Progressive Corp (PGR) — Q1 2022 Earnings Call Transcript

Thank you, Emily, and good morning. Although our Quarterly Investor Relations events often include a presentation on a specific portion of our business, we will instead use the 60-minute schedule for today's event for introductory comments by our CEO and a question-and-answer session with members of our leadership team. Questions can only be asked by telephone dial-in participants. The dial-in instructions may be found at investors.Progressive.com/events. As always, discussions in this event may include forward-looking statements. These statements are based on management's current expectations and are subject to many risks and uncertainties that could cause actual events and results to differ materially from those discussed during today's event. Additional information concerning those risks and uncertainties is available in our annual report on Form 10-K for the year ended December 31, 2021, as supplemented by our 10-Q reports for the first quarter of 2022, where you will find discussions of the risk factors affecting our business, safe harbor statements related to forward-looking statements, and other discussions of the challenges we face. Before going to our first question from the conference call line, our CEO, Tricia Griffith, will make some introductory comments. Tricia?

Well, thanks, Doug. Good morning and thank you for joining us today. Anniversaries are a natural time to look back on the past, and since this is the first investor call of Progressive's 85th year, I wanted to do just that. We have grown from a scrappy startup trying to find a foothold in the Great Depression to the tenth largest homeowners carrier, the third largest personal auto carrier, and the Number 1 commercial auto carrier. In just the last five years, our total company-wide written premium has nearly doubled. Nowhere has growth been more remarkable than in Commercial Lines, which just passed the major milestone of over $9 billion in written premiums on a trailing 12-month basis. We grew commercial auto premiums over 200% in the last five years while generally achieving a better than average industry profit margin and ended March just shy of $1 million in Commercial Lines policies enforced. It has truly been an incredible run with significant opportunities still waiting to be captured. Congratulations to the Commercial Lines team, and thank you to all Progressive's 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 off or even beginning to decline, used vehicle values are still significantly above those of early 2021. A steady but increasing trend in bodily injury severity has also contributed to the increase in loss costs we've experienced. Further, as a country emerges from the Omicron wave, we saw Personal Auto vehicle miles traveled recover to fourth-quarter 2021 levels, which were in the 9% to 10% range below the pre-pandemic baseline. Our response to these trends has been to reduce marketing expenses, increase underwriting scrutiny, and limit bill plan options. In the first quarter, we implemented rate increases of 7 points in Personal Auto that are still pending to earn in, which is in addition to the eight points we took in 2021. While we're making progress, we still have more work to do to ensure all of our states reach rate adequacy. Our rate and non-rate actions have had the expected effect on Personal Auto growth. While Personal Lines PPIF growth is still positive on a year-over-year basis, sequential PPIF growth is negative. New applications are down year-over-year, and policy life expectancy is also declining. When we look across all the metrics we track, it seems likely that we're ahead of our competitors in increasing rates, which explains a large part of our slowdown in growth. As we look forward to the rest of 2022, we're optimistic. As more states reach rate adequacy, we expect to be able to increase marketing spend and re-engage the growth engine. Because of the advantages we believe we have and the way we buy media, we can adjust marketing spend at the local and segment level to ensure the new business we write meets our economic goals. Since we believe we are ahead of our competitors in taking the right actions, we hope to continue our long-term trend of writing more than our fair share of business. Even as we face these macroeconomic pressures, we have not slowed our pursuit of segmentation superiority. Our U.S. Personal Auto product model is now available in over half the states and is showing early promising results, especially among more preferred segments. We have also further expanded the footprint of our 4.1 homeowners’ product into four additional states in the first quarter, bringing the total to 12. Our new normal since the onset of the pandemic has been disruptions in the economy that have buffeted our business. While there are many paths the future can take, I'm confident in our strategy and our people and believe our greatest successes are still to come in the next 85 years. Thank you. I will take your questions.

Hi, good morning. 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 obviously been robust in granting permission to raise prices. Are you seeing any changes in that at all, or do you expect changes over the next few months?

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

And the reluctance of California and some of the states that have been difficult is because of the strong results that companies had in 2020 and early '21, or is there something else behind it?

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

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

I don't know if there was a huge benefit. Things opened up a little bit more, but still vehicle miles traveled and frequency are both still on pre-pandemic levels. Do you want to add anything on that? During the early period, we did see vehicle miles traveled drop relative to the fourth quarter of 2021, but we've seen those return in March. So a very modest benefit, if any at all.

