Progressive Corp (PGR) — Q3 2023 Earnings Call Transcript

Good morning, and thank you for joining us today for Progressive's Third Quarter Investor Event. I'm 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. Although our quarterly Investor Relations events often include a presentation on a specific portion of our business, we will instead use the 60 minutes schedule for today's event for introductory comments by our CEO and a question-and-answer session with members of our leadership team. Introductory comments by our CEO were previously recorded. Upon completion of the previously recorded remarks, we'll use the balance of the 60 minutes schedule for this event for live questions and answers with members of our leadership 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 can 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, 2022, as supplemented by our 10-Q reports for the first, second, and third quarters of 2023, 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. These documents can be found via the Investor Relations section of our website at investors.progressive.com. To begin today, I'm 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. At the end of the second quarter, we were in a difficult place. Rising loss cost, adverse development and catastrophic weather events meant we were facing a significant uphill battle to deliver on our calendar year 96 combined ratio target, while facing a very uncertain future. We made difficult decisions to steer the business through this challenging time. Despite the headwinds, I believed in our strategy and the leaders who are in charge of delivering that strategy. While we knew it wouldn't be easy, we knew that if we executed it properly, we would come out better on the other side. While there is still much uncertainty in our future and more work to do, the results in the third quarter suggest our strategy is working. Before discussing what did happen in the third quarter, let's first discuss what did not happen. First, unlike the first half of the year, the third quarter saw modest company-wide reserve development of only 0.2 points unfavorable across all lines. As we discussed in our presentation during our last call, our reserving group adjusted reserves in the first half tracks many things, including higher severity caused by steepening trends in our fixing vehicle coverages, and higher attorney representation rates in Florida precipitated by House Bill 837. In contrast to the first half, in the third quarter, we saw some flattening in the loss cost trends for fixing and replacing vehicles. We also now believe we have adequately reserved for the higher severity related to pre-House Bill 837 lawsuits. Second, in the third quarter, catastrophe losses were 1.3 points lower in total after reinsurance than the first half of the year. We do not write homeowners in Hawaii. So our exposure to the heart-wrenching Maui fires was limited. After reinsurance, our property catastrophe losses in the third quarter were 28 points lower than the first 6 months of the year. And while Hurricane Idalia was devastating to the people in its path of destruction, the density of homes and autos we insured in that path was relatively low. What did happen in the third quarter is that our rate and non-rate actions had a positive effect on premium and profitability. Including the 4 points of rate we took in the third quarter, we have now taken approximately 16 points in personal auto year-to-date with more of that rate earning in every day. Both Commercial Lines and homeowners also took rate as we looked to address loss trends in those lines. We continue to adjust and refine non-rate actions across the portfolio to help the business we are writing to meet our profitability targets. In addition to improved underwriting results, our net income is also benefiting from the higher interest rate environment. For the first 9 months, our investment portfolio yield is 90 basis points higher, and recurring investment income is 59% higher than the same period last year. With sustained higher interest rates, we expect yields to continue to increase as securities with lower interest rates mature and those funds are reinvested at higher rates. Many of the actions we took and continue to take to address profitability have an adverse impact on unit growth. New applications in personal auto were down 20% in the third quarter compared to the prior year and contributed to a decrease in PIF compared to the end of the second quarter. This is a reflection of our self-imposed pullback in media spend as we seek to manage our combined ratio through the acquisition expense ratio and find the right balance in cohort pricing, which we talked about at length at our last quarterly call. We continue to assess our marketing spend. And as always, we endeavor to find the right balance between profitability and new business growth. While new applications shrank year-over-year in personal auto, retention reflected through our PLE measure continues to be robust at 35% in personal auto on a trailing 3 basis. We believe robust retention, especially in the face of higher rates than a year ago, is an indicator that many of our competitors are still tight on underwriting, and we remain competitive in the marketplace. Despite the headwinds created by our profitability actions, our year-over-year growth was very strong. Through September, company-wide PIFs were up 10% year-over-year. Positive year-over-year PIF growth plus higher rates means our premium growth was spectacular with net written premium up 20% year-to-date or $7.9 billion. To put the first 3 quarters premium growth into perspective, we've added the premium equivalent to a top 8 personal auto insurance carrier, which is a truly amazing statistic. Despite the successes that occurred in quarter 3, we are not yet declaring victory. Our calendar year combined ratio currently stands 1.2 points above our 96 target. While loss trends have flattened, they are still elevated. Macroeconomic indicators suggest inflation is abating, but we are vigilant. Given the geopolitical and macroeconomic environment, our view of the future could change overnight. We continue to refine our plans for the rest of 2023 and 2024 as new information comes in. We have built a business where we can quickly take advantage of the opportunities the market offers us. So I'm confident that as things change, we will react with the goal of delivering the best-in-class results we expect of ourselves. Finally, as a reminder, and as we've previously announced, beginning this fourth quarter, we will move to reporting results on a Gregorian calendar basis versus our historical approach of a 544 convention. Consequently, for the next year, we will limit historical comparisons on a monthly basis and we will continue such comparisons on a quarterly basis. Thank you again for joining us, and I will now take your questions.

