Progressive Corp (PGR) — Q4 2021 Earnings Call Transcript

Good morning and thank you for joining us today for Progressive’s Fourth Quarter Investor Event. I am Doug Constantine, Director of Investor Relations, and I will be the moderator for today’s event. The company will not make detailed comments related to its results in addition to those provided in its annual report on Form 10-K, quarterly reports on Form 10-Q, and the letter to shareholders, which have been posted to the company’s website. This quarter, we will have a presentation on a specific portion of our business, followed by a question-and-answer session with members of our leadership team. The introductory comments by our CEO and the presentation were previously recorded. Upon completion of the previously recorded remarks, we will use the balance of the 90 minutes scheduled for this event for live questions and answers with leaders featured in our recorded remarks as well as other members of our management team. 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. Additional information concerning those risks and uncertainties is available in our annual report on Form 10-K for the year ended December 31, 2021, 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 Investor Relations sections of our website at investors.progressive.com. To begin today, I am pleased to introduce our CEO, Tricia Griffith, who will kick us off with some introductory comments. Tricia?

Good morning and thank you for joining us today. As I stated in my letter, 2021 was a year like no other. We were forced to confront the new normal imposed on us by the pandemic. We faced business challenges unlike those we have ever previously seen, all while continuing to serve our customers at the level they have come to expect from Progressive. Our people are flexible. They can see the challenges coming and react appropriately to ensure we meet our business objectives. Our ability to respond like this is supported by our corporate culture, which is built on our four cornerstones: who we are, which is based on our five core values; why we are here, which is our purpose; where we are headed, which is our vision; and how we will get there, which is our strategy. This construct guides us so we are all headed in the same direction regardless of the bumps in the road. To achieve our vision to become consumers' and agents' number one choice and destination for auto, home, and other insurance, we need to execute on our four strategic pillars. In our quarter two call, I spoke in detail about our pillars and their importance to our business, and I continued that discussion in my annual letter to shareholders. While each pillar is equally important to support our strategy, today, we are going to focus on a single pillar: competitive pricing. Competitive pricing does not mean having the lowest rate all the time, although we strive to do that as much as possible. Rather, it means having the correct rate to match the risk we are trying to ensure, while at the same time, delivering more value to the customer. We believe that if we could outsegment our competition, settle claims accurately, and manage expenses appropriately, providing attractive rates to our customers will come naturally. It’s no secret that the insurance industry is going through a period of immense change brought on by catastrophic weather events and macroeconomic headwinds. Our business is no exception. The changes in Personal Lines results, which is our largest line of business, were especially pronounced. Personal Lines results continued to benefit in the first quarter of the year from lower frequency brought on by the pandemic. However, the last three quarters delivered challenges. Frequency started to rise, returning to near pre-pandemic levels. While the increase in frequency did not surprise us as people started driving more, what was a bit of a surprise were the increases in severity, especially the cost to repair and replace vehicles. It was these rising trends that forced us to increase rates. Once we realized these developments were not temporary, our product managers acted quickly, and in the second quarter, started taking Personal Auto rate increases, which were in advance of many in the industry. We have continued to increase rates through the fourth quarter with a total of 8% taken in calendar year 2021. In addition to rate changes, we also had to make some difficult decisions to reduce expenses and increase underwriting scrutiny to hit our profitability goal of a 96 combined ratio, which is the expected impact of reducing growth. While these decisions are tough to make and the short-term results can be difficult to acknowledge, we believe we have built a better mousetrap. History has shown that following times of industry disruption, we have grown our Personal Lines business faster than our competitors with better profitability. Further, it has been after times like this that we have made some of our greatest strides to achieving our vision. Today, we will spend some time talking about the mousetrap that allows us to react faster, and we believe more accurately than the industry as a whole. Our first topic today will be on the science of Personal Auto pricing.