And then just lastly, have you changed anything in terms of how you're investing in this environment, any major classes that you're reemphasizing or conversely, where you're seeing good value?

I'll talk a little bit about our investing guidelines, and then John Bowers can add in as well. We've had a long-standing approach to our investing in that 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 based on our portfolio. Most importantly, John's team’s most important job is to protect the balance sheet. That way the operating company can grow as profitably and as fast as possible. John, do you want to add anything?

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

Thank you.

Okay. 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?

Yeah. Andrew, first of all, I enjoyed your write-up last week. Welcome to P&C Insurance. We have a couple of different underwriting restrictions. We look at gathering additional data, possibly, if we have more questions on a customer. So we call this pre-binding verification. We may ask for a little more specifics to ensure we have the information adjusted correctly.

I think that's exactly what we do; if 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 in new business and 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.

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

I think it's more about 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've blocked, and they've likely gone somewhere else because we don't have accurate information.

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

Probably, I would say of incoming policies, probably low double digits, which is from half that when we were more comfortable with underwriting margins. What we're trying to do here is ensure that every piece of new business coming in the door is going to be profitable for us. We understand that there is a distribution on our pricing. So on the tail where we're less sure that we are going to make money, that is where we're going to ask a lot more questions, and frequently those questions lead to the customer seeking insurance elsewhere. That has been 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. So some of these efforts are focused on that segment. By pushing that segment to our competitors, obviously, we ensure that we're profitable. To the extent our competitors do not employ similar methods, it will affect them adversely.

Lastly, in your Commercial Lines, you noted in the letter that it was a remarkable 63% growth since they've been optimistic that you can continue to grow in the double digits. What gives you that optimism?

That is significant for a couple of different reasons. We did grow double digits in all of our business marketing carriers, and we are still growing significantly in FHT in us for-hire transportation based on still having amount. So there is not much being moved across the country since the pandemic. In addition to that, about half of that increase came from our transportation network renewals. We moved from 6-month to 12-month policies, which is obviously significant. We increased our projected mileage, which is how we compute our premium. Rate increases were made to reflect the inflationary environment. For us, we see this as a lasting trend. So about half that increase was from our renewals. Even if on the commercial side that the BMAs we have now may slow down, the great part about what we've been doing, and you wrote about this, over the last several years, is thinking about the future. We are just getting going on our BOP, our Business Owners Policy; small businesses continue to grow. There, we have rolled out 37 new states with three new states actually this year. We expanded the number of power units for our fleet program that we write from 10 to 40. We have acquired protectors from medium to larger fleets. How we think about business in Horizon 1 and 2 for now, and ultimately, we will do that in Horizon 3, is, how do we continue to have growth even if maybe one segment of that business may slow down or may fluctuate based on macroeconomic conditions? So I'm excited about all the opportunities in Commercial Lines because we've spent the last four or five years investing in the future.

Thanks so much.

Hi, thanks. Good morning. My first question, I was hoping that you could quantify what percent of premium per state represents where you think the majority of rate increases are 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 both frequency and severity?

I would analyze each state individually and feel optimistic that we have gained an advantage over competitors, which we believe is important. We are closely monitoring trends and, while I don't have a crystal ball, we will keep an eye on those trends. We are still observing labor rates and other indicators that might lead us to adjust our rates. The good news is we were proactive in our rate adjustments, and we hope that if we do need to adjust rates in some states, they will be smaller adjustments that we prefer. This environment has made it challenging for us to make changes due to the significant increase in trends. We believe that in a few states, we have already implemented the majority of the necessary rate actions. Our main focus now is determining the right moment to pursue some of that growth. Pat, John, and I frequently meet with the Personal Lines controller to discuss our return to profitability and growth in that order. We meticulously analyze the auto book on a state-by-state, channel-by-channel basis. If we see favorable results in April, we might consider easing underwriting restrictions or expanding local marketing efforts. I mentioned earlier how each segment and market allows us to adapt due to our media purchasing strategy. It’s a complex situation with various nuances, but we are confident. Of course, we still have 7 points to work through, and more insights will emerge as we continue to monitor the situation closely.

