Progressive Q1 2022 Earnings Call Transcript

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May 3, 2022

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.
AI Generated. May Contain Errors.
Earnings Conference Call
Progressive Q1 2022
00:00 / 00:00

There are 9 speakers on the call.

Operator

Welcome to the Progressive Corporation's 1st Quarter Investor Events. 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 has 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 and team. At this time, I will turn the event over to Mr.

Operator

Constantin.

Speaker 1

Thank you, Emily, and good morning. Although our quarterly Investor Relations Since 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.

Speaker 2

As always, discussions in this event may

Speaker 1

include forward looking statements. These statements are based on management's current Additional information concerning those risks and uncertainties is available in our annual report on Form 10 ks for the year ended December 31, 2021, as supplemented by our 10 Q reports for the Q1 of 2022, where you will find discussions of the risk factors affecting our business, safe harbor statements related to 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?

Speaker 3

Thanks, Doug. Good morning and thank you for joining us today. Anniversaries are a natural time to look back on the 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 3rd largest personal auto carrier, and the number one commercial auto carrier. In just the last 5 years, our total company wide written premium has nearly doubled.

Speaker 3

Nowhere has growth been more remarkable than in commercial lines, which just passed a major milestone of over of 5 years, all while generally achieving a better than average industry profit margin and ended March just shy of 1,000,000 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 And thank you to all Progressive employees and customers who have made the last 85 years so extraordinary. Throughout our 85 year history, we've 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.

Speaker 3

Steady but increasing trend in bodily injury severity has also contributed to the increase in loss costs we've experienced. Further, as the country emerged from the omicron wave, we saw personal auto vehicle miles traveled recover to Q4 2021 levels, which were in the 9% to 10% range below the pre pandemic baseline. Our response to these trends have been to reduce marketing expenses, Increased underwriting scrutiny, limits bill plan options. And in the Q1, we implemented rate increases of 7 points in personal auto that's still linked to earn in, which is in addition to the 8 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.

Speaker 3

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. New applications are down year over year, and Policy lives 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.

Speaker 3

As more states Reach rate adequacy, we expect to be able to increase marketing spend and reengage the growth engine. Because 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. And since we believe we are 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. Even as we face these macroeconomic pressures,

Speaker 4

we have

Speaker 3

not slowed our pursuit of segmentation superiority. Our US personal auto product model is now available in over 8 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 4 additional states in the Q1, 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 The future can take.

Speaker 3

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

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.

Speaker 2

So I had a question first Just on the pricing environment and what your expectations are in terms of getting price hikes through all of the states because I think some of the states like California have You've obviously been reluctant to raise price 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?

Speaker 3

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 open up are to loosen our underwriting restrictions. And once we get that rate, we can start to have that growth engine move. So 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.

Speaker 2

And 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 early 2021 or is there something else behind it?

Speaker 3

Specifically in California, it's a little bit how they look back versus prospective. And so I think the data is showing that these are real trends, inflationary trends and the need across the 3 is very significant and we want to be open for Californians and we'll work closely with the regulators to make that happen.

Speaker 2

Okay. And then just on the claims trends in January February, do you think your business Saw a benefit from the Omicron wave at all in the early parts of the Q1?

Speaker 3

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 of pre pandemic levels. Would you want to add anything on that?

Speaker 5

In January February, we did see vehicle miles traveled drop a little relative to the 4th Quarter of 2021, we've seen that since return in March. So a very modest benefit, if any at all.

Speaker 2

Okay. And then 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?

Speaker 3

I'll talk a little bit Our investing guidelines and then John Bauer is 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. And most importantly, John's team, their most important job is to protect the balance sheet.

Speaker 3

That way, the operating company can grow as profitably and as as fast as possible. John, do you want to add anything?

Speaker 6

Yes. Thanks, Tricia. I would only add to that. Obviously, the environment is pretty dynamic right now, and we continue to search out for good opportunities that would create Long term value for the portfolio, but always with a focus on, number 1, protecting the capital and then getting the best total return that we can in the portfolio.

Speaker 2

Thank you.

Operator

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

Speaker 7

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?