This concludes the previously recorded portion of today's event. We now have members of our management team available live to answer questions.

I have a quick question about your perspective on growth. As you approach your 96% targeted combined ratio, how should we view the future growth trajectory? Given that losses are improving and reserving appears more manageable as we head into 2024, if you reach a 96% combined ratio in 2023, would it be reasonable to expect a reacceleration of growth in 2024?

Yes, that's definitely reasonable, Bob. Here's how I'm thinking about it. We obviously have 1.2 points to diminish to get to our 96, we're going to continue to work on that. We're still seeing a pretty hard market out there, so we're getting a lot of ambient shopping. And if you caught the last part of the statement even with us doing the self-imposed pullback from our media spend and from non-rate actions, we were able to grow the company nearly $8 billion compared to the first 9 months of last year. 10% PIF is a little bit higher on the direct auto side. So we're pretty excited about what we were able to achieve this year. And I say that not necessarily for the analytical community out there, but mostly for the 60,000 people that got us there. So profit comes before growth. We'll continue to work on that. And what we'll start to do in the relatively near future is start to pull back some of our non-rate actions. So we have a hierarchy of non-rate actions that we'll look to start to pull back. We can test. There's obviously been a lot of uncertainty out there. So we're going to be measured. And then we can pull back that next tranche in the hierarchy of non-rate actions. And we just met with our media team and are working on a pretty robust budget that we'll plan to put into effect. We still have, obviously, marketing the rest of this quarter but into 2024. So I would say, we're excited. I will say that there's been a lot of uncertainty. And so we're going to be really diligent and cautious, but our goal is to grow as fast as we can at 96 or better.

That's very helpful. Maybe pivot a little bit on reserving. On the 10-Q, you had a lot of disclosure on an explanation of how severity trends are developing over time? But just curious in terms of frequency, specifically on bodily injuries. It looks like frequency normalized, improved quite a bit. Just curious if you have any commentary there around what's causing the frequency numbers to improve? And is that a trend that we should be expecting that it will normalize back to a generally negative frequency number going forward?

Yes. It's really hard to discern frequency. A lot of it has to do with geography mix, CMT mix, it could have to do with our underwriting effect. So I don't really want to focus too much on that because there's just a lot of inputs. What I would say from a stability perspective is we're down overall about 1.5%, 13 to 24 months. So we've been pretty stable as far as frequency overall. What I'll also say is when we look at our UBI data, we are seeing about 15 months of stability where VMTs are still down about 15% pre-COVID. Now again, I can't confirm that that stability will continue. But what we're seeing is not a lot of more movement to commute hours, and we have some external data that shows that badge swipes in office remained pretty stable at about 50% of office workers working from home versus office. So there is some stability. There's always a lot of inputs and there's always a lot of change that's happening, especially as we talked about rolling back some of our non-rate actions, but it's been stable for quite a while.

I guess a follow-up on ambient shopping. Should we be thinking about it as kind of looking at the industry's profitability and capital position? And then ultimately, as the industry heals, as long as — as well as Progressive's profit margins heal, the ambient shopping benefit, which is pretty extraordinary, should dissipate. How are you guys — internally, do you guys have your own kind of view? Or has your view evolved at all on the benefit you're getting from kind of lower LTV to CAC and ambient shopping?