Okay. And then my second question, as you've navigated through this environment, have you guys noticed any change with your Snapshot and the take-up on your UBI products? Additionally, has there been any change in discounts that you guys have offered or the time period you guys are observing with your products?

We saw initially a pretty big increase in the take rate in the agency channel, which had been a challenge for us. Right now we sit at about a 40% take rate in the direct channel, about 10% in the agency channel, and this of course excludes California and North Carolina where we cannot use telematics. So that blended amount is about a 28% take rate. We continue to see surcharges and discounts, and we’re really trying to ensure we ultimately price to the whole curve. We will continue to do that as our Snapshot evolves.

Okay. Thanks for the color.

Thanks, Elyse.

I'm sorry. Can you discuss the lessons learned from your continuous operation in one state over the past month? What takeaways do you have, and what can we expect if you plan to implement this nationally? Additionally, how would a national rollout impact your overall business? Would it lead to more accurate pricing, better loss ratios, and improved gross performance? Please elaborate on the implications for your company.

It's been implemented in Oklahoma for 30 days. We will need to address the progress in the next quarter or the following one. We aim to continue this initiative because it helps us respond better to changes in driving behavior, especially considering the pandemic. We believe we can proceed, particularly since costs for mobile and other devices have decreased over time, and it seems like a good moment to move forward. We are optimistic that the initiative in Oklahoma will be successful, and we plan to expand it once we gather more data.

Okay, thanks. Second, totally unrelated question, what percent of your new customers when they come in the door start off by going online and then end up switching from online to actually using a call center from you guys? And I'm wondering, is there any near-term opportunity you can take advantage of given the unit's funds from competitors and what they are doing with their other services?

I think it's a pretty small percentage. It used to be much larger, but I think our technology has gotten so much more sophisticated that more people finish the buy online when they're there. It's a small percentage.

Okay. Thank you, Tricia.

Thanks, Phillips.

Thank you and good morning. I wanted to ask about claims counts and claims personnel, and you've had a lot of growth on the commercial side. Maybe it's flat or but I wondered if you could talk to us about having the right people as things are changing rapidly. And if there's any difficulty in getting the staffing right there.

It's a great question. Over the year, we really spent a lot of time ensuring we think about centralization and consolidation and having the right people available when needed. We took advantage of the slowdown when frequency plummeted during the beginning of the pandemic to do the same thing on the Commercial Lines side because it's such a different animal. What I would say is turnover is up, especially with new hires. We're seeing that trend across the industry, particularly with entry-level jobs. That said, we've had this recruiting machine that has enabled us to continue to hire at a rate that helps us get out in front of our growth. We want to ensure that our people are not just here but are trained and can provide the right service for our customers. One of the things I am proudest of is that we didn't reduce our claims force during the pandemic. We were overstaffed for several months, but we decided against doing that because we knew the impact would be more profound for the country rather than just our company. This allowed us to have staff ready and available when things picked up. We will continue to hire in advance of need and benefit both claims and CRM side, ensuring we have the right training in both a virtual and sometimes in-office environment. We are also looking at how these groups report to John, and our internal audit group has been assessing the quality of the files, and we've seen continued good results there.

For just Snapshot, have you discussed using Snapshot in the claims process? Have you

I think you cut out, but I think what you're saying is are you considering using that in the claims process? That's something we'll definitely consider as we think about continuity. We'll also consider other services, and claims could be an area where we could assist with the investigation should our customers have that Snapshot device.

So that's still a future aspect you're looking at, nothing really happening now.

We're testing all the time. That's what I would say.

Got it. Thank you very much.

Thanks, Gary.

Thank you. During the re-pricing and marketing rationalization, the policy count growth in Progressive property was still fairly healthy. I'm going to guess that you're not terribly interested in insuring someone's home if they are not often going to give you their cars. Can you talk a little bit about the differences in retaining customers versus getting new ones over the past nine months?

So, Sam's have always been defined as shoppers and thus are expensive. We know that our retention will decrease when we increase rates on the auto side, and that has proven to be true. We've had less of a retention problem in the homeowners' side. From the home perspective, we've made clear our desire to de-risk and to get more of our non-volatile storm states more in the two-thirds of our book versus the current 50%. This quarter we'll start non-renewing the policies that we mentioned in Florida, about 60,000 policies over the next year. We aim to de-risk our portfolio. In property, it takes time because there are 12-month policies, and it's also reflective of industry pricing. The storms happening in March and now again in April are indicative of this growth. It could be that right now, it's still a competitive market because everyone has increasing rates. But we'll continue to increase rates and try to stay ahead of that trend to de-risk our book a bit.