Speaker 3

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

Speaker 3

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

Speaker 4

No, no. I think that's exactly what we do is 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, We want to make sure we're getting the right rate for our new business customers at inception.

Speaker 7

And as a result of these initiatives, What percent of your book ends up with a or 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.

Speaker 3

Well, I think it's more of a Entering in and getting the right rate at inception. So 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.

Speaker 7

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

Speaker 3

Probably, I would say, of incoming flows, probably

Speaker 5

Low double digits, which is up from sort of half that when we were more Comfortable with underwriting margins. So what we're trying to do here is ensure that every piece of new business coming in the door is going to 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 going to make money, that is we're going to ask a lot more questions. And frequently, those questions lead to the customer seeking insurance 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.

Speaker 5

So some of these efforts are Focused on that segment by pushing that segment to our competitors, obviously we ensure that we're profitable and to To the extent our competitors do not employ such methods, it will affect our competitors adversely.

Speaker 7

Got it. And just lastly, 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?

Speaker 3

Well, that growth was significant for a couple of different reasons. So we did grow double digits in all of our business marketing tiers, And we still are growing significantly in FHT in our for hire transportation based on still a massive So not a good being moved across the country since the pandemic. In addition to that, about half of that increase came Our transportation network renewals. So we had one of our partners, we went from 6 months to 12 month policy, so that obviously is significant. We increased our projected mileage, which is how we compute Our premium, so that was part of the increase.

Speaker 3

We had rate increases to reflect the inflationary environment. And 4th, we ceded less to our reinsurers. So about half that increase was in TNCs. So all that said, even if on the commercial, the BMTs that we have now, the 5 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. So we just are getting going on our BOP, our business owners policy small business, I continue to grow there.

Speaker 3

We have 37 new states being rolled out and 3 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 fleet. So How we think about really business in all, at least horizon 1 and 2 for now, and ultimately we'll do that in horizon 3 is how do we continue You have growth even if maybe one segment of that business may slow down or may fluctuate based on macroeconomic conditions. So I'm excited about all the opportunities in commercial lines because we've spent the last 4 or 5 years investing in the future.

Speaker 1

Thanks so much.

Operator

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

Speaker 8

Hi, thanks. Good morning. My first question, I was hoping that you could quantify What percent of premiums the states represent where you think the majority of rate increase is behind you? And then associated with that question, what gives You guys the confidence to make that statement about rate versus forward loss trend given there is just so much uncertainty still with full frequency into those?

Speaker 3

Yes. I probably would expect 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 The crystal ball I wish we had would help us, but we'll watch those trends.

Speaker 3

We still 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, will be the smaller bites of the apple that we like We obviously couldn't do it in this environment because the trends were so dramatically increased. But 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 and 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.

Speaker 3

And what we're looking at is literally state by state, channel by channel in the auto book and saying, okay, If April results come out here, could we reduce underwriting restrictions? Could we open up a little bit of the local marketing? And I talked in my opening Comments about how we have the ability to do so in each segment, in each market because of the way we buy media. So it's a complicated question And there's 50 shades of this and actually 100 because of the channels and that we're working closely to figure out when to do that. But we feel Confident and of course we have that 7 points to earn in.

Speaker 3

So more will come to the story, but we're watching things closely.

Speaker 8

Okay. And then my second question, as we've gone through this kind of this environment, have you guys noticed any change with just Snapshot and the take upon your UBI products? And then has there been any change in discounts that you guys have offered or time period that you guys are observing with your product?

Speaker 3

Yes. We saw initially a pretty big increase in the Take rate on the agency channel, which has been a challenge with us. So right now, we sit at about 40% take rate on the direct About 10% in the agency channel and this of course is excluding California and North Carolina where we're We can't use telematics. So that blended amount is about 28% take rate. We continue we have Surcharges and discounts and of course participation discounts.

Speaker 3

And we continue to learn from those and really try to make sure That ultimately we try to price to the whole curve and that's what we'll continue to do as our snapshot evolves.

Speaker 8

Okay. Thanks for the color.

Speaker 3

Thanks, Elyse.

Operator

Our next question comes from Michael Phillips.

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