How I think about that, Mike, is it's been a hard market for a while. We did get out in front of rates to begin with, and then again at the beginning of this year as we saw the trends change specifically in severity of fixing cars. So getting out in front of that, when others might be behind, we're going to get that ambient shopping. We watch it really closely in the auction environment. And the great part about that is that you can get a really low cost per sale. So we'll watch that, but we will definitely put on the gas as needed if we feel like the market is softening at all. I can't really speak to what other competitors do, but I imagine that they're trying to get to their target profit margins, and that means they're going to put a lot of rate out there, which means shopping is going to happen, and that's how we get that business.

Mike, I'd add. Much of the ambient shopping today, we are dissuading from purchasing a policy with Progressive. So as Tricia was saying, we are going to pull back on some of the non-rate actions we've had in place that had been obviously designed to improve profitability. And as we do so, more of those ambient shoppers are going to get through to potentially buy a Progressive policy. So we have some, what I'll call, unmet demand out there that as we're more adequately priced will become growth.

Okay. That's helpful. Lastly, I was hoping to switch gears to the TNC business on the commercial side. There's been a lot of growth there, you've taken a lot of market share from peers. I'm assuming that, that business is coming to you at hefty price increases. But it's also been a cause of reserve development. I guess any color you can offer on what's going on with that business? And just lastly, does this business come with a bigger new business penalty than other parts of personal auto or commercial non-TNC?

Yes, I'll start with the last part. I think what it comes with is sometimes we don't necessarily know that product in the state. So just like any new business, where we're learning the cost associated with it, we've seen that in TNC. So said another way, the more mature states that we've had are performing much better. But you're right on the rate increases. We've over doubled the rate since 2021 in the TNC business. And specifically, what we are seeing is the rate increases are driven by just a few states. And those states have some structural challenges relating to limit mixes, specifically UM/UIM. So what we've been doing with both of our customers is really gathering the data that we have. We have a treasure trove of data being the largest commercial auto writer. And then they have their own data. We obviously separate and bifurcate the two companies, but talk with them about how to get to the right rates in a more timely fashion and work with them to develop approaches just around flexibility. So think of 6-month policies or greater segmentation. And that's what we're working on right now. I can't go into a lot of specifics because it is proprietary, but we're working very closely to get the rate we need, specifically in the states I talked about with the high UM/UIM limits. And the other states, we're more comfortable with because they're performing better.

So first, I had a question on Commercial Line reserves. We had an issue for several months where you guys had consistent adverse development in the personal auto side, and I think in September, you had adverse development on the commercial side as well. So maybe discuss what the drivers of that were and what gives you the confidence that this is sort of not the beginning of a trend where adverse development might continue for a few months in Commercial Lines as well?

Yes. So we saw some of the similar things we did in private passenger auto in Commercial Lines. Really the two factors, the one I just talked about was the TNC reserves in those specific states and the other was late reported injury claims. And I think those make up the majority of the Commercial Lines. We'll continue to look. We obviously feel in some of the reserving that Gary and his team have looked at it pretty deeply. So think of the Florida House Bill 837, think of fixing cars. And Gary will continue to look at those high limit states throughout the year to make sure we're adequately reserved for Commercial Lines as well.

Okay. And then secondly on your expense ratio, has the decline been mostly driven by just a proactive view on your part to pull back from the market while you're seeking price hikes and not be as active on marketing? Or are there any structural changes in the and exemptions as well?

Well, we're always looking to reduce expenses, especially on the non-acquisition expense ratio. But we've pulled back significantly in advertising, and that obviously hits the expense ratio as well as the increase in premium.

And you'll come back, I guess. What do you need to see before you start coming back into the market with more marketing spending?

Yes. Even considering the reduction in our marketing spend, we still allocate a substantial amount towards marketing, and this will continue into the fourth quarter based on planned expenditures. However, we will take a cautious approach and initially begin to reduce non-rate actions, while we have a solid media budget set for 2024. That’s our plan. This gives us the flexibility to increase spending if we see significant business opportunities, as long as we maintain our target profit margins, or to decrease spending if we encounter conditions similar to the first half of 2023.

Two questions. So first, do you see any potential impact from the UAW strike, which is hopefully behind us now?

We do a little bit because even though the strike wasn't that long, I think, around 8 weeks total. There's about 12 to 18 weeks before we start to see recovery in some of the parts as well as new vehicles being made. So immediately, when we saw the strike happen, John Murphy and his group went into the sort of mode of sensitivity analysis around this. We have deployed and executed a plan on that. And our main issue for this next 12 or so weeks is really to just minimize the disruption in both our customers and the company.

