Progressive Corporation (The)

Welcome to the Progressive Corporation's Third Quarter Investor Invent. Welcome to the Progressive Corporation's Third Quarter Investor Invent. The company will not make detailed comments related to quarterly results in addition to those provided in its quarterly report on Form 10Q 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 online can access the slides from the event pages at investors.progressive.com. In the event we encounter any technical difficulties 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. Acting as moderator for the event will be Julia Hornak. At this time, I will turn the event over to Ms. Hornak.

Thank you, Chris, and good afternoon. Today we will begin with a presentation on our Horizon 3 strategy by our Chief Strategy Officer, Andrew Quigg. Our presentation will be followed by Q&A with our CEO, Tricia Griffith, and our CFO, John Sauerland. Also joining us by phone for Q&A will be our Chief Investment Officer, Bill Cody, and the General Manager of Progressive Home Business, Dave Pratt. This event is scheduled to last 90 minutes. As always, discussions in this event may include forward-looking statements. These statements are based on management's current expectations and are subject to many risks and uncertainties that could cause actual events and results to differ materially from those discussed during the event. Additional information concerning those risks and uncertainties is available on 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, Progressive.com. It is now my pleasure to introduce our CEO, Tricia Griffith. Good afternoon, and welcome to Progressive's third quarter webcast. I feel like a broken record, but we continue to be really thrilled with our results. I started off my letter talking about having 15 consecutive quarters of net premium written over time. And so to me, a double digit, I should say. And to us, that is really incredible. And I started thinking about not just growth in premium because, of course, that's very important, but it can be influenced by trends or a mix of business. I started thinking about what we also talk about, that is growth in units. And so I looked back and realized that we've had nine consecutive quarters of double-digit growth in auto policies and force. So to me, that's equally impressive. We continue to be bullish on where we've come from and where we're going, and that will be a lot of what we're going to talk about today. Andrew is going to focus on Horizon 3. He's our new chief strategy officer, and he'll talk about how we're thinking about the future. And then we'll have ample time for Q&A with John Sauerlin and myself. So thank you for being attentive. You're all familiar with this construct. We call it the three horizons based on McKinsey's three horizons. Today I'm not going to talk about horizon three because Andrew will cover that. He'll also cover a little bit of horizon two. But as you recall in the last webcast, John Barbagallo and Karen Bailo gave a really deep dive into all the exciting things we're doing in horizon two, including small business, our new BOP coverage, TNC, fleet, smart hall, just to name a few. We have a plethora of things that we've invested in. in a couple of years ago, they're really coming to fruition now, and we're very excited about that. That doesn't mean we won't stop thinking about more opportunities in Horizon 2. We absolutely will. And we'll make sure that we capitalize on our brand, our acumen in terms of analytics, our segmentation strategy. But probably more importantly, once we get those plans together, the ability for 40,000 progressive people to execute on those plans. Speaking of execute, that's what we call Horizon One. And we really, for the vast majority of progressive people over this last couple of years, really want everyone to focus on executing Horizon One. Think of auto and home, bundled, monoline, but taking growth, increasing our market share. It's been something that we're surgically focused on because it can get exciting to think about the Horizon 2 and Horizon 3 opportunities, and they are, but we have so much to gain here, and I believe our strategy has worked incredibly. For the next three slides, I'm going to show... our net premium written growth over a 10-year period with the exception of our property. I'll show that from 2015 when we took over a controlling interest in ASI. We will look at that, and then we'll look at our combined ratio, the orange line compared to the industry, the gray line. So as you can see, this is auto for the last 10 years. We've had incredible growth, especially over the last four or five years. In fact, in the last 10 years, we have grown premium $15.4 billion. That's over 130% increase. And probably more importantly is that we've had a delta on average of eight CR points lower than the industry. That, to me, is really incredible, especially as we've been growing at such a fast rate. On the commercial side, same story. Huge growth, especially in the last several years. In fact, we've grown over 150% and $2.7 billion in premiums. More impressively is the fact that the difference on average of the CR between us and the industry is a full 18 points. That is incredible, and that has led us to really understand the segmentation in this industry and continue to invest in Horizon 2. Our property, our home has grown substantially as well as we've kind of expanded across the country. We're about in lockstep with the industry, but that's not satisfactory to us because we want to have every product make money. We don't subsidize per product. So we will take and have been taking the time to roll out our next product model, continue to increase rates, have some underwriting restrictions, and have some coverage changes to make sure that we try to set expectations for next year to be within our target profit margin. But, again, looking at these over time, we continue to be impressed with our ability to grow and grow profitably, especially compared to our peers. The combined success of our insurance products and our investment income has really made a strong ROE, as you can see from these slides. So what you're looking at here is the blue bar is progressive. The orange bar is the S&P 500 P&C index. And the gray bar is the S&P 500. And as you can see, over a 5, 10, and 20-year period, we have substantially outperformed all the index and the S&P. And that's really impressive. So we continue to be thrilled with those results. In fact, over the last five years, we've returned 55% of net income to our shareholders in the form of dividends and share repurchases. As a reminder, how we think about equity or capital, I should say, as we think about capital, we want to make sure we invest and expand the business as long as the long-term it reaches our financial policies. Under leveraged capital, we return to shareholders, and we expect a return on equity in excess of its cost. The importance of net income, EPS, and ROE is never lost on us. But we view achieving long-term performance of these measures as stemming from our consistent focus on the primary elements of our business model. And that's very clearly grow as fast as we can at NID6. We have done this