Progressive Corp (PGR) — Q2 2019 Earnings Call Transcript

Thank you, Bridget, and good afternoon to all. Today, we will begin with a presentation regarding the opportunities in our Commercial Lines business by John Barbagallo and Karen Bailo. Our presentation will be followed by a Q&A session with our CEO, Tricia Griffith, and our CFO, John Sauerland. Also joining us by phone for Q&A will be our Chief Investment Officer, Bill Cody, and the General Manager of Progressive Home, Dave Pratt. 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 and results to differ materially from those discussed during the event. Additional information about those risks and uncertainties is available in our 2018 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 on the Investors page of our website, progressive.com. It’s now my pleasure to introduce our CEO, Tricia Griffith.

Good afternoon, and welcome to Progressive’s second quarter webcast. We continue to be thrilled with our results across the board and, probably more importantly, our plans to continue to gain market share. That said, if you have been watching the commercial lines results, they are nothing short of phenomenal in terms of both growth and profitability. In addition, we have taken the last couple of years to really invest in IT and talent, and we’re going to talk a lot about that today, along with the addressable markets that we are really diving into and are excited about. We have a couple of guests who will provide you with a lot of details. This slide might look familiar in a slightly different form, but when we started this webcast, we wanted to look at the overall Property and Casualty (P&C) addressable market and understand where Progressive plays and where we win. In the last couple of years, we’ve focused mostly on the Personal Lines section, which is more than half of the P&C industry, especially auto and home insurance, particularly as we integrated ASI into Progressive Home. We have shared with you our four pillars and cornerstones, highlighting our ability to continue to grow market share in auto, in home, and of course in our bundles. The good news is that we are currently under 9% market share in Personal Lines across the entire P&C market, which means we still have a lot of runway ahead. As I’m sure you have read, our highest growing segment is the Robinsons. The other half of the equation is the Commercial Lines addressable market, which is nearly half of the overall P&C market valued at $328 billion. Let’s take a look at what we will call a downwalk-through in Commercial Lines, outlining where we plan to operate and where we believe we will win. I'll start with the orange segment, which represents our present focus: monoline commercial auto, with an addressable market of almost $14.5 billion. We have been excelling here for decades, holding the position of number one commercial auto writer with 22% market share. With advanced segmentation and our talented workforce, we truly believe we can capture even more market share. The next segment to the left is small fleet, which comprises vehicles between six and 30. While we excel in the 6-to-9 vehicle category, we will be expanding into the 10-to-30 vehicle fleets. Karen will elaborate more on how we plan to penetrate that market. The next segment, represented by the black sliver at $1.5 billion, pertains to insured Transportation Network Companies (TNCs). As you know, we have a longstanding relationship with Uber, insuring drivers on their platform in 13 states. We aim to continue to grow our presence there as well. The yellow segment represents commercial auto bundled with General Liability (GL) and Business Owner’s Policy (BOP). Consider the synergies of commercial auto under the 'Robinsons' umbrella; we just began offering that earlier this year and are excited about the opportunities it holds. Again, our strategy will be surgical; we want to ensure profitable growth. The blue section represents small businesses with GL and BOP, which corresponds to a $20 billion addressable opportunity. We are very optimistic about this venture considering there are approximately 30 million small businesses with less than 20 employees, and we’re confident we will excel here. When you consider all five of these sections, our addressable market increases by over three times, making it incredibly exciting. We've done notably well in the commercial auto market by utilizing segmentation and manageable underwriting approaches, and we plan to apply similar strategies to these new areas. However, there are a few places where we will be cautious for now, such as in the gray areas which include hazardous materials and public transportation, and we won't engage with businesses having more than 20 employees just yet; we need to get this right before considering expansion. The other large territory of commercial insurance falls under categories like marine insurance, workers’ compensation, and mortgage guarantees. Nevertheless, we feel optimistic about growth opportunities given our investments made in the past couple of years are materializing. Some key details to recognize include the last five years of growth and profitability in Commercial Lines, showcased on this chart. On the X-axis, you’ll see profitability presented through the combined ratio with an inverted scale; we want to aim for the right of 100. On the Y-axis, the net written premium is displayed, where we want to land within the shaded gray area. Progressive is represented by blue, industry by black, and our nine competitors in gray bubbles. As represented, we've consistently remained ahead of competitors over the past couple of years, which is encouraging as we explore new opportunities in this vast addressable market. Now, let's dive into the core details with my guests, John Barbagallo and Karen Bailo. You are familiar with both of them based on their vast experiences at Progressive. Karen began her career here in 1990 within the CRM organization, compiling extensive experience in processes, claims, and product management. Most recently, she has been the head of agency distribution and has played an integral role in rolling out the Platinum program and in the integration of the sales force at ASI and Progressive. She's done extraordinary work, and I'm excited for her to share her insights. First, however, I'll invite John Barbagallo to take the stage. John has been with Progressive since 1983 and has held various roles including national sales and claims. After a brief hiatus, he returned to us, and for the last ten years, he has served as our Commercial Lines Group President. Today, you will see what John has worked on and the vision he holds for the future. John.