Got it. So near-term impact potentially, but not really beyond 12 to 16 weeks or so?

That's what we're thinking. Of course, every now we'll watch just like all of the data and especially as we continue to earn in more rate towards the states that we're adequately priced, it may not have any impact. The thing we worry about the most is delays in fixing vehicles, which has been a concern going forward in the past, I should say, just based on talent in the body shops and having the right mechanics to do that, but we'll be able to see that really quickly and react to that should we need to.

Got it. And then my second question, maybe you can help us think through this. So you've implemented a lot of rate in personal auto, still earning a good chunk of that as well. You're talking about some stabilization of the loss trends. So if and when you accelerate this growth on a much healthier rate adequacy, do you expect that to ultimately improve the loss ratio? Or is the immediate impact still an adverse impact because of the new business penalty?

Well, if we spend more on marketing, there is a new business penalty. But if we believe we are putting new units on the book at a lifetime 96 or cohort 96 calendar year, then we feel good about it. And we'll price to that. We are very efficient in our media spend, and we'll price to that. And really, we feel better every day in all products as each day goes by as more rate earns in. But we know that's part of new business and we're happy to do it if we think we can make the target profit margin that we go to.

Looking at competitor behavior, I don't need to speak about individual competitors, but GEICO lost a lot of customers over the past year and I look at some other publicly traded companies. And the leakage of policies has not been so significant elsewhere where I can tell yet Progressive has grown dramatically. And thinking about the year to come and the year that's passed, when you think about captive independent and direct channels, where has most of the market share growth that Progressive has achieved come from? And next year for a company like GEICO that becomes more aggressive in its desire to add new customers, does that change the calculus on what the market share gains and the type of customers might be in the new year?

Well, I think we're a growth company, Josh, and I think we're going to try to do anything we can to grow as long as we make our target profit margins. We understand where much of our business is coming through because we know the proof of the prior carrier. And so it's been not just GEICO, but other companies, I don't want to talk specifically about the percentage of where it's come from. But it really depends on are people priced right in the market? Do they have the right brand? Do they care about expense ratio, which keeps the prices competitive? And so for us, it's really — and we've talked about before, it's making sure that we have all 4 of our strategic pillars, really starting with our people and culture and then going on to our brand, competitive prices and broad coverage. And that's where I think we're able to win and continue to grow. We can react very quickly when our competitors do have actions. And really, that's our focus, is to make sure that we have those 4 strategic pillars and that we invest in all of them to continue to be a high-growth company.

The thing to consider there, Josh, is which segments we're growing in would be somewhat indicative of where they're coming from. So we are continuing to grow well in the more preferred segments of our business, the Robinsons, but also we call rights who are homeowners that do not bundle yet their home and auto with Progressive. And we have not been growing, actually this year, we've been shrinking a little bit on the standard end. So the nonstandard end of the spectrum. So that bodes really well for our future growth because, obviously, those customers stick with us longer. And I think where they come from is important, but also whom we're bringing into our customer set is a really important way to think about it.

And given that answer, is there a way of bifurcating or segmenting the property business such that — I guess, the question is what percentage of the business is operating at a 96% or better and growing as fast as it can. Obviously, there are some states where you're not there yet and maybe it's segmented by state, but to what extent have you achieved the goal of the property business running the way you want it in the geographies that you operate?

Yes. I think we start with what we started with about a year ago, and that was to derisk the book and have less new applications and policies in volatile states and more in nonvolatile. And you saw the data on that in the queue that we believe we're doing a great job. We're non-renewing about 115,000 policies in Florida, we're just over indexed in Florida. And so we love Florida. We have a lot of Robinsons. We have a lot of autos and we continue to have a lot of homes, but we were not making money and we needed to non-renew some. So that will happen over the next year or so. We knew it would take a long time. But I think really what our strategy is on the property channel is not unlike it was years ago in the auto channel. We're investing more in segmentation, we're investing more in understanding rate to risk and the necessary need for reinsurance, but we will get there. And obviously, third quarter was a lot better than it was in the past. And there's a lot of buzz because Ian came off, and there wasn't as many storms. But we feel good about our plan, it will still take some time to execute, but we're in the heart of that.

