Progressive Corporation (The)

Welcome to the Progressive Corporation's First Quarter Investor Event. The company will not make detailed comments related to quarterly results in addition to those provided in its annual report on Form 10-Q and the Letter to Shareholders, which have been posted to the company's website and will use this event to respond to questions after a prepared presentation by the company. This event is available via a moderated conference call line and a live webcast with a brief delay. Webcast participants will be able to view the presentation slides live or download them from the webcast site. Participants on the phone can access the slides from the events pages at investors.progressive.com. In the event we encounter any technical difficulty with the webcast transmission, webcast participants can connect through the conference call line. The dial-in information and passcode are available on the events page at investors.progressive.com. as a moderator for the event will be Julia Hornack. At this time, I will turn the event over to Ms. Hornack.

Thank you, Joelle, and good afternoon to all. Today we will begin with a presentation by two senior portfolio managers, Richard Madigan and Jonathan Bauer. That presentation will be followed by a Q&A with our CEO, Tricia Griffith, and our CFO, John Sauerland. Our Chief Investment Officer, Bill Cody, will also join us by phone for Q&A. This event is scheduled to last 90 minutes. As always, discussions in this event may include forward-looking statements. These statements are based on management's current expectations and are subject to the many risks and uncertainties that could cause actual events and results to differ materially from those discussed during the event. Additional information concerning those risks and uncertainties is available in our 2018 Annual Report on Form 10-K, where you will find discussions of the risk factors affecting our businesses, safe harbor statements related to forward-looking statements, and other discussions of the challenges we face. These documents can be found via the investors page of our website at progressive.com. It's now my pleasure to introduce our CEO, Tricia Griffith.

Good afternoon and welcome to Progressive's first quarter webcast. We are delighted with our first quarter results, growing net written premium 16% at an 88.8 combined ratio. Really great start to 2019, especially after several years of profitable growth. Today's webcast is going to be a little bit different than what we've done in the past. We have focused the most recent webcast on our operational strategies and how they help us make investments to ultimately achieve our vision. Today we're going to talk about the investment side of the house. Before we get into that, I want to step back a little bit and just make sure we're all clear on our overall objective function, and that's for both the operating side of the business and the investment side of the business. We want to grow as fast as we can, at or below a 96 combined ratio, as long as we can service our customers. The great news is we've been achieving that goal many times over the last several years. 2016, we grew 2.8 in net written premium. 2017, another 3.8. Last year, 5.4. And comparing quarter one of 2019 with quarter one of 2018, we've already grown nearly 1.3 billion. What that has made is a huge asset under management for our investment firm to invest of about 35 billion. And of course, premium float is one of the inputs to our investment strategy. Progressive capital management, or PCM as you'll hear it called today, It's based in Norwalk, Connecticut. It's a 13-member strong, a small but mighty team. Let's first talk about overarching risk. We want to balance our operating risk with the risk of financing and investment activities to have sufficient capital to support all of the insurance we can profitably underwrite and service. Within that, that's overarching. Within that, the PCM organization has three mandates. Jonathan will talk about this. Jonathan and Richard will both talk about this a little bit later in more detail. The first one, protect the balance sheet. The second, achieve a strong risk-adjusted total return. And the third one, support the operating business as we think about future endeavors. I think about Horizon 3 that I shared with you before. We tend to be more conservative about on the investment side because we've chosen to lever the operating franchise because we see it as our most durable means for a really strong ROE. A comprehensive ROE is measured by business profitability and capital efficiency. This slide gives you a sense of how we look at comprehensive income. This is a pre-tax basis and it is the past five years plus the first quarter of 2019. In each of the bars, you'll see several colors. The blue is underwriting profit. The orange is investment returns. And the small sliver of gray are interest expenses. As you can see, the investment part of our company is very important. And that's why I thought it was important to share with you a little bit more about our philosophy today. As you can see, for 2019, it's actually over 50% of our comprehensive income. We don't have an explicit comprehensive return on equity goal. Rather, it's the natural outcome of our operating goals, our investment mandate, and our financial policies. So, again, operating goal, grow as fast as we can at a 96. Investment mandate, have a strong total return on our investment. And our financial policies that we've shared with you before, and that is maintain a three-to-one premium to surplice. surplus, and then have a contingency layer of capital for unforeseen things that could happen, and then have no more than 30% of our total capital comprised of debt. When we have those three working together, which we have for many, many years, we're able to earn an attractive, comprehensive return on equity in excess of our capital structure. So now I'm going to get to the heart of the matter, and that is to introduce you to Richard and Jonathan. So They both started out many years ago at PCM. They started out as analysts and quickly moved into the portfolio roles. They both report to Bill Cody, who you've met before, so we thought it would be nice for you to meet two members of his strong bench. Richard Madigan has his BA in accounting from Boston College and his MBA from University of Chicago. He currently leads our structured product portfolio. And he served on the strategy council that we developed several years ago and still works closely with Andrew as we think about the future. But first I'm going to introduce to you Jonathan Bauer. He has his BA in economics and political science from what we Ohioans call the school up north in Ann Arbor and he has his MBA from Columbia. He leads our corporate bond portfolio and he takes the initiative to think about technology strategies to make sure the PCM organization is efficient and effective.