Progressive Q1 2022 Earnings Report

Progressive EPS Results

• Actual EPS: N/A
• Consensus EPS: $1.15
• Beat/Miss: N/A
• One Year Ago EPS: N/A

Progressive Revenue Results

• Actual Revenue: N/A
• Expected Revenue: N/A
• Beat/Miss: N/A
• YoY Revenue Growth: N/A

Progressive Announcement Details

• Quarter: Q1 2022
• Date: 5/2/2022
• Time: TAS
• Conference Call Date: Tuesday, May 3, 2022
• Conference Call Time: 6:50AM ET

Progressive (NYSE:PGR) Corporation is a large U.S.-based property and casualty insurer that primarily underwrites personal auto insurance along with a broad suite of related products. Its offerings include coverage for private passenger automobiles, commercial auto fleets, motorcycles, boats and recreational vehicles, as well as homeowners, renters, umbrella and other specialty P&C products. Progressive also provides claims handling, risk management and related services to individual and commercial policyholders.

The company distributes its products through a mix of direct channels—online and by phone—and an extensive independent agent network. Progressive has been an early adopter of technology and data analytics in insurance, deploying telematics and usage-based insurance programs to price risk more dynamically and offering digital tools and mobile apps to support sales, servicing and claims. Its operations serve customers across the United States and in Canada.

Founded in 1937 and headquartered in Ohio, Progressive has grown into one of the better-known U.S. insurers through an emphasis on product diversification and technology-driven underwriting. Tricia Griffith serves as the company’s chief executive officer, leading Progressive’s strategy in personal and commercial P&C insurance, distribution innovation and digital transformation. The company’s public profile reflects its long-standing role in the broader insurance market and its focus on customer acquisition, pricing innovation and claims efficiency.

Progressive Q1 2022 Earnings Call Transcript

Key Takeaways

• Commercial lines milestone: almost 1 million commercial policies in force and Q1 63% growth, with companywide written premiums nearly doubling over the past five years.
• Personal auto rate increases: implemented 7 points in Q1 2022 (on top of 8 points in 2021) to combat elevated loss costs and drive towards rate adequacy in all states.
• Personal auto growth slowdown: sequential policy-in-force growth turned negative, new applications declined year over year, and policy life expectancy dropped as Progressive led the market in rate actions.
• Macro headwinds: used vehicle values remain significantly above early-2021 levels, bodily injury severity is trending upward, and vehicle miles traveled have rebounded to near Q4 2021 levels, increasing loss costs.
• Product expansion: the U.S. personal auto product model is now live in over half of states with promising early results, and the 4.1 homeowners product has expanded to 12 states, boosting segmentation strategy.

Presentation

[Operator]

Welcome to the Progressive Corporation's first 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. Although CEO Tricia Griffith will make a brief statement. The company will then use the remainder of the event to respond to questions. Acting as moderator for the event will be Progressive's Director of Investor Relations, Doug Constantine. At this time, I will turn the event over to Mr. Constantine.

[Douglas Constantine, Director of Investor Relations at The Progressive Corporation]

Thank you, Emily, and good morning. Although our quarterly investor relations events often include a presentation on a specific portion of our business, we will instead use the 60 minutes scheduled for today's event for introductory comments by our CEO and a question and answer session with members of our leadership team. Questions can only be asked by telephone dial-in participants. The dial-in instructions may be found at investors.progressive.com/events. As always, discussions in this event may include forward-looking statements. These statements are based on management's current expectations and are subject to many risks and uncertainties that could cause actual events and results to differ materially from those discussed during today's event.

[Douglas Constantine, Director of Investor Relations at The Progressive Corporation]

Additional information concerning those risks and uncertainties is available in our annual report on Form 10-K for the year ended December 31, 2021, as supplemented by our 10-Q reports for the first quarter of 2022, where you will find discussions of the risk factors affecting our business, safe harbor statements related to forward-looking statements, and other discussions of the challenges we face. Before going to our first question from the conference call line, our CEO, Tricia Griffith, will make some introductory comments. Tricia?