I want to step back to your comments about the non-rate action. And it sounds like you're getting ready to dial back some of those actions. Can you remind us exactly what some of those actions were? Did they include any things around commission or fees to lead gen companies? Do you expect those things to change over the next year?

I'll let Pat comment on that. It was less about commissions and more on our strategy around some underwriting paid plans. But Pat, do you want to talk about that a little bit?

Yes, Greg. Tricia's comments are related to John's remarks about how we manage the business we allow in. We've implemented more restrictive billing plans and additional verification checks to ensure we receive accurate risk information, allowing us to price appropriately. As we approach year-end, we are focusing on these non-rate actions in certain markets. Regarding lead generation and increasing spending, that will be a focus for 2024. Once we are assured that we have met our 2023 targets, we will begin investing to generate demand as necessary. We have been inactive in some markets for a while, so we anticipate a gradual return to activity, spending only what is essential to attract customers efficiently and cost-effectively. The challenging market conditions continue, with many competitors needing to adjust their rates, which means there is still significant pricing potential in the market. We will build on that as we enter the new year from a spending standpoint.

Great. I guess the other question, pivoting to some of the previous comments around the property business. You're definitely trending in the right direction from a combined ratio perspective, but it's still running above your 96 target for corporate-wide. Is it your objective that — or your view that you're going to get that property business to a 96 combined ratio next year? It seems like it's been a drag on your consolidated results for several years now. I just — or maybe you're using it as a loss leader to grab share in the Robinsons cohort? Just some updated views on that would be helpful.

Yes. We're not attempting to use it as a loss leader, I'll tell you that. It has been a drag. Overtime, when you look back, home has done pretty well. Now what we did was we should have probably seen the need to derisk a little bit in states like Florida, Texas, Louisiana, and across the country. That's why we're doing that now. That's why we're investing in technology and segmentation, new product models. So we do feel good. We have different target profit margins depending on if you're bundled or not, et cetera. But no, our desire — I can't predict the future. I have no idea what's going to happen next year. But our goal is to continue our plan to derisk and make the target margins that we have in property and have that be a robust part of our book because we know the Robinsons cohort is super important to our future.

And we have actually been exceeding the objectives we set out for the 2023 period in terms of growing more where we think — historically, results are far less volatile in property and shrinking considerably in areas including Florida, as Tricia noted, that have been way more volatile from a weather perspective historically. And just to the 96 point, as Tricia was noting, we priced to an aggregate 96 for the company. So by segment, we actually have different combined ratio targets and we think about those as all deriving a return on capital equivalent to or better than the personal auto business. So the 96 calendar year is our commitment to achieve that in aggregate. But below that, we are pricing the different targets based on the characteristics of each business.

My first question is about the auto accident year loss ratio, excluding catastrophes. Last quarter, in the presentation, you mentioned a shift in the mix between renewal and new business and its potential positive effect on the loss ratio. Can you help quantify how much of the improvement in the loss ratio this quarter is due to the decrease in new business compared to the improvement in the renewal portfolio?

That's pretty tough to size and I think when we obviously renew, we will know more about you as a customer, but when we bring new business on, our intentions are that we reach our target profit margin.

The rate actions we've taken have a much greater impact on the accident year loss ratio than the new renewal mix. In the third quarter alone, we achieved 5 points earned in our personal auto business, and year-to-date, it's more than double that figure. When you significantly increase the denominator, it's the best way to enhance the situation. While there is also the numerator, most of our loss ratio improvement comes from this. Additionally, the moderation of severity this quarter has greatly benefited us. The rates we've implemented and continue to implement are earning in, and you're witnessing that in the loss ratio.

And then just a question, I guess, just on — it seems like — I mean, the retention has definitely been better than I would have thought. It's obviously a hard market out there. I guess has that surprised you at all and influenced at all how you guys are thinking about growth and maybe adding a little bit more business in 2024, just given how strong the retention is on the renewal book? And Pat, as you just said, that seems to have a better or more profound impact on the loss ratio than the new business?

I mean, I don't know if it surprised us because we watched the data. It certainly delights us, I would say that. And what we want to do, really, the thing with retention is having some stable rates. And we have been increasing rates as has the competition in an extraordinary fashion based on inflation trends. So what we'd love to do is have tremendous growth in 2024, but have some stability around the trends. And I was saying I haven't been able to say on this call for a while, small bites of the Apple where we take a really small rate and our customers feel that makes sense and they don't shop. So that's our goal. But we're very happy with the retention of both the trailing 3 and a trailing 12. We'd like to see some stability, and we will grow as fast as we can as long as we see that stability.