So net of the Florida non-renewals, obviously, you're growing in 47 other states with fairly desirable appetites. Should we feel that the deceleration in policy count growth overall for property is ongoing, or do you think those two things neutralize each other, and it will be hard for us, from our perspective, to see that going through the numbers?

Yes. I mean, our desire is to grow in the non-volatile states, so we're taking actions to do so with more agents who are able to sell our property book. It's hard to say. Again, that'll ultimately depend on what our competitors do as well. I talked in my opening comments about our increased use of deeper segmentation in the property products. We believe we have best-in-class segmentation on the auto side, and we're looking to take that same level of segmentation into homeowners. I think that'll be crucial. In many of the states where we still have a decent amount of policies, we've been able to leverage higher deductibles and cost-sharing. This change means this is not just treated as a maintenance policy, waiting for the hailstorm to come and we will replace your roof. Those are some of the other things we've changed. I can't predict how we'll grow in non-volatile states, but that is our approach, and I think it will take some time.

Okay. Thanks very much.

Thank you.

Good morning, everyone. So in your answers, you mentioned eventually returning to growth. I want us to focus on the advertising piece of that. Your advertising spend is down in the quarter or down year-over-year. I’m wondering whether you actually need the lowest price to win the customer or, put another way, does the brand Progressive get you to a customer even if you don't have the lowest price? When will the advertising spigot be turned back on if most of your rate increases are behind you?

Oh, yeah. I do think our brand allows us to win in the marketplace and we don’t always need to be the lowest rate, especially for people who have had experiences with us. I remember years ago when I ran claims, we had a very high NPS for those people that experienced claims because of how we treated them when they needed us most. So I think that makes sense. When we look at the difference between agency and direct, as far as loss ratio, we see that direct has gone down significantly, and we believe that has to do with our strong brand. Pat and I discuss marketing plans by state and will run sensitivity analyses; if we turn on local marketing, what could happen to new apps and etc. We will only do this if we believe we are positioned to begin this growth again. We are just as eager as anyone to turn it on. We did not like having negative new business applications; we want to grow as fast as we can. Profit is a core value that will take precedence over growth, but let me tell you, these conversations happen daily, and when we turn it on, we will feel confident that we are in a good position to do so. Of course, these things can change, and we will always be nimble to the changes, and we will be able to do this based on the data we analyze daily.

My second question, I wanted to pivot to the homeowners’ product. Can you just tell us a little bit about that product and what differentiates it from what you were offering before?

Yeah. Happy to talk about that. Part of the segmentation we need to enhance in the property side of the business is on the age of the home and the age of the roof primarily. We've just improved our segmentation that we're bringing in as we expand that product over time, which also includes some coverage expansions that agents have requested. But primarily, it's about understanding the risk better and recognizing that the majority of our losses stem from damage to the roof on that home. Capturing both the age of the roofs and/or the age of the home, or most cases both, helps us better rate and better underwrite.

And just as a follow-up to that answer, does that mean that the older the roof, you're applying depreciation schedules that allow the customer to buy out for roof replacement? I am just trying to understand how that fits with what some of your competitors are offering.

Yes, it certainly varies by state what we can offer. When we talk about a market like Florida, it limits our ability to price a depreciated roof accurately. That presents challenges that we see in a state like Florida, but we do offer a depreciation or effectively a roof depreciation schedule for customers, so they're not incentivized to have that roof replaced when it's old and damaged.

Okay. Thanks for the answers.

Thanks.

Hey, thanks. Good morning. Tricia, you stated you believe that the major auto rate increases are behind you, and as you’re looking to turn on growth, how should we think about the auto loss ratio? When will it start to stabilize and improve? Do you think that’s a second half of '22 event or how are you thinking about that?

That's follow-up and a good question. We will monitor the rates that will earn into the loss ratio, and we have a couple of large states where we were able to get the rate pretty quickly, mainly Texas and Florida. We will watch those closely to see when we think it's the right time to grow. Again, we're keeping an eye on all macroeconomic factors that are influencing the inflationary pressures, specifically with collision and property damage, to ensure those do not continue to increase. I think of labor rates and those sorts of observations we will note to ensure we have an appropriate amount of rates to begin growth.