[Tricia Griffith, CEO and President at The Progressive Corporation]

Thanks, Doug. Good morning, and thank you for joining us today. Anniversaries are a natural time to look back on the past, and since this is the first investor call of Progressive's 85th year, I wanted to do just that. We have grown from a scrappy startup trying to find a foothold in the Great Depression to the 10th-largest homeowners carrier, the third-largest personal auto carrier, and the No. one commercial auto carrier. In just the last five years, our total company-wide written premium has nearly doubled. Nowhere has growth been more remarkable than in Commercial Lines, which just passed a major milestone of over $9 billion in written premiums on a trailing twelve-month basis.

[Tricia Griffith, CEO and President at The Progressive Corporation]

We grew commercial auto premiums over 200% in the last 5 years, all while generally achieving a better than average industry profit margin, and ended March just shy of 1 million Commercial Lines policies in force. It has truly been an incredible run with significant opportunities still waiting to be captured. Congratulations to the Commercial Lines team, and thank you to all Progressive employees and customers who have made the last 85 years so extraordinary. Throughout our 85-year history, we have worked through many hard and soft markets, and we continue to address the hard market we're in today. While some indices suggest the value of used vehicles is leveling or even beginning to decline, used vehicle values are still significantly above those of early 2021. Steady but increasing trend in bodily injury severity has also contributed to the increase in loss costs we've experienced.

[Tricia Griffith, CEO and President at The Progressive Corporation]

Further, as the country emerged from the Omicron wave, we saw personal auto vehicle miles traveled recover to fourth quarter 2021 levels, which were in the 9%-10% range below the pre-pandemic baseline. Our response to these trends have been to reduce marketing expenses, increase underwriting scrutiny, limit billing plan options, and in the first quarter, we implemented rate increases of seven points in personal auto that's still needs to earn in, which is in addition to the eight points we took in 2021. While we're making progress, we still have more work to do to ensure all of our states reach rate adequacy. Our rate and non-rate actions have had the expected effect on personal auto growth. While Personal Lines PIF growth is still positive on a year-over-year basis, sequential PIF growth is negative.

[Tricia Griffith, CEO and President at The Progressive Corporation]

New applications are down year-over-year, and our policy life expectancy is also declining. When we look across all the metrics we track, it seems likely that we're ahead of our competitors in increasing rates, which explains a large part of our slowdown in growth. As we look forward to the rest of 2022, we're optimistic. As more states reach rate adequacy, we expect to be able to increase marketing spend and reengage the growth engine. Because of the advantages we believe we have in the way we buy media, we can adjust marketing spend at the local and segment level and in such a way to ensure the new business we write meets our economic goals. Since we believe we're ahead of the competitors in taking rate actions, we hope to continue our long-term trend of writing more than our fair share of quotes.

[Tricia Griffith, CEO and President at The Progressive Corporation]

Even as we face these macroeconomic pressures, we have not slowed our pursuit of segmentation superiority. Our U.S. personal auto product model is now available in over half the states and is showing early promising results, especially among more preferred segments. We have also further expanded the footprint of our 4.1 homeowners product into four, additional states in the first quarter, bringing the total to 12. Our new normal since the onset of the pandemic has been disruptions in the economy that has buffeted our business. While there are many paths the future can take, I'm confident in our strategy and our people and believe our greatest successes are still to come in the next 85 years. Thank you, and I'll take your questions.

[Operator]

To be added to the questions queue, please press star followed by one on your phone. In order to get to as many questions as possible, please limit yourself to one question and one follow-up. The first question comes from the line of Jimmy Bhullar from JPMorgan. Jimmy Bhullar, your line is open.