And I'll state the obvious, but we're coming off a fairly low point in terms of retention last year. So last year, we were ahead of the market in taking rate, and I would think of it in sort of like maybe 10 points ahead of the market in terms of taking rate that we saw the need for. And as our customers got those rate increases, they shop and they could still find a better rate. Competitors now have caught up, and in some cases, actually surpassed us on rate take and consequently, even though our rates continue to rise as customers shop, they're less able to find a better rate. And so our year-over-year renewal rates, the changes are robust and we're getting back closer to PLEs lifetime expectancies that we've enjoyed previously. We're not yet back up to historical highs, but as Tricia noted, we're delighted with the trends we're seeing, and we think they're going to continue.

My first question, you guys pointed out, right, that you're a little bit above the 96% year-to-date. You guys have a sense of what rate you're going to earn in, in the fourth quarter, right? And it sounds like loss trend, right, in the Q3 got better relative to the Q2. So I'm sure you have expectations there as well. So what's like the biggest swing variable as we go into the next few months of earnings with whether you ultimately get below that 96% target for the year?

Yes, weather is a significant factor, and we are closely monitoring it. We have another 3 points to earn in the private passenger auto segment. On the Commercial Lines side, we have been earning rates from revisions in 2021, 2022, and 2023. However, we believe much of our progress in Commercial Lines for this calendar year has come from non-rate actions. As we approach 2024, we anticipate starting to earn more rate in the commercial line sector. We often analyze what we need to do to achieve our goals. We are committed to managing expenses and continuously strive to reduce them. I believe weather will be the major variable, Elyse.

Okay. And then my second question, advertising has come up a bunch on this call. So it sounds like the clock, obviously, in the calendar resets, we get to the start of next year. So will — is that when you expect to kind of push more advertising considering we're restarting and then you can go for the 96% next year? I'm just trying to think through the thought process around when you ultimately turn on the marketing machine. And then how do you balance not growing too fast too soon, recognizing that's what happened at the start of this year?

Yes. I can let Pat comment a little bit, but our intentions are if we see — if weather is sort of normal in the next several months. And we see some of the non-rate actions that we're pulling back on to achieve new business, then we are going to be able to likely put a lot more media spend into play in the first quarter. But a lot of that depends on what we're seeing. A lot of it depends on how much we need to. But I think that excites us because we do sort of get the start of — the clock starts over. But Pat, do you want to add anything?

Yes. The only thing I would add is last first quarter. So first quarter of 2023, we had sort of the perfect storm of lots of ad spend in a really hard market. And what we don't yet know is how much ambient shopping remains in market and how much shopping fatigue could be in market. So John's point about when shopping pays off because you find a lower price that reinforces or rewards that. If consumers shop in the first quarter and our rates are similar to where they are, there may not be as much ambient shopping and switching available in market. So we don't yet know. But as Tricia mentioned, there are markets where we're off most markets for local advertising today, but there were markets we were off at the start of this year too. So it's very dynamic based on our lifetime expectation of hitting our profit targets for new business that we generate during the period. So dynamic system, and you're right that we will start spending more after the first of the year, but we will be leaning into that and ramping that up as needed depending on how much is available in the ambient market and which markets we feel we've got adequate rates to support the ad spend.

I'm curious about Elyse's question. Considering the rapid growth you experienced earlier this year followed by a sudden increase in inflationary pressures, and given the ongoing macroeconomic uncertainty, will you approach opening up your growth engine with more caution this time? Will you wait to gather more data before pursuing that growth?

Yes, I think we will be more cautious, and that's why — that's sort of the beauty around the 96 and the discipline around the 96, whether it's on a calendar year or a cohort year. And that's why we'll slowly pull back, watch, test, and we'll only be pulling back in the states where we feel like we've got enough rate. And so that's a little bit of a limiting factor. But we want to grow, but I do think that there's been so much uncertainty that we will watch it closely. So we aren't in the same position where we have to crank up rates like we did this year. Yes, we don't price fully to the curve. We have expanded on both the surcharge and the discount. I think it's pretty tough to quantify what that is really what I'd say.