Got it. Thanks. I was thinking about some of the severity factors in trends that you're observing during the first quarter and your outlook. Could you break down how you think about used car prices, as well as labor, which you mentioned, and the outlook for those as we move forward?

Yes. We've been monitoring the Manheim Index closely, and even though a couple of data points suggest it has flattened or possibly decreased, it's still 35% higher than January of 2021. So there hasn't been a significant drop in used car prices. Additionally, we know accidents are occurring at a higher rate, so there are more damages reported. We know parts prices have gone up over 12%. Labor has only increased a couple of percentage points. We are observing that closely, especially regarding the hiring environment and the industry’s challenges in that regard. Due to body shop capacity, we are also seeing rental car extensions lasting several days. All these factors contribute to the elevated severity trends in both collision and property damage, which explains why they remain higher. However, I feel confident it is stable for bodily injury. Over the last four quarters, it has remained in the 6% to 8% range. We will continue to keep an eye on that. We have noticed a slight uptick in general damages, which are the non-medical damages. But we believe that has stabilized over four quarters, so we will monitor that closely. These are the key drivers influencing severity trends in collision and property damage.

Got it. And as you said that you're poised to move to more growth, with rates, it seems as though most of them are behind you. What is the severity view that you're making regarding that statement?

The severity view? I think we're looking to see if we can stabilize as we price to the inflationary perspective, so we're just pricing to that, and when we believe we can meet our calendar year and lifetime target margins, we should return to growth.

It's important to note that many decisions are made locally. Our product managers responsible for geography and products are obviously adjusting rates with their views about future loss trends. They will take rates up. While they are confidently projecting that their forecasts are accurate, you're going to want to see results before deciding to open up new business. There are geographies where we have done that, but there are also many where we either haven't achieved the rates we need, such as in the large states previously mentioned, or we're still cautious in understanding if we have taken enough rate to justify opening up the new business. So ultimately, it will depend on state-level decisions, and we're confident we will make the right choices in each state at the right time.

Understood. Thanks so much for your time.

Thank you, David.

Thank you. Good morning. I was just curious about the situation in Eastern Europe and Russia. It seems that some of the European OEMs are experiencing supply chain issues. Are you seeing this impact U.S. manufacturers or prices of cars, used cars, parts, or anything similar?

Not really. We’re seeing the same bottlenecks in the supply chain with parts that happened before what transpired with Russia and Ukraine, so there are still supply issues, especially with new cars, which has increased used car prices, but that was already in play.

Right. Okay. And then I think one of your comments regarding homeowners indicated that your ability to grow is dependent on the competitive environment. Can you discuss how you perceive the competitive environment in homeowners insurance outside of the Southeastern Florida?

That's also state-by-state as well because if you go further west, there are issues in terms of fires, etc. So we analyze and assess each area, consider the propensity for major weather events, deepen our segmentation, and look around competitively. It’s a competition on both the direct and agency sides, so we have to compete on agency grounds against some major players, as well as compete directly with our unaffiliated partners. We believe we have access to a lot of business in non-volatile states, and that’s where we’re focused.

We have a great and expansive distribution network in those non-volatile states that are committed to Progressive as a company they frequently use. Our independent agents across those non-volatile states effectively ensure a lot of new business. We’re focusing more on that. I know you excluded Florida in your question, but it’s crucial to note that there are solutions in those states viable for both consumers and the industry. Florida, in particular, is a very disruptive market right now, and we’re working with regulators and legislators to find solutions. The issues regarding the liability of depreciating roofs in Florida are difficult. In Florida, it’s required to provide full replacement value for the roof. So solutions need to be viable for homes that have older roofs not meeting codes. We aim to grow in non-volatile states and hope for viable solutions in some of these challenging states, in benefits to both consumers and the industry.

Thank you.

Good morning. Before declaring victory, I am wondering if you're seeing favorable seasonality in the first quarter, like others are talking about. If so, have you taken that into account when you say the majority of your rate increases are behind you?

I believe our seasonality has been relatively stable as it has been in the past. I'm not saying we're winning, but what we're conveying is that we believe we got out ahead of our competitors regarding rate based on data we examine. We monitor trends very closely, and we have many caveats regarding our capacity for growth. We are proud of our rate-making capabilities that enable us to emerge from this market with challenges.