Thank you, Tricia. Commercial Lines continues to be a very strong narrative at Progressive, especially in commercial auto, a crucial contributor to our overall growth and profitability. This has been particularly true over the last five years, reflecting the competitive position we’ve built over two decades. As Tricia mentioned and as Karen will elaborate on, we still perceive ample opportunities for further growth simply by leveraging our existing people, skills, and assets, alongside the new capabilities we're developing. Before diving into specifics, I want to discuss our results as they distinctly diverged from those of most industry players. Displayed on the left is a 20-year timeline showing Progressive’s commercial auto direct written premium growth compared to the rest of the industry. Two trends are notable: one, commercial auto shows cyclical tendencies, moving in sync with the broader economy; two, when the market expands, Progressive has historically grown at a much quicker pace. In fact, over the last four years, we have increased our market share by 50%. We’re not only capitalizing on an expanding market, but also gaining share from our competitors. A more significant divergence is illustrated on the right chart, which presents underwriting profit over the same 20-year time period. We maintain a consistent delta of 8, 10, and in some instances, exceeding 20 points in combined ratio versus the industry. This begs the question: how has this been possible in a sector viewed as intensely competitive? While I cannot delve into every aspect, I believe our intense focus on commercial auto as a key line of business is paramount. Back in 2014, I introduced our business market targets (BMTs), initially devised as a marketing tool for product management, but over the years, we operationalized these BMTs across all business facets. This operationalization reveals actionable differences between the BMTs. For instance, demand functions differ by BMT, the way that demand reacts to economic shifts varies, and loss tendencies such as attorney representation rates and litigation outcomes are different across BMTs as well. These variances critically inform our rate levels and underwriting tactics. This granular attention empowers us to develop insights faster, respond promptly, and create strategies to profitably seize market share. While having a granular understanding of the business is helpful, it’s crucial to have the will and confidence to react quickly based on observed data. Back in 2016, we noticed a marked uptick in accident frequency from May to November, which is highlighted by the blue shaded area on both charts. With frequency surging and former year loss reserves improving positive severity trends, we reacted swiftly, raising rates by over 10% in a little over three months across the portfolio and implemented several underwriting adjustments. Over time, we continued modifying our approach as new information emerged, which I believe has been instrumental in maintaining robust underwriting margins and expanding our business during this recent stretch. Our claims organization presents a significant competitive advantage concerning commercial auto. This advantage stems from two factors: leveraging our extensive personal auto claims infrastructure and quality control mechanisms enabling us to process a considerable volume of commercial auto claims at low costs. In the last four years, we essentially doubled the size of our core auto business while maintaining a competitive loss adjustment ratio and good quality. The second advantage lies in the targeted specialization within Commercial Lines regarding high-impact claims. Our claims organization comprises over 19,000 employees, focusing on efficiency and specialization. This extensive workforce processes the majority of our commercial auto claims, affording us an edge over many commercial auto competitors. Additionally, we have established a specialty claims group, currently numbering over 750, dedicated exclusively to Commercial Lines. This distinct group accounts for nearly 60% of the indemnity dollars we allocate, managing the most impactful and intricate claims. We have 115 seasoned commercial casualty adjusters and managers tasked with handling the most substantial and intricate commercial injury claims, while we also have over 300 claims professionals primarily deployed in the field, specializing in heavy equipment and cargo claims. To support our rapidly growing TNC business, we now employ a dedicated team of over 200 claims adjusters and managers. We've primarily built this specialty team through internal hiring from among our most experienced employees, ensuring that, despite being new to their roles, they bring substantial experience to foster consistently positive outcomes. I believe the synergy of our optimized, highly efficient claims infrastructure, paired with a specialized group for high-impact claims, affords us a competitive edge in managing claims that few can rival. Lastly, I want to highlight our reserving philosophy, which emphasizes accuracy and minimal variance, an approach that has served us well. Our commercial auto reserve development, over a seven-year period compared to the industry, shows tighter variance. This is largely due to our claims organization handling a greater number of high-impact, complicated claims quickly, leading to more timely and accurate claims assessments and estimations. Furthermore, our highly segmented approach to loss reserving for commercial auto follows the same principles as our other products. Operationalizing our BMT structure enables us to detect pattern changes sooner and respond convincingly. Our consistent loss cost estimates allow us to gauge true ultimate costs promptly and refine our pricing and products effectively. So that’s a background on the performance trends you’ve seen over the last few years and the reasons behind our distinct outcomes. Now I’d like to welcome Karen to share more about our future strategy and tactics, along with exciting growth opportunities.