Thanks, Tricia. Today, Kanik and I will give an update on the rate-making process in our Personal Auto business. We have structured our discussion in a Q&A format based upon common questions we receive from our investors. There are many facets to managing rate level in our Personal Auto business. And today, we are going to focus on two key aspects. First, we will share how we determine our rate need to support our operational goal to grow as fast as we can at or below a 96 combined ratio. This can broadly be categorized into two areas: segment level and aggregate level. Segment level pricing is largely the responsibility of our product R&D group. While very important, we are not going to discuss this in detail today. You might remember that Pat Callahan and Sanjay Vyas discussed our approach to product segmentation back in our third quarter 2018 Investor Relations call. Today, we are going to focus on aggregate rate level, ensuring we are collecting enough premium in total to cover our expected future loss costs and expenses to achieve our 96 combined ratio goal. We will provide an overview on two key aspects of how we do this. The first topic that I will cover is the role of our auto pricing team who is responsible for the pricing indication process and providing product managers with an accurate estimate of rate need to ensure they hit rate revision profit targets. The second topic that Kanik will cover is how our product managers leverage these pricing indications, their broader toolkit, and local knowledge and expertise to set the pricing strategy for their respective states to ensure they hit not only rate revision targets, but also our calendar year goals. We will close the presentation with an overview of our deployment capabilities. In our Personal Auto business, it is very common for us to do hundreds of rate revisions per year, which involves many groups at Progressive. This is an area we have invested significantly in over the years to ensure we have industry-leading speed to market and the agility to adapt our resources to meet the dynamic needs of the marketplace. So, let’s start with the first topic on how pricing and product management work together to determine our aggregate rate need.

Thanks, John. The goal of the product management organization is to deliver profitable growth at our target margin through adapting Progressive’s products to win in our local markets. This organization comprises of highly talented individuals. They are results-oriented and were attracted by profit and loss ownership. They want accountability and decision rights, and we empower them to make decisions at the local level. Think of them as Chief Operating Officers of their own businesses. There are several aspects to our Product Manager’s job at Progressive. Each product, state, channel is different and our Product Managers design strategies to meet our goals within the individual businesses. Compliance is mandatory. Profit is our second priority. Growth at target margins comes next. Managing legislative, regulatory developments, and relationships are key levers in order to respond to economic conditions and the competitive environment within their states. Today, I am going to focus on one aspect of their role: tactics to deliver our target margins. And this is especially relevant in the current environment. The first step in consistently hitting our target margins is to give our product managers very clear operational goals. You know it as our grow as fast as you can at a 96 objective. Just a reminder, that’s a composite calendar year target number. Product Managers manage to their respective targets within their channel product or geography down to the line coverage level. Each business fulfills their role within the overall portfolio to meet this composite goal. Our product managers have multiple tools that help us operationalize this goal. We call it the product manager toolkit. Product managers actively monitor results with daily reporting on volume measures and monthly data across all other KPIs. The toolkit affords both diagnostics and informs actions to ensure we deliver segment-level results that roll up to our aggregate objectives. At the macro aggregate level, operationalizing this objective is like riding a wave. It requires a very delicate balance; go too fast with rate, and you will be ahead of the market and compromise growth. However, if you move too slowly and fall behind on rate, it’s incredibly hard to catch back up, and you will miss profitability targets.

Thanks, Elyse. And I think that’s very dependent on each state. So we feel good where we’re at now. So we took the 8 points last year, took another 3 points in Personal Auto in January. And we’ve had some successes with some of the regulators. So let me give you an example. In Texas – I think that came up in the last call. We – they had some objections. We went back and forth with a lot of data and came to an agreement earlier this month, and both of those prior approvals are done and effective, I think, on the 24th. And then we’ve put another rate increase in February. So we feel good about states like Texas where we’ve had great conversations with our regulators, and we can get the rates on the street. And that allows us to open up local advertising, our bill plans that we might have restricted underwriting guidelines and – our underwriting restrictions, I should say. And so it’s a mixed bag depending on each state. So we will continue to watch the trends.

Hi, thanks. Good morning. My first question – thanks for all the disclosure just on the rating side of things. Given where you guys are now, the rates that you mentioned, the 8 points that you guys took last year as well as just what seems like continued elevated severity, when do you think you will potentially be at your target margins within Personal Auto? If I remember from the call last quarter, it seemed to indicate perhaps it would take 6 months or longer. I just want to understand kind of where we are in the time frame of you guys thinking we will have enough rate to kind of get back to where you want your margins to be in auto, just in Personal Auto.