I hear your optimism, but in some states, do you think you've reached the maximum limit that regulators will allow you to take? In theory, if you wanted to, could you take more rates?

We analyze data and perspective rates with trends. If we need more in states where we have raised rates several times, we will share actuarial data to achieve the right rate to meet profit targets. We’ve built strong relationships and exceptional communication with regulators regarding our needs because the worst thing that can occur is not receiving the necessary rate. Without the rate, insurance becomes unavailable, and ultimately we need to obtain that rate. Over time, we can expect larger rates in the future; therefore, I’m optimistic.

Okay. I’m sorry, just really quick, you mentioned a 20% take-up in telematics. Is that for new business only? If not, what percentage of your in-force uses telematics?

The 28% is in-force. I’m sorry, that was new. 40% new in direct, 10% in agency. We’re not going to report anything else. I’m sorry.

Sorry, you don't share that. Okay. Thank you for taking my questions.

Thanks, Tracy.

Yes. Thanks. John, first one for you. Where do your new money yields stand right now as of today compared to your book yield on your fixed income portfolio? Perhaps you could give us a general sense of how much of your portfolio rolls every 12 months.

Thanks. I will take that one. So, I don’t want to be too specific, but in broad strokes, if you look at March 2022, in terms of investment yields inclusive of treasuries, there was about 2.5% taking that out on either side of 3%. Generally, if you consider a portfolio with a three-year duration and our size, I would estimate something in the neighborhood of $6 billion to $8 billion rolls off annually.

Great, really helpful. I’m curious, Tricia, could you speculate on when you think California will actually begin granting rate increases?

Well, Brian, if I knew the answer to that, we're working with the regulators and doing everything we can because we want to increase our market share in California, the most populous state, with affordable and available insurance.

Great. Is there a time frame that you’re willing to wait for those rate increases? Are you taking some significant non-underwriting actions to improve results right now?

Yes. We are taking significant non-rate actions due to our inability to achieve the needed rate. We will collaborate with regulators to determine the best course of action for our mutual benefit.

Great. I can ask one more quick question. I’m just curious, PLE continue to drop significantly. Is that reflective of what’s changing in the business mix or just the pricing environment? Please clarify what PLE reflects.

It really reflects the pricing environment. I mentioned the differences between agency and direct with agency being a bit more elastic. Regarding PLEs, Texas and Florida, they don’t drop as dramatically, suggesting that price is an issue because we have effectively outpriced competitors in these two large states early on. Our ultimate goal is retention, but we must also ensure we’re correctly priced. We have noticed some consumers adjusting their coverages to lower their prices when renewing. Our CRM organization is working to expand our customer preservation teams. If they call in and are facing challenges to pay their bills due to increases, can we accommodate them with better bill plans or coverage to ensure they remain covered at the right rate? This is primarily reflective on price.

Just to emphasize a couple of points made earlier in response to that question. We see different behaviors based on consumer segments. More preferred segments are less elastic, while more non-standard or price-concerned shoppers are significantly more elastic. Additionally, as Tricia noted earlier, we observe differences between channels. The direct channel exhibits less degradation than the agency channel.

Very helpful. Thank you.

Thanks.

Thanks. First, I had a question on the Personal Auto NPW growth. High-level, when we try to triangulate PIF growth you're attaining and the rate increases taken, NPW growth isn’t demonstrating the extent of those rate flows compared to expectations. I’m interested if there's any make-shift or nuance affecting that?

I would likely point to the average written premium growth in response to pricing increases authored, and I believe that's indicative of our overall new business growth.

A couple of additional comments. We previously mentioned that indeed, we still have seven points of rate to earn in, in our Personal Auto programs, so some of the rate we’ve adopted isn’t yet reflected in the policies. We report the written premium change, so these earnings will reflect more on the combined ratio down the line. If you compare the change in new average written premium with renewals, you’ll see renewal has increased by a significantly larger margin. As we take revisions that are predominantly base rate revisions, those will directly affect all our renewal customers. On the new business side, customers tend to shop, meaning we won’t realize the full benefit of average written premium for new customers at the time of rate increases. Temporal issues exist there, but we’re also mindful of the new renewal mix and how that flows through in total average premiums. The rate we’re taking is indeed earning into the book, being accepted by consumers at a higher rate than we’ve seen historically, reflecting studied conditions; therefore, we believe the actions we’ve undertaken are leading towards expected results.