[Jimmy Bhullar, Senior Insurance/Equity Research Analyst at JPMorgan]

Hi, good morning. I had a question first just on the pricing environment and

[Jimmy Bhullar, Senior Insurance/Equity Research Analyst at JPMorgan]

What your expectations are in terms of getting price hikes through all of the states? 'Cause I think some of the states like California have obviously been reluctant to give permission to raise prices. Are you seeing any changes in that at all or do you expect changes over the next few months?

[Tricia Griffith, CEO and President at The Progressive Corporation]

We still have some challenges in a few states, including the one you mentioned, and we're working closely with regulators to get the rate that we need. Our desire is to be able to be more open, to open up our bill plan options, to loosen our underwriting restrictions. Once we get that rate, we can start to have that growth engine move. We've got a couple of states that we're still working with, a couple of big states that we've had some success in and why we feel pretty optimistic about the future.

[Jimmy Bhullar, Senior Insurance/Equity Research Analyst at JPMorgan]

The reluctance of California and some of the states that have been difficult, is it just because of the strong results companies had in 2020 and early 2021 or is there something else behind it?

[Tricia Griffith, CEO and President at The Progressive Corporation]

Specifically in California, it's a little bit how they look back versus prospective. I think the data, you know, is showing that these are real trends, inflationary trends, and the need across the industry is very significant. We want to be open for Californians, and we'll work closely with the regulators to make that happen.

[Jimmy Bhullar, Senior Insurance/Equity Research Analyst at JPMorgan]

Just on claims trends in January and February, do you think your business saw a benefit from the Omicron wave at all in the early parts of the first quarter?

[Tricia Griffith, CEO and President at The Progressive Corporation]

I don't know if there was a huge benefit. Things opened up a little bit more, but still vehicle miles traveled and frequency is still below pre-pandemic levels. Would you want to add anything on that?

[Pat Callahan, Personal Lines President at The Progressive Corporation]

In January and February, we did see vehicle miles traveled drop a little relative to the fourth quarter of 2021. We've seen that since return in March, so a very modest benefit, if any, at all.

[Jimmy Bhullar, Senior Insurance/Equity Research Analyst at JPMorgan]

Okay. Just lastly, have you changed anything in terms of how you're investing in this environment? Any sort of major classes that you're de-emphasizing or conversely, where you're seeing good value?

[Tricia Griffith, CEO and President at The Progressive Corporation]

I'll talk a little bit about our investing guidelines, and then Jonathan Bauer on the phone. John, if you want to add anything, let me know. We've had a long-standing approach to our investing, and that is we don't want to target a certain book yield or level of investment income for that matter. We want to earn the best risk-adjusted rate of return on our portfolio. Most importantly, John's team, their most important job is to protect the balance sheet. That way, the operating company can grow as profitably and as fast as possible. John, do you want to add anything?

[Jonathan Bauer, CIO at The Progressive Corporation]

Yep. Thanks, Tricia. I would only add to that, you know, obviously, the environment is pretty dynamic right now. You know, we continue to search out for good opportunities that would create long-term value for the portfolio. Always with a focus on number one, protecting the capital and then getting the best total return that we can in the portfolio.

[Jimmy Bhullar, Senior Insurance/Equity Research Analyst at JPMorgan]

Thank you.

[Operator]

Our next question comes from Andrew Kligerman from Credit Suisse. Andrew, please go ahead.

[Andrew Kligerman, Senior Insurance Services Equity Research Analyst at Credit Suisse]

Hey, thank you. Good morning. Regarding the underwriting restrictions that you mentioned, could you give a little color on what in particular you're doing there?

[Tricia Griffith, CEO and President at The Progressive Corporation]

Yeah, Andrew. First of all, I enjoyed your write-up last week. Welcome to P&C Insurance.

[Andrew Kligerman, Senior Insurance Services Equity Research Analyst at Credit Suisse]

Thanks.