Yes. We will continue to watch frequency closely. So we’re watching companies open. And what the new normal is of how people go back to work, I think, is yet to be determined. I know with Progressive, we are just figuring that out as well. There’ll be a lot more people that work from home or work from home part of the time. So we’re going to watch frequency once things stabilize a little bit more. So the real answer is we don’t know for sure. But hopefully, John and Kanik let you understand that the propensity to have the majority of our auto policy 6 months allows us that flexibility to get the rate in more quickly. Thanks, Elyse.

Hey, good morning. Great presentation. First question, Tricia, to your comments about in the past, during times of industry disruption, you’ve been able to – the company has been able to make great strides. Just curious, is – obviously, every cycle is different, as you all mentioned. Is the window of opportunity just very different this time given that it appears Progressive results have deteriorated much more so than peers, which maybe could be due to being overweighted non-standard drivers? Are you seeing kind of a bifurcation of results, non-standard versus standard, which might make other peers less likely to need as much rate?

Well, when we strip away at the Q4 results from some of our competitors, we feel like we’re in pretty good company. It looks like almost everybody needs a similar rate than we do.

Okay. Understood. Thank you. My follow-up is just trying to – maybe if you can try to unpack some of the severity statistics a little bit more. You focus on the Manheim in the deck it looks like. But just curious, we’re also hearing about supply chain issues requiring cars to be taking longer to fix, higher rental car prices. Just curious, are any of the other issues that have been impacting severity, are they getting better? Are they decelerating? Or is there still a lot of uncertainty?

Mike, there continues to be a lot of uncertainty, but I think you hit the nail on the head. So we’ve got the supply-demand issues with chips. So we have parts prices continue to increase. Because it’s taking longer to repair those, our rental prices have gone up. We’re watching labor rates in body shops closely and working with our MSOs to understand what we think about that. But when you think about severity, we look at it in a couple of different ways, but I’ve been focusing on looking at it from this last quarter, quarter four of 2021 compared to '19. and let’s take collision as an example, and we don’t usually share at this level. But in the aggregate, we are up in severity about 11.9%. Collisions, up substantially more than that. And actually, frequency is down less than pre-COVID, and severity is up. So we’re watching very specific line coverages to understand the trends and how they relate to the increases that we need specifically.

This concludes the recorded portion of today's event. We now have members of our management team available live to answer questions, including John Curtiss and Kanik Varma, who can address inquiries regarding the rate level presentation. We will now take our first question.

Hi, thanks. Good morning. My first question – thanks for all the disclosure just on the rating side of things. Given where you guys are now, the rates that you mentioned, the 8 points that you guys took last year as well as just what seems like continued elevated severity, when do you think you will potentially be at your target margins within Personal Auto?

Thanks, Elyse. And I think that’s very dependent on each state. So we feel good where we’re at now. So we took the 8 points last year, took another 3 points in Personal Auto in January. And we’ve had some successes with some of the regulators. So let me give you an example. In Texas – I think that came up in the last call.

Thanks. And then my follow-up.

Yes. We will continue to watch frequency closely. So we’re watching companies open. And what the new normal is of how people go back to work, I think, is yet to be determined. I know with Progressive, we are just figuring that out as well. There’ll be a lot more people that work from home or work from home part of the time. So we’re going to watch frequency once things stabilize a little bit more.

Okay, thank you.

Thanks, everyone. I'm excited about the outlook and hope to understand how you're doing in terms of your market penetration within the auto insurance market. Are you seeing competitive pricing pressures in certain regions, or are you struggling to achieve your mandated growth rates?

Yes, we believe successfully getting the rates out and watching how the market reacts is going to be very critical for us. We did see an impact in our applications, especially in areas where there were dramatic changes in rate. However, we feel confident that we will stabilize as we get our rates aligned to the risks we are underwriting.