Yes. So I think Tricia is right, we've been expanding our offering to price closer to the curve over time, and we've been expanding to continuous monitoring in the UBI world to collect more data and to be able to more continuously price policies more accurately. As far as specific quantification of how much growth is coming from and the profit coming from it, I wouldn't comment on that at this point. And it's a meaningful piece of our business. It's our most powerful rating variable. And we continue to invest in both the technology to lower the expense of collecting data and to analyze the data more precisely to price more accurately over time on a continuous basis. So I think we're in probably 50% of our earned premium states. I think 29 states have continuous monitoring at this point in time. So we feel really good about continuing to invest to maintain or even widen that moat that we think we have in the issues-based insurance space.

As we get back to what should be normal, is there any way of quantifying both in terms of growth and profitability how much impact the fact that you're fully pricing to the telematics curves have had before COVID? I assume that you're probably generating excess profits for growing a little bit less quickly than you could have been?

Well, we don't price fully to the curve. We have expanded on both the surcharge and the discount. I think it's pretty tough to quantify to that is really what I'd say.

I think Tricia is right about the excess profits. We've been focusing on pricing continuously and have improved our data accuracy significantly over time. Our approach is maintaining competitiveness while also ensuring profitability.

I think that depends. We always look to see if we can do book rolls. However, as you mentioned, a smaller company will face more challenges in investing in technology, segmentation, branding, and distribution. As you've noted in the past couple of years, we have managed to improve some of that internally. Therefore, I wouldn't want to pay a premium to acquire those policies. I believe we can secure them based on our size and efficiency.

Just some quick math. You achieved 16% year-to-date rate increases in auto. And in the 10-Q, you said that you plan to take an additional 3% in 4Q, so that will get us something like 19% for the full year. I think last quarter, you penciled in 17% personal auto rate increases for the full year. So it feels like you need to take more rate now. It's not a lot, but can you share the key drivers behind this additional rate needs?

Yes, I think it's important not to overinterpret a small difference. Sometimes, there can be delays in getting approvals as we need to coordinate with each department. The trends we've been discussing are reflected in the rate. Whether it involves attorney representatives or car repairs, I won’t provide further commentary on that.

Okay. Great. It also looks like you had modest favorable personal auto prior year development this quarter. The adverse mostly came from commercial lines. Was that because you feel good about adequately reserving the Florida reform? Were there other factors? And I'm curious if you're seeing reopen claims in the quarter?

That's exactly right. We're feeling much more confident in both the House Bill and fixing cars.

Okay. And I know you touched on it last quarter, but can you remind me what caused the reopen claims in the first half of the year that you haven't seen in the past? What it changed?

Yes, there are a few things that happen, but you can create an estimate. Then when the customer, whether it's an insurer or a claimant, goes to get the car repaired, we have made that payment, and the process is closed. Once the car is in the shop, they may discover additional damage which can lead to delayed repairs and increased rental costs. Factors such as lead time for parts, labor rates, and repair duration contribute to the increase in rental expenses.

And on the injury side, there was a significant influence from Florida. House Bill 837 resulted in a surge of attorney representation and lawsuits, prompting us to increase our reserves to account for what we anticipate the future costs of settling the claims will be.

Okay. So you don't wait until an actual claim closes, you estimate what the close would look like. Was it maybe perhaps premature in calling those claims closed?

No. It's the way our system works. So we have reserves set for different line coverages. And then if those change and they change dynamically not one file or two files, that's when we know we need to strengthen our reserves.

But yes, we are absolutely estimating the ultimate loss cost with the best information we have at this time.

It's quite typical in our industry to encounter supplements because certain components of vehicles may not be visible. This includes parts like the suspension. You document what is visible, and you should not include more or less than that. As the claim progresses, particularly with collision or property damage, more information may emerge. Sometimes there may be no additional findings, but there could be supplements, which is a common occurrence.

Just one question about Florida. Now that the situation has mostly settled regarding reserving, are you noticing any positive impacts from the recent legislation on the newly written business? I know you have a significant presence in Florida. Is it still too early to determine?

I think it's too soon to tell. We anticipate that it will be positive, but we have to let this play out a bit.

That appears to have been our last question. So that concludes our event. So I will hand the call back over to you for the closing scripts.