Thank you, John. As both Tricia and John outlined, our Commercial Lines business is growing and profitable. With our investments, we have an expanding addressable market that presents future growth opportunities. Our roadmap for expanding the business centers on investing in three areas: pursuing untapped commercial auto potential, enhancing our product distribution, and expanding our product portfolio. I will begin with the opportunities within our core commercial auto business, which is where we have pivotal enhancements fueling growth. Due to time constraints, I won’t conduct a comprehensive review of everything currently underway, but I’ll spotlight a few things we're especially excited about and how we are penetrating substantial and underutilized markets with more competitive offerings. I'll discuss preferred truck, fleet, and how our two telematics-based programs are strengthening our competitive position. This chart highlights growth in our truck segment, represented by a written premium index traceable back to the year 2000. We’ve been investing in our truck business for several years, and we’re enthusiastic about our progress and the opportunities in the near future. Reflecting on our growth contributions, I'll highlight 2012 as a pivotal year when we broadly rolled out our long-haul product and began employing business market targets (BMTs) in our segmentation and product management. In 2015, we released a new product featuring a proprietary scoring model for trucking risks incorporating parameters such as tenure, safety, and stability. Between 2017 and 2018, the marketplace presented various growth opportunities. During this period, the economy was expanding, and the trucking sector grew with an increased volume of new truck sales and ventures; the industry collectively raised rates as a response to poor underwriting outcomes and adverse development. In late 2017, with the implementation of the federal electronic logging device mandate, we positioned ourselves excellently due to our prior rate adjustments and the strong segmentation in our products. Although we have experienced significant growth, there remains more opportunity ahead. Notably, in 2016, John communicated the potential of telematics-based pricing for trucks. Since then, we’ve amassed our telematics data. What we’ve observed is that commercial operators' driving behavior differs from personal customers in terms of how, how much, and where they drive. Consequently, we were primed for expansion in 2017 when the federal ELD mandate went into effect. The telematics data we collect has proven even more powerful than we anticipated. As part of the mandate, most over-the-road truckers must use an electronic logging device to manage their hours of service. Our Smart Haul telematics-based program leverages this driving data for a potential discount of up to 18% off insurance premiums. The data on the left of this chart illustrates the effectiveness of this program, demonstrating the relativity in loss ratios across quantiles. What we are observing indicates that telematics data predictivity is notably strong, presenting further opportunities with this data, including geolocation information that can enhance rating accuracy, ultimately eliminating unreliable approaches such as radius of operation. We anticipate that this information's segmentation value will be more significant for Commercial Lines than it has been for Personal Lines with Snapshot. While there's potential to further capitalize on this data, our current Smart Haul model already outperforms any competitive product. The conversion rate for Smart Haul quotes is more than double that of our standard trucking business, demonstrating substantial savings of around $1,400 per truck. Considering that insurance costs are the fourth largest expense for a trucker, following fuel, lease payments, and repairs, this constitutes a major competitive advantage in a sector where shopping rates are prevalent. Additionally, despite applying these considerable discounts, we continue to witness favorable loss ratios on this business, making it mutually advantageous for our customers and us. Customer adoption has been impressive, showing a 50% take rate in our direct business, and while the agency adoption is lower, it remains stronger than what we see in Personal Lines. The segmentation value is tangible, results are positive, and we’re just at the beginning. While we’ve achieved substantial growth, we constantly seek untapped growth potential. We view the preferred truck market as a key area for future expansion, currently estimated at about $1.2 billion, targeting 1-to-10 vehicle risks. Our internal definition of this preferred market factors in attributes related to tenure, safety, financial responsibility, and operational practices. In the marketplace, we’ve grown our market share over 50% in the last three years and estimate we are the second largest writer in the preferred truck sector, edging closer to the number one spot. Our significant progress has been made through utilizing telematics and our core strengths in pricing and segmentation to deliberately target this segment and enhance our competitive standing. Ongoing enhancements of our preferred truck offering include continued investments in Smart Haul, rate adjustments, and product improvements to boost our rate competitiveness, adoptability, and overall coverage offerings. These investments are designed to elevate our competitiveness and growth potential in the preferred truck market. Another promising opportunity across all our business market targets focuses on businesses with 10 to 30 vehicles, the small fleet market, which is estimated to be around $4 billion in size. With our current penetration being low, we've only just begun concentrating efforts here. Previously, our objective and verifiable data-driven approach has struggled in a space typically driven by qualitative evaluations of businesses. Today, we possess assets and capabilities, alongside more verifiable data, allowing us to leverage our strengths in pricing and segmentation to pinpoint this opportunity. The fleet market has caused us to rethink how we engage with these customers regarding our products, processes, and workflows. We've entirely redesigned our approach in these areas based on these insights. Recent investments have involved reengineering our risk assessment processes for fleets using new available data. Additionally, we have revamped our services focusing on improved turnaround times and service levels while ensuring our underwriting capabilities possess both profit and loss accountability and an acquisition mindset to enhance quotes and conversions. We’ve tested these enhancements in Texas and are thrilled with the outcomes. We have observed a 28% improvement in quotes, with conversion rates exceeding three times our previous levels prior to these enhancements. Based on our successes, we are initiating a nationwide rollout of these new enhancements and anticipate reaching states representing over 80% of our premium by the end of