Got it. Thank you. Secondly, on competition, you addressed some advantages in advertising sophistication. Have you observed, as we’ve moved through the pandemic, some wake-up calls for traditional brick-and-mortar distribution companies? Are you seeing heightened competition, or is your ability to execute your strategy remaining consistent relative to the past regardless of pricing?

Yes, I would direct you back to our four strategic pillars, as we continuously invest in these areas. They include our people and culture that serve as our most critical competitive advantage. During the pandemic, we ensured that we connected virtually with our employees through every new hiring class. I prioritize making people feel good about being part of our winning team. Secondly, we’ve prioritized our brand. We will continue investing in our brand to create engaging campaigns, rolling out some creative this month or early June. Next, competitive pricing remains a constant discussion, and we are working toward maximizing this aspect, but this also depends on achieving the right rates. Lastly, our distribution via broad coverage ensures we’re available when, where, and how consumers want to shop. Regardless of whether in the independent agency or direct channels, we have appreciated our position in both, ensuring consumers have choice in purchasing insurance that meets their needs. We will continue to invest in both platforms and strengthen our presence. I feel very optimistic about our competitive position in both segments and our outlook for the future.

Okay. Thank you.

Thank you.

Great. Thanks so much. Tricia, in your earlier remarks, you talked about returns and profit preceding the return to growth during your discussions with the controller. Is this measured monthly or annually? If you are priced adequately but have not yet earned the rate increases currently in the market, will that constraint affect growth?

Yes, we'll assess when it’s strategically appropriate to begin ramping up local advertising. Remember, we haven't entirely ceased national advertising, ensuring our brand name remains prominent, allowing us to grow. We will judge the optimal time to initiate that growth ensuring that rates in those specific states meet profit margins.

Okay. But there could be monthly combined ratio pressures from prior low rates, is that not an impediment to growth?

Indeed, we are managing with a calendar year, striving for a 96% or better target. That is an objective, of course, while product managers endeavor to ensure adequate pricing on new business written today over their anticipated lifetime. If their evaluations yield confidence around profitability on new business written, they will likely opt for more growth. Both calendar year combined ratios and lifetime pricing considerations are taken into account, but if they believe the new business is priced well over its life cycle, they will be keen on pursuing growth.

Perfect. Thanks so much; I appreciate your help.

Thank you.

Hey, thanks. Good morning. I just had a question on operating within Progressive's constraints. Historically, the plan has been to maintain a 96% or better combined ratio and grow as quickly as possible. Typically, growth is easier when you are close to that 96%, but whenever you’ve gotten closer to that level, such as in the second half of last year, you’ve focused heavily on re-underwriting, prioritizing management over growth. I’m curious, especially since you were operating around 94 on an aggregated basis, with Personal Auto above 96, is it reasonable to understand that your risk appetite is similar to what it was later in 2020?

Yes, I mean, I believe our standards and operating philosophies haven’t shifted. Remember, if we're reporting a 94.5%, we're still paying attention to perspective rates and observing trends expected to evolve over 96% unless we make adjustments.

Of course, we are managing on an annual basis, maintaining the objective to achieve a 96% combined ratio. While prioritizing re-underwriting, we continuously strive to optimize new business pricing to ensure an adequate lifetime combined ratio. Essentially, if they believe new business is priced adequately to meet long-term profitability targets, they will not hesitate to pursue growth.

That's clear. My follow-up was just regarding retention. Retention has surprisingly held up well amidst the increases you've implemented recently. As you’ve noted, you’ve instituted considerable rate hikes within the first quarter. I’m hoping for you to clarify how much you have implemented and how this is affecting customers. It seems like there could be a tailwind in the second quarter.

Well, it depends if you're observing the trailing three or trailing twelve figures. The trailing three months data is often more dynamic concerning our rate increases. In some of the states where we acted quickly, we have evidentially positive results for retention. Despite experiencing some degradation overall, much of this is displayed against what our competition has done. With rising rates, when consumers shop around during renewals they will frequently lean towards us, as long as we have stability, which they prefer.

Thank you.

Thank you.

We have exhausted our scheduled time, and thus concludes our event. Emily, I will turn the call back over to you for closing scripts.