Progressive Corp (PGR) — Q2 2018 Earnings Call Transcript

Thank you, Andrew, and good afternoon to all. Today, we'll begin our event with a presentation on customer experience. After that presentation, we will have a Q&A session with our CEO, Tricia Griffith; our CFO, John Sauerland; and our guest speakers today, John Murphy and Steve Brose. Our Chief Investment Officer, Bill Cody, will also 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's my pleasure to introduce to you our CEO, Tricia Griffith.

Good afternoon, and welcome to Progressive's Second Quarter Webcast. We are thrilled to be able to talk to you about the investments we've been making for and on behalf of our customers and our customer relationship management group. If you read my letter to shareholders, I outlined several other investments that we're making on behalf of our customer on the claim side. We've been discussing these for a couple of years, and we are excited to tell you that many of the initiatives we've implemented are coming to fruition, and we're really pleased with their progress. Before we get to that, I must mention an accomplishment that has been over 10 years in the making, which is achieving our #3 ranking in private passenger auto. It has taken a lot of hard work, and we're extremely excited and thrilled to celebrate this accomplishment. It also brings us closer to our ultimate vision of becoming consumers' #1 choice. I want to take a moment to thank the over 36,000 Progressive employees for their hard work, dedication, and commitment to our core values. I also want to thank our shareholders for their confidence in us and ultimately, I want to thank our customers whom we are privileged and honored to serve. So let me set the stage for today. You will have seen a construct before; this is the third time we've discussed it. This is what we call our four cornerstones: our core values, who we are; our purpose, why we're here; our vision, where we're headed; and our strategy, how we're going to get there. We focused a lot on the strategy because that's the core of how we will achieve our mission. We have four strategic pillars. Today, we're going to focus on two of them. The first is meeting the broader needs of our customers throughout their lifetime. We want to be available where, when, and how customers want to shop and be served. You're going to hear a lot about that today, because it's not just about us dictating what we're offering; we really follow the customer. We'll continue to evolve as technology evolves and customer needs change. The other pillar we'll discuss is maintaining a leading brand, specifically experiences that instill confidence. When customers call to add a policy, coverage, or have a claim, we want them to leave that experience saying, 'I'm so confident I made the right choice choosing Progressive.' That is critical to us.

Great. Thank you, Tricia, and good afternoon, everyone. Over the past three years, we've embarked on a very deliberate journey towards customer centricity. We are no longer just an auto insurance company, but rather a customer-centric company that specializes in insurance products and services to meet customer needs throughout their lifetime. To fuel ongoing, sustained, and now accelerating growth, we've made retaining our existing customers as high a priority as acquiring new ones. This business mandate is the catalyst for the changes that Steve and I are going to discuss today. We're going to start with some foundational adjustments intended to position us well for both near- and long-term success. Then we will refresh you on our preferred measure of retention, policy life expectancy, as well as our approach to it. We will spend much of our time discussing the technology-related investments we've made on behalf of our customers, spanning the lifecycle, while also providing insights into our investment selection criteria. Finally, we're going to share how customers are rewarding us for the improvements we've delivered, and you will see that the return on these investments has been substantial. Historically speaking, sustained improvements in retention have been elusive for us, as they have been for many others. Knowing we wanted to see both significant and sustainable progress going forward, we felt it necessary to make foundational adjustments to position us for success. This list you're about to see is not comprehensive, but we want to give you a look into a few meaningful changes we've made. We're going to start with our company-wide mission. We've long had the objective to become #1. Our excellence in marketing and new business acquisition practices has really allowed us to appeal to large segments of consumers and increase market share. Previously, our company-wide mission was to become consumers' #1 choice for auto insurance. Our mission has now evolved to becoming consumers' #1 choice and destination for auto and other insurance. This current statement reflects the understanding that in order to become a destination insurer, we must have the products and services needed to meet customer needs as they transition through their insurance journey. We need to go beyond new business acquisition, where we've excelled for years, and deliver a more compelling, comprehensive customer value proposition that enables us to become the true destination insurer. To this end, we have made major changes to our business, products, and services.