[Tricia Griffith, CEO and President at The Progressive Corporation]

Yeah. You know, there's a couple of different underwriting restrictions. We look at gathering additional data, possibly if we have more questions on a customer. We call it pre-binding verification. We may ask a little more specifics to make sure we have the garaging address right, and things like that. Do you want to add anything, Pat?

[Pat Callahan, Personal Lines President at The Progressive Corporation]

No, no, I think that's exactly what we do is, you know, when we want to be certain we've got all the underwriting characteristics accurately reported, we will have some additional follow-up questions for customers, both at new business and then occasionally at renewal. Additionally, we will put restrictions on how open we are from a bill plan perspective and other things. Just as we look at overall profitability, you know, we want to make sure we're getting the right rate for our new business customers at inception.

[Andrew Kligerman, Senior Insurance Services Equity Research Analyst at Credit Suisse]

As a result of these initiatives, what percent of your book has ended up with a rate change over the last quarter and maybe even the last 12 months as you've gone through these underwriting restrictions?

[Tricia Griffith, CEO and President at The Progressive Corporation]

Well, I think it's more of an entering in and getting the right rate at inception. We've had a higher percentage of customers that once we have the additional information, we have blocked, and they've likely gone somewhere else because we don't have the accurate information.

[Andrew Kligerman, Senior Insurance Services Equity Research Analyst at Credit Suisse]

I see. Any sense of proportion on that, Tricia, that you could give us? Like, how much of your book you're seeing that on?

[Tricia Griffith, CEO and President at The Progressive Corporation]

Probably I would say of incoming quotes, probably double digits, low.

[Pat Callahan, Personal Lines President at The Progressive Corporation]

Low double digits, which is up from sort of half that when we were more comfortable with underwriting margins. What we're trying to do here is ensure that every piece of new business coming in the door is gonna be profitable for us. We understand that there's a distribution around our pricing, so on the tail where we're less sure that we're gonna make money, that is we're gonna ask a lot more questions. Frequently, those questions lead to the customer seeking insurance elsewhere. That is more frequently the outcome than an adjustment in the overall premium, because frankly, some customers are looking to achieve a lower premium by not answering the questions accurately. Some of these efforts are focused on that segment.

[Pat Callahan, Personal Lines President at The Progressive Corporation]

By pushing that segment to our competitors, obviously, we ensure that we're profitable, and to the extent our competitors do not employ such methods, it will affect our competitors adversely.

[Andrew Kligerman, Senior Insurance Services Equity Research Analyst at Credit Suisse]

Got it. Just lastly, our Commercial Lines, you noted in the letter that it was a remarkable 63% growth. Is there optimism that you can continue to grow in the double digits, and what would give you that optimism?

[Tricia Griffith, CEO and President at The Progressive Corporation]

Well, that growth was significant for a couple different reasons. We did grow double digits in all of our Business Market Targets, and we still are growing significantly in FHT, in our for-hire transportation based on still a massive amount of goods being moved across the country since the pandemic. In addition to that, about half of that increase came from our transportation network renewals. We had one of our partners, we went from six,-month to 12-month policy, so that obviously is significant. We increased our projected mileage, which is how we compute premium, so that was part of the increase. We had rate increases to reflect the inflationary environment, and fourth, we ceded less to our reinsurers. About half that increase was in T&C.

[Tricia Griffith, CEO and President at The Progressive Corporation]

All that said, even if on the commercial, the BMTs that we have now, the five on commercial, even if they slowed down a little bit, the great part about what we've been doing, and you wrote about this, over the last several years, is thinking about the future. We are just getting going on our BOP, our business owner's policy, small business, continue to grow there. We have 37 new states being rolled out and three new states actually in this year. We have our fleet program, where we've expanded the number of power units that we write from 10 to 40. We have the acquisition of Protective, so medium to larger fleets.

[Tricia Griffith, CEO and President at The Progressive Corporation]

How we think about really business in all, at least horizon one and two for now, and ultimately we'll do that in horizon three, is how do we continue to have growth, even if maybe one segment of that business may slow down or may fluctuate based on macroeconomic conditions? I'm excited about all the opportunities in Commercial Lines because we've spent the last four or five years investing in the future.