this year. Although we’re excited about getting these improvements to market, we're just beginning. We have a strong roadmap ahead of us comprising ongoing enhancements and improvements. To fully capitalize on our commercial auto business's untapped potential, I'd like to reference telematics again. Similar to our truck segments, we foresee telematics becoming a critical success driver in our small fleet business. There will be advantages for us and our customers, spurring adoption rates. For us, it means added segmentation that we expect will match the significance we've seen in Personal Lines with Snapshot. For customers, this translates into savings from discounts and better rates, as well as value-added services emerging through our SmartTrip program. Further savings are expected through enhanced safety by monitoring and promoting safe driving behaviors. In addition, we aim to improve fleet operational efficiencies through better asset management and monitoring. We believe there exists a ready market for these services, as approximately 20% of 10-to-30 vehicle fleet operators currently purchase such services independently. Thus, there’s a demand with low penetration, creating a market opportunity. Through indemnity savings and retention benefits, we can essentially offer these services at no additional cost. We are piloting SmartTrip in six states for the rest of this year, with plans for a nationwide rollout next year. Moving on to our second area of investment regarding our small business direct channel, back in 2016, we highlighted our expectation that small business owners would increasingly turn to direct channels for their insurance needs. Consumers across various industries are not only exhibiting acceptance but a preference for these channels. Market projections suggest that the small business direct channel may capture as much as 15% market share within the next five years. Specific findings from Novarica, a technology strategy research firm, reveal that younger small business owners are comfortable with and prefer shopping online, indicating a demographic shift that will further drive demand in this direction. Ultimately, we view this as a largely untapped segment within the Commercial Lines market presenting significant growth opportunities. Having sold direct commercial insurance for more than a decade, our initial focus was heavily auto-centric. In 2012, we broadened our approach to spotlight the insurance and protection of businesses, and in recent years, we’ve made substantial investments to enhance capabilities. Consequently, we’ve seen considerable growth in our direct business over the past two years. I will discuss these investments in the following slides. Simultaneously, we optimized our marketing strategies to align with consumer demands. We developed an in-house agency to sell other carrier business owner policies like general liability, workers' compensation, and professional liability products, in addition to our commercial auto offering. We’ve found incredible success growing our direct business. In September of last year, we introduced the Business Quote Explorer (BQX), an online quoting platform designed for small business owners. Now, customers can choose how they want to shop for their insurance coverage. Reflecting on the advancement of our personalized direct business, we've achieved robust results through continued testing and refining of our quoting platforms, fostering the same virtuous cycle approach in Commercial Lines. It's evident that even marginal enhancements in the quoting experience can yield substantial improvements in sales metrics. Thus, we are concentrating on ongoing advancements in specific areas, including increasing engagement during the initial stages of the quoting process, enhancing the overall quoting experience through increased capacity, improved matching of carriers to risks, and adding online purchase options. An aspect crucial to the quoting experience is properly classifying a business. For instance, while 'landscaper' might seem straightforward, insurance classification varies significantly among carriers, including distinctions between landscaping services, lawn care services, and tree services. Misclassification can lead to misrating or inappropriate acceptance or denial of risks. To enhance accuracy in this process, we recently introduced an advisor tool that leverages supervised machine learning to guide business owners through an accuracy-focused questionnaire that aligns their business for appropriate classification. Following its rollout, we noted a 7% increase in quote progression. We’re observing improved experiences, particularly with quote conversions from mobile and tablet devices, enabling an initial effort at employing supervised machine learning effectively. Besides ensuring correct classifications, we're executing several strategies to expand our capacity and improve product availability to cater to customer insurance needs. We're collaborating with carefully selected carriers, holding workshops to potentially widen their appetites and enhance our matching processes. Additionally, we're identifying areas necessitating greater carrier supply through capturing further capacity in various product classes. In less than a year, we've made significant strides in enhancing our product availability, enabling us to meet approximately 70% of inquiries from customers seeking coverage. The improvements I've outlined are focused on boosting what we refer to as 'quote yield'. This measure reflects the number of customers who complete a quote and access a rate online. The combined advancements over the past year have led to a twofold improvement in our quote yield, signifying a remarkable enhancement in our ability to match more customers with optimal carriers based on their risks while also accommodating the necessary coverage. Finally, I would like to underscore a critical improvement in our sales efficiency in our direct operations. Data indicates that some customers prefer guidance from a real person, yet many do not finalize their purchases via phone. To bridge this gap, in April, we launched an online purchase option for select general liability business classes, yielding encouraging results; quotes coupled with an online purchase option experienced a 15% higher success rate than those without such an option. This evidence demonstrates that online quotes can comfortably convert to digital purchases, aligning with customer preferences for online shopping. In July, we introduced additional online purchase capabilities for specific professional liability business classes, with plans to broaden these options for additional general liability products shortly. Ultimately, we are advancing towards a fully digital experience that provides online purchase options across all product offerings, reflecting our ongoing efforts to drive demand and ensure we meet that demand with strong supply and excellent customer experiences. At this point, I will turn it back to John to discuss our strategies to expand our product offerings.