Thank you, John. Good afternoon. Let's begin our discussion with the slide that John shared a few minutes ago. Becoming a destination insurer for our customers requires investment in product breadth. Adding products to our portfolio allows us to meet the broader needs of our customers throughout their lifetime. Looking at the PLE data, it's evident that no product is more critical to add than homeowners insurance. It directly increases auto PLE more than any other additional products we sell. It's also worth noting that our growing Robinsons group plays a significant part in our strategy. The Robinsons began with either an auto or homeowners policy and, as their needs evolve, they often acquire the additional policy over time. Our marketing to current customers is just as important as marketing to potential customers. We believe customers should have the option to purchase homeowners insurance however they wish: through independent agents, online at progressive.com, or via phone.

Thank you, Steve. So, in summary, to fuel ongoing and sustained growth, we've prioritized retaining our existing customers as much as acquiring new ones. We've made foundational and cultural adjustments to position us for longstanding success. We've shifted our mix towards longer-retaining customers while continuing to support growth across all segments, delivering significant and measurable improvements to the experience across the customer journey. Now, we suspect you might be wondering, how are we doing? The answer is exceptionally well. Policy life expectancy is at an all-time high, with an increase of more than 20% in just three years, equating to well over $10 billion in lifetime premium across our entire book of business. This is not a one-year phenomenon; we made steady progress in 2016, which we've built upon again in 2017. We're proud of our progress, but we're even more excited about what the future holds because we believe we have just scratched the surface of what's possible.

Thank you. With that, Andrew, please introduce our first participant from the conference call line.

Good afternoon, thanks for that great presentation. I'd like to ask two quick questions. The first question goes back to the discussion on HQX and MPQ. It's been a year since HQX came online, and I was thinking about what kind of customer would respond to this product. Now that time has passed, do you think younger customers, perhaps Sam or Diane, are responding more than you initially anticipated? Additionally, how do you see this affecting our Robinsons, and can you provide the percentage share by the segments in relation to the product?

I would suggest that rather than thinking about it demographically, it likely wouldn't be the Sam necessarily but rather those who will become Robinsons because they have a home. The customers that want to go through the HQX process are likely digitally savvy. They want an accessible experience and a platform where they can verify the information transparently. Think of them as savvy customers of the future, much like those who began searching for auto insurance online.

My second question is a shift in gears. I want to touch on growth. Recently, a number of auto manufacturers revised their outlook due to the impact of tariffs. Referring back to old transcripts from '08 and '09, Glenn and others have discussed how slowing auto sales may impact margins. What are your thoughts on this potential impact?

We are closely monitoring this situation. If there are fewer automobiles to insure, it could affect the industry. However, we currently have a very small share of that addressable market. When considering the $300-plus billion in auto and home insurance, we currently hold around 10%. So even if the overall market shrinks, we believe that we'll still capture a larger piece of the pie.

Thank you. Andrew, can we take the next caller, please?

Going back to HomeQuote Explorer, could you provide some additional context about the number of carriers participating in that product? I've heard some recent news regarding a curtailment of partnership with Progressive. Can you share details around HomeQuote Explorer and comment on that announcement?

Currently, on HQX, we have four carriers, including Progressive Home. We've been working with them for years through our Progressive Advantage Agency. Although recent news came out this week regarding our pricing, we've been discussing these changes with them for over a year now to convert that business and will be non-renewable to provide our rates for Progressive Home and other partners. The majority of business has transitioned to Progressive Home, which is great, and we are happy with the retention rates of those customers after they switch to Progressive Home.

Can you provide insight into mobile adoption among your customers? What percentage of total customers have adopted mobile solutions? Additionally, what's the split of mobile adoption among segments?

We don't disclose specific figures, but mobile adoption continues to increase, predominantly within the direct channel, reflecting customers who prefer direct engagement. As agents work collectively to encourage customers to utilize mobile services, our analytics show improved engagement.

A significant percentage of our direct customers quoting online are now using mobile devices. As we expand our app functionality, we've seen greatly improved adoption rates.

Great. Andrew, can we take the next caller from the line, please?

Can you provide details around the homeowners' rollout? What percentage is through direct versus agency channels, and how do these segments compare concerning relative profitability metrics and growth?