[Andrew Kligerman, Senior Insurance Services Equity Research Analyst at Credit Suisse]

Thanks so much.

[Operator]

Our next question comes from Elyse Greenspan with Wells Fargo. Elyse, your line is open.

[Elyse Greenspan, Senior Insurance/Equity Research Analyst at Wells Fargo]

Hi. Thanks. Good morning. My first question, I was hoping that you could quantify what % of premiums the states represent where you think the majority of rate increase is behind you. Associated with that question, you know, what gives you guys the confidence to make that statement about rate versus forward loss trend, given there's just so much uncertainty still with both frequency and severity?

[Tricia Griffith, CEO and President at The Progressive Corporation]

Yeah. I probably would dissect all the states. I would say that we feel pretty positive that, one, we got ahead of competitors, which we think is important, has been important in the past, and we're watching trends closely. I don't. You know, the crystal ball I wish we had, you know, would help us, but we'll watch those trends. We still, you know, are watching labor rates and some other indicators that could make us need to take more rate. I think the beautiful part is we got out ahead of rate that our hope is that the rate we take if we need to in some states will be less, the smaller bites of the apple that we'd like to take.

[Tricia Griffith, CEO and President at The Progressive Corporation]

We obviously couldn't do it in this environment because the trends were so dramatically increased. We think there's a few states we're working on. We think that the majority of the rate actions are behind us, and what we're really thinking about now is when we can pull the trigger on some of that growth. Pat and John and I sit down with the controller from Personal Lines very frequently to talk about return to profit and return to growth in that order. What we're looking at is literally state by state, channel by channel, in the auto book and saying, "Okay, if you know, April results come out here, could we reduce underwriting restrictions?

[Tricia Griffith, CEO and President at The Progressive Corporation]

Could we open up a little bit of the local marketing?" I talked in my opening comments about how we have the ability to do so in each segment and each market because of the way we buy media. It's a complicated question, and there's 50 shades of this, and actually 100 because of the channels, and we're working closely to figure out when to do that. We feel confident, and of course, we have that seven points to earn in, so more will come to the story, but we're watching things closely.

[Elyse Greenspan, Senior Insurance/Equity Research Analyst at Wells Fargo]

Okay. My second question, you know, as we've gone through this environment, have you guys noticed any change with just Snapshot and the take-up on your UBI products? Has there been any change in, you know, discounts that you guys have offered or the time period that you guys are observing with your products?

[Tricia Griffith, CEO and President at The Progressive Corporation]

Yeah. We saw initially a pretty big increase in the take rate on the agency channel, which had been a challenge with us. Right now we sit at about 40% take rate on the direct channel, about 10% in the agency channel, and this of course is excluding California and North Carolina, where we can't use telematics. That blended amount is about 28% take rate. We continue, you know, we have surcharges and discounts and of course participation discounts, and we continue to learn from those and really try to make sure that ultimately we try to price to the whole curve. That's what we'll continue to do as our Snapshot evolves.

[Elyse Greenspan, Senior Insurance/Equity Research Analyst at Wells Fargo]

Okay. Thanks for the color.

[Tricia Griffith, CEO and President at The Progressive Corporation]

Thanks, Elyse.

[Operator]

Our next question comes from Michael Phillips.

Participants

Executives

• Douglas Constantine, Director of Investor Relations
• Jonathan Bauer, CIO
• Pat Callahan, Personal Lines President
• Tricia Griffith, CEO and President

Analysts

• Andrew Kligerman, Senior Insurance Services Equity Research Analyst at Credit Suisse
• Elyse Greenspan, Senior Insurance/Equity Research Analyst at Wells Fargo
• Jimmy Bhullar, Senior Insurance/Equity Research Analyst at JPMorgan