Thank you, Karen. It is indeed an exciting development for Commercial Lines. In May, we launched our manufactured BOP product, and we now have trained and authorized 144 independent agents to sell it. The BOP comprises a multi-line policy providing business liability coverage and addressing typical property exposures that small businesses generally encounter. We view this as a first step towards a nationwide rollout of the product set to unlock a $20 billion addressable market mentioned by Tricia, along with accessing an additional $12 billion market for commercial auto, currently tied up in auto BOP bundles. I'll give you an overview of the product and provide updates on our trajectory in upcoming months. Our Commercial Lines strategy has always embraced competitiveness through cost-effectiveness and user-friendliness. Like commercial auto, we aim for a streamlined, intuitive quoting process and competitive pricing achieved through strict expense management and price segmentation. We decided to deploy our BOP product initially through the agency channel, designing the product, systems, and experiences to succeed with agents, while also preparing the ground for the digital channel. Currently, this business predominantly lies within the agency channel, wherein agents deliver significant value regarding small business insurance. Initially, we limited our underwriting appetite to five categories that are sufficiently lucrative to warrant attention, focusing on developing pricing and segmentation skills within this space and facilitating a straightforward quoting and binding process. These categories encompass half of the 31 million small businesses in the United States with fewer than 20 employees—our target demographic. We plan to expand these categories over time as we deepen our experience and discover additional automation opportunities for our quoting and underwriting processes. This BOP product will be competitive, matching leading offerings available in the marketplace. We're introducing industry-specific endorsement packages, including unique embedded endorsements for employment liability, cyber risks, equipment breakdown, and errors and omissions (E&O). The early market reception has been favorable, signifying we’ve designed a product that aligns with user expectations. This is illustrated by quotes from our Ohio agents, which resonate well with feedback we’ve received overall. The distribution of quotes across these five identified categories aligns well with our initial expectations. Our slight skew toward contractors isn’t unexpected due to their robust presence in our commercial auto operations, and we believe we can begin capturing bundled auto-BOP business. We plan to reassess our rates in October, as the conversion has been below our desired levels. Initially set off prior ISO data, we accumulated live competitive quoting data that allows a more precise calibration to align our rates precisely with market expectations over time. Our anticipation is that at scale, our expense ratio will surpass a lot of competitors targeting this business, while we remain competitive in our segmentation strategy through extensive distribution and robust marketing capabilities, ultimately driving substantial business our way.

Adding on to this, we are launching a new marketing campaign shortly designed to thoroughly communicate our value proposition surrounding small business offerings in particular.

Great. Thanks, Bridget. Can we take the next caller from the line, please?

Thank you. Good afternoon. My first question pertains to the personal auto sector. In the 10-Q, you mentioned a softening market, a trend you noted last quarter. You also indicated that you would continue taking rate action. Could you clarify whether that suggests that you're planning additional rate increases to maintain growth levels in a softening market?

Absolutely, thanks, Elyse. Before answering your question, I want to clarify that I have two Johns here with me today. Given the extensive information on Commercial Lines, we thought it best to have both John Barbagallo and John Sauerland present. Should you have a specific question for either, please specify which John you are directing your question to. Regarding your question, we have observed continued softening in the market, coinciding with reduced shopping patterns. As always, we analyze each channel, state, and segment in detail to pinpoint opportunities for increasing inversion due to competitors' actions in order to apply necessary rate adjustments. We've taken several actual rate decreases as well, which we previously reported. Similar to our past practices, we proceed cautiously. This is a time of uncertainty, and we are keen on sustaining fast growth within our established target margins. We've enjoyed strong margins and have no intention of compromising them without verification of its convertibility. Our approach is methodical; we prioritize identifying areas where we can excellently succeed while ensuring we do not disrupt successful conversions. We know marketing is becoming increasingly challenging, but we remain well within acceptable costs.

Great, thank you. As a follow-up for John B regarding BOP, I want to understand the rates set initially. Can you shed some light on how those rates were determined and what guidance you can give us on rate-setting as this product rolls out nationwide?

Certainly, Elyse. Initially, we relied on ISO data as a base, incorporating underlying expense ratio assumptions based on operating rates. In addition, we began testing our segmentation strategies using external data. However, the real advantage emerged when we gathered competitive quotes once we entered the market, enabling us to assess our rates against industry standards. With only a few minor adjustments in our rate calculation, we believe we will land on our desired rates long-term. We have confidence that as we scale, our expense ratios will exceed those of many competitors targeting this business while we outpace the competition through superior segmentation and the reach of our marketing efforts.

Indeed, we have a new marketing campaign on the horizon that I believe will effectively communicate our story about small business and other product offerings.

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

Good afternoon. My first question is about the letter you sent out, where you mentioned rolling out a new property product dubbed 4.0. You also spoke about how the results in your property sector are affected by catastrophes. I'm curious how you plan to navigate weather-related challenges as you launch this new product and adjust for that in your combined ratio results.

Absolutely. We have indeed rolled out our Next-Gen 4.0 product in two states, with plans for wider distribution across the country. This product aligns more closely with our auto product strategy on the Personal Lines side, emphasizing deeper segmentation. Our R&D teams are collaborating to ensure we can implement segmentation effectively for our homeowners' products in areas prone to weather challenges, enabling us to mitigate losses due to such events.

Great. For my follow-up, I wanted to discuss Slide 16, where you showcase your accurate and efficient claims handling, including a downward trend in your LAE ratio. Can you elaborate on some of the levers you’ve employed to reduce your LAE expense ratio beyond just growth in business?

Yes, I can start with that and then I invite John B to add specifics related to commercial claims. We have diligently worked to improve our loss adjustment ratio for years, ensuring accurate payouts consistently. We conduct extensive training, particularly during these periods of heightened growth. We've also proactively hired before demand to ensure efficient onboarding, enabling us to place the right claims in skillful hands. Furthermore, centralizing our claims organization lets us align specialists to focus on similar activities, increasing throughput. John B’s slides showcased how we've categorized larger losses in commercial, ensuring experts handle litigation and non-litigation files to enhance efficiency.

Indeed, Greg. The LAE ratio you’re referencing strictly pertains to commercial auto. While it might seem counterintuitive following our substantial growth, maintaining the LAE ratio means we made considerable investments in rightly structured commercial capabilities over the years. With these investments holding steady while we significantly expand our volume, I see that as a positive signal, incorporating future potential for even greater efficiencies and higher accuracy as we progress.

Thank you for the clarifications.

Thanks, Greg.

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

Great. To start, can you provide an update on personal auto? Specifically, regarding bodily injury inflation rates, which you've indicated remain elevated and were seen in the 10-Q. I recall you mentioned this was tied to specific states, and we were all attempting to decipher whether this is a Progressive-specific issue or an industry-wide phenomenon.

Definitely, Mike. Our investigations into the fourth quarter of 2018 revealed that both Progressive and the industry are experiencing BI inflation. Reviewing our quarterly results, the incurred BI severity increased by about nine points. By accounting for two points focused on reserve strengthening, we gauge that our effective severity incline stands around seven points. We look forward to tracking the second quarter’s industry results. Upon reviewing some competitors’ earnings announcements, we’ve found our positions are closely aligned. We’ve narrowed our observations to several states, recognizing five areas where process improvements are essential. We also ascertained that increases in specials are occurring, which include a rise in attorney-represented cases, more surgeries, and increased injections. We’ll monitor these developments closely, though they appear to carry implications for the overall industry, albeit difficult to measure accurately. Additionally, as our mix shifts toward higher limits, we are effectively increasing our premiums associated with these limits. Overall, we feel comfortable with our loss costs, which should ensure our combined ratios consistently land below target levels.

Thank you. For my final question, I wanted to follow-up on Greg Peters's earlier query regarding your expense ratio. If I recall correctly, you previously shared certain targets for your expense ratio improvement in recent years. I don’t believe you met those targets, one reason being because you chose to spend more on advertising as you pursued growth. I'm curious whether you foresee any low-hanging fruit for improving the expense ratio in the coming years, and if competition continues to intensify, will the demand for those ratios inherently decrease due to less advertising?

Indeed, our approach to expense ratios bifurcates between overall and non-acquisition ratios. As we grow, if we find sufficient returns from expenditures in agency commissions and advertising, we will keep investing accordingly. This will ensure continued growth, presuming we engage responsibly. The claim side influences our discussions around loss adjustment expenses. We've delved into advanced methodologies like video or photographic claim assessments that enhance our efficiency. We're consistently seeking innovative technology applications across our organization’s CRM, such as AI-driven chat and natural language IVR systems. Suffice it to say, we are committed to driving down expenses, continually balancing investments against future returns across the board throughout commercial lines while remaining attentive to our strategic objectives of competitive costs. It’s expected that customers will rate us highly on cost-effectiveness, so we are vigilant in that regard.

To add, our focus on decreasing our overall expense ratio has been consistent, particularly in non-acquisition expenses, where we’ve established internal targets that we have been meeting. For example, in our Personal Lines business, the non-acquisition ratio has consistently dropped year-to-date. Looking ahead, we anticipate the marketplace will grow more competitive, which validates our need to press forward on minimizing infrastructure and non-acquisition costs.

Thank you for your insights.

Thanks.

Bridget, can we take the next caller, please?

Good afternoon, and thanks for the call. This is more of a housekeeping question: where are the expenses related to your Commercial Lines running through? Are they categorized all under Commercial Lines, and are they material to the overall expense ratio within that segment?

Yes, all expenses related to all Commercial Lines activities run through the segment's P&L. Essentially, we need to fund our initiatives internally while simultaneously achieving our combined ratio and expense ratio targets within that channel.

