get us the biggest benefit from the rating information, but today we solve that -- for that loss. Did that answers the question?

Gary Ransom -- Dowling & Partners -- Analyst

Yes, that does and maybe a follow-up to -- flipping to homeowners. Is -- are you using data from many of the Internet of Things type technologies and collecting that, is that a useful means of segmentation in homeowners.

Tricia Griffith -- President & Chief Executive Officer

We're working on that, we have a couple of people, both at Progressive Home and here at Progressive working on Connected Home and ultimately how that -- how we can understand what people -- people buy and how that affects loss costs, probably too early to tell right now. This will be my answer, but yeah, we're definitely looking at that.

Pat Callahan -- Personal Lines President

We are pricing segmentation based on the different perils and the different technologies that can be deployed to trial and limit losses on those perils or (inaudible) that. The take rate now is very, very low. So the deployment of such technology is really just beginning. And we have discounts for those devices. I will admit that the data behind the discounts for those devices is somewhat limited, based on the fact that we simply haven't had much history. But that is absolutely where our product is designed to go Tricia. So we have a lot of people who are actively making sure we are a leader when it comes to deploying, those types of things in our rating for homeowners.

Tricia Griffith -- President & Chief Executive Officer

I think ultimately what you want to get to from a home perspective because the severity is so much higher than say an auto is if you have a device and it alerts you, you have to stop the loss or at least lessen the loss from happening. Naturally the key is, if you have something and you're on vacation and you can't stop the water leakage that doesn't really help much. It's really about understanding and lowering loss costs.

Gary Ransom -- Dowling & Partners -- Analyst

I wonder if I could guys, just fit in one little one too, how important on the different levels of segmentation you're going from a 4-8, 5-8, 6-8, 7, (ph) the speed of that. How important is that replacement, constant replacement to your ability to develop the adverse selection that you talked about earlier?

Tricia Griffith -- President & Chief Executive Officer

I think it's critical.

Pat Callahan -- Personal Lines President

It is very important. So, as you know, most of our rating algorithms are filed and in the public domain. The minute we send them to the departments of insurance, as we mentioned in the presentations, we are also looking at our competitors' filings. So we are copied very quickly. This is frankly about running faster and then we talked about the iterations of 8-7, 8-9, 9-6 (Ph). So I think was where we were headed. It's critical, we continue to get them out fast.

Tricia Griffith -- President & Chief Executive Officer

And it's more fun. Actually, that's the way we expanded (ph). So that's the fun part of being a product manager as you -- some of that segmentation comes from grassroots efforts and then we look at them countrywide and there's a lot on the table. A lot of exciting things. So just about running faster. It's in our DNA and we'll continue to do it.

Julia Hornack -- Investor Relations

Thanks, Gary. So we are going to sneak in one last caller even though we're past the 3 o'clock hour. Shanaou, can you introduce the last caller please?

Operator

Our next question comes from line of Yaron Kinar of Goldman Sachs. Your line is now open.

Yaron Kinar -- Goldman Sachs -- Analyst

Just made it. Thank you. I had two questions. One, as you continue to improve on your segmentation and pricing. I guess one thing that's quite notable is that your combined ratio is actually improving along the way as well. And I would have thought that with a target of growing as fast as you can 96, it would kind of be opposite way around, and maybe you'd achieve even greater growth while keeping with a 90, or getting as close to the 96 as possible. So I guess my question is, is the fact that 96 is -- that you're well below 96, is that just because you're still keeping some margins of error and you're being cautious in how you're pricing or frequency is below what you had expected to be or is there some other deliberate driver there that would keep the combined ratio as low as it is.

Tricia Griffith -- President & Chief Executive Officer

Remember, it's 96 or better. So four is sort of the -- we have to have and it's better. Frequency is one input. Again, we talked about today when I wrote in my letter, mix is a big difference too, having more preferred customers. We still have a small percentage of the Robin (ph) since we have a lot of room to grow on that. And we also highlight and put a lot of emphasis on our cost structure, on both on the LAE side and what we call non-acquisition expense ratio. So it's a bunch of different things in play that goes into our widened margins.

Yaron Kinar -- Goldman Sachs -- Analyst

I understand all of that. But would the (inaudible) at that could be priced for, to begin with. And not that I'm complaining about 20% net premiums growth in any way, shape or form, but why wouldn't it be 30% with keeping margins a little bit lower?

Tricia Griffith -- President & Chief Executive Officer

Well, again we said, we look at state-by-state, channel-by-channel, segment-by-segment. And if we believe that -- one, the growth has been tremendous. But if we believe that there is an area where we think we could grow more handle, or we think that there is an opportunity to be at the competition, we will absolutely consider whether limiting margins or reducing margins there to get that growth should happen. We go through that exercise all the time. So there is a handful of states right now where we have reduced new business rates in order to grow.

We look at a lot of different data to understand that, our conversion being one of them. Again, you can easily say, yeah, let's, if we can grow 40% if you said to me right now if we grow 10 more points and only lose a half a point of combined ratio, I'd say, yes. But you just don't want to throw away that margin and not get the growth. So it's really surgical when you make that trade-off.

Yaron Kinar -- Goldman Sachs -- Analyst

Okay, and then my second question, I think you've often describe yourself more a technology company than insurer, and seems like now there is another technology company and during this phase is dipping its toe in the water, Amazon. And if I understand Amazon's mission correctly, it's basically to take margin out of businesses, and out of industry. So I'm just curious to hear your thoughts as to how homeowners or maybe even auto eventually gets impacted as Amazon tries to build a presence in insurance.

Tricia Griffith -- President & Chief Executive Officer

I mean I think we'll cross that bridge when we see it, in terms of that, if we see it. Insurance is complex product, having 51 jurisdictions, it's highly regulated, not an easy place to get into, and do it well and make money. I think Pat said it's easy to make money. It's easy to grow, not easy to do both. So we have 80-plus years of experience. We've had ups and downs, way more ups than downs.

That said, we've seen a lot of competition come along over our 80 plus years and we believe we're well positioned with all the things that we've said in terms of great brand, incredible segmentation, great people and culture, service like no other. So we'll take all of our advantages, our competitive advantages and work to continue to grow and grow profitably.

Julia Hornack -- Investor Relations

So thank you everybody for your time and interest today. We've exhausted our scheduled time and then some. So Shanaou, I'm going to hand over the call back to you for the closing scripts.

Operator

That concludes the Progressive Corporation's third quarter Investor event. Information about a replay of the event will be available on the Investor Relations section of Progressive website for the next year. You may now disconnect.

Duration: 97 minutes

Call participants:

Julia Hornack -- Investor Relations

Tricia Griffith -- President & Chief Executive Officer

Pat Callahan -- Personal Lines President

Sanjay Vyas -- General Manager, Personal Lines

Michael Zaremski -- Credit Suisse -- Analyst

Elyse Greenspan -- Wells Fargo Securities -- Analyst

Amit Kumar -- Buckingham Research Group -- Analyst

Joshua Shanker -- Deutsche Bank -- Analyst

Kai Pan -- Morgan Stanley -- Analyst

John Sauerland -- Vice President and Chief Financial Officer

Paul Newsome -- Sandler O'Neill -- Analyst

Unidentified Speaker --

Marcos Holanda -- Raymond James -- Analyst

Meyer Shields -- Keefe, Bruyette & Woods -- Analyst

Gary Ransom -- Dowling & Partners -- Analyst

Yaron Kinar -- Goldman Sachs -- Analyst

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