The dynamics of our homeowners' business continue to evolve, with growth in both channels. While we don't discuss target margins publicly, we aim to have a comprehensive overview of our profitability. The profitability metrics typically aggregate around 96, and we explore homeowners' performance relative to the rest of our offerings.

The property results we report reflect the premium we are writing through Progressive Home. We have commissions from the business written directly through several other carriers. We believe homeowners' insurance solidifies our overall strategy in achieving a balanced portfolio of preferred customers.

Thanks. Andrew, can we take the next caller from the conference line, please?

Firstly, congratulations to Steve for adding another customer to your $17 million customer base. My first question revolves around the recent trend of policy life expectancy, which seems to have plateaued. The second quarter data shows a reduced pace of increase compared to previous quarters. Are we reaching a saturation point or experiencing seasonality? How much further can this growth continue?

While it's difficult to predict the future, we've experienced significant growth, and we aim to continue that trajectory. Keep in mind that pricing plays a crucial role, and we're monitoring it closely as competition increases. Our new business conversion remains strong, and we will focus on policy life expectancy from both the nature and nurture perspectives.

Regarding your impressive second-quarter results reflecting a combined ratio of 90% and 20%-plus growth, do you foresee any adjustments in margins or growth rates due to the infrastructure challenges you've faced in previous years?

That's a great question; our goal remains to grow as fast as possible. We aim to maintain at least $0.04 in underwriting profit. We're currently well-positioned with a strong infrastructure, competitive brand, and a solid workforce. While we monitor our metrics state-by-state, channel-by-channel, and product-by-product, we have no immediate concerns about slowing down.

Our successful efforts in staffing and training have positioned us to manage our growth effectively. Our customer service levels and claims frequency have been stable, enabling continued growth support.

Additionally, with the Robinsons' growth at less than 2% market share, we are optimistic about the runway ahead. Our mix shift is improving, and new initiatives are on the horizon to attract more preferred customers.

Thank you, Andrew. Can we take the next caller from the conference line, please?

In light of consistent favorable auto frequency trends noted for the second quarter sequentially across the industry, I'm keen on knowing your thoughts about driving forces behind this trend. Additionally, when do you think we could declare this as a new normal for the industry?

There are numerous factors at play, and it’s tough to pinpoint one specific cause. Economic data goes into measuring frequency, and fluctuations can occur based on miles driven, fuel prices, and other metrics. We’re doing our best to monitor these trends and will adapt our pricing strategies accordingly.

It's important to note that trends have been inconsistent over the decades, but we remain agile and can respond quickly based on ongoing data analysis.

Andrew, can we take the next caller from the conference line, please?

Thank you for your insights on customer segments, particularly around Robinsons. Can you remind us of the differential combined ratio between Robinsons compared to Sam, Diane, and Wrights?

We haven't shared specifics in that context, but we maintain a target of 96 across customer segments.

It's important to understand that the combined ratio for a new customer versus renewal customer is significantly different across the segments; a balance we're striving to maintain.

I understand you estimated $1.6 billion in lifetime premium effects corresponding to the increased policy life expectancy. Can you clarify how much of this relates to Robinsons?

The figure mentioned factors across the entire book as we analyze long-term returns from the Robinsons who demonstrate strong retention.

Let's proceed with the next caller from the conference line, please.

I enjoyed your discussion on customer experience. Could you address how increased engagement opportunities at the product level can enhance interactions with customers? Would a pay-by-the-mile product encourage additional engagement?

We indeed are focused on how we utilize insight from mobile data, understanding that distractions while driving should shape our mobile offerings. This is imperative to ensure our products are adaptable and resonate with customer needs over time.

Andrew, can we take the next caller from the conference line, please?

Could you provide the year-over-year increase in platinum agents? Or at least a rough ballpark percentage-wise?

We haven’t shared a specific percentage, but aim to ensure our agent footprint adequately reflects the needs of our customers. We've seen substantial growth over recent years, with strong on-the-ground representation helping to expand our reach.

Thank you, everyone, for your great questions. We appreciate your participation today. As a reminder for the audience on the call, valuable insights and detailed data points can be found on our website and in our quarterly reports.