Moreover, they maintain their unique marketing budget. However, I can assure you that they benefit greatly from the overarching Progressive brand, which amplifies the reach and effectiveness of their initiatives.

On a slightly different subject, do you intend to utilize any level of reinsurance to set boundaries around the signals from this commercial growth?

Yes, we will leverage reinsurance. For the BOP product I mentioned earlier, we have a maximum total insured value for any risk capped at $5 million, with our retention on any coverage group limited to $1 million. Thus, we employ reinsurance solutions to cap our exposure at $1 million per instance across each coverage sector. Our primary focus remains on small businesses with fewer than 20 employees, approximating 31 million across the United States. These limits exceeding $5 million in total insured values comfortably cater to the majority of the businesses in the market.

As you stated, venturing into areas with less experienced knowledge compels us to establish quota-share arrangements alongside coverage lines to mitigate risks. Our intention is to cap maximum exposure while fielding competitive products and gaining experience, which we can enhance from steady onboarding.

As John emphasized, we are pursuing a methodical and measured approach. This growth avenue is exciting—we’re focused on becoming profitable while targeting our addressable markets wisely.

I'm now going to address a question from the webcast. Several long-time shareholders have posed pertinent inquiries today. In light of the somewhat softening pricing environment, what additional steps are being tapped into to uphold the impressive gains in policy life expectancy?

In the context of personal insurance, we are undertaking comprehensive measures—including ensuring the availability of home coverage through both Progressive Home and our longstanding partnerships—to optimize conversion rates on nearly every incoming policy query from our home quote explorer, HQX, or our agency channel. Our ongoing commitment to pricing competency also remains a priority, as we frequently revisit how we can continuously benchmark segments to offer competitive rates. We aim to enhance our brand further; our visibility has been significantly aided by our campaigns that extend beyond traditional figures like Flow. Furthermore, we aim to appeal to customers by widening our insights on what they require.

We recently saw declines in competitor rates during Q1. However, the second quarter demonstrated continued decreases in the market, albeit at less severity than before. Hence, as both the industry and our company experience rising severity while frequency declines, loss costs will likely cause rates to cease falling. The ongoing competitive landscape is indeed complex.

Thank you for your insights. Let's allow Bridget to introduce our next caller from the line.

Thank you. Thank you. To start, looking at your commercial written premium growth, I noted that it slowed down in the second quarter. While you've expanded into more states with Uber, I’m curious why this happened. Was there something in regards to the reinsurance you bought, or another hindrance?

No, nothing of that nature impacted us. The premiums related to Uber tend to fluctuate and are recognized in some months as larger amounts, which distorts our view. Thus, that spike was observed in the first quarter. Currently, we lack a similar event impacting the second quarter figures. Over the span of the previous four years, our premium growth consistently grew at an approximate 20% compound rate, and while it has eased from that pace, we’re still maintaining substantial growth on a significantly larger base.

Thanks. Regarding collision severity, I understand there have been evident shifts, perhaps linked to newer technology in vehicles. Are you seeing competitors react similarly towards these trends?

While I can’t speak for competitors, we scrutinize these trends rigorously and continually refine our models to account for the equipment vehicles utilize, including ADAS technology, which assists us in determining applicable discounts. It consequently enables us to gauge the expenses tied to losses effectively, whether they result in total loss or component-specific replacements. Overall, I maintain a favorable expression of the accuracy in our models and anticipate continued enhancement in efficiency.

A final question from the webcast: Given Progressive’s recent growth and profitability, could we anticipate increased aggressiveness in share repurchase activities over the coming years? If not, how would you deploy the prevalent amount of excess capital, particularly seen as growing?

Absolutely. We fundamentally prioritize making informed decisions with our capital allocation. Over the past couple of years, we've sought to capitalize upon identified growth potentials. Grounded in diligence, our 3:1 premium-to-surplus ratio has effectively expanded corresponding to our growth trajectory, and we want to maintain adequate capital reserves for unforeseen circumstances. Share repurchases are considered when strategic opportunities align, though currently, we believe expanding the company, and its prospective growth avenues necessitates a larger share of our capital resources. We've also adjusted our dividend initiatives for the upcoming year, engaging the board in conversations regarding a variable dividend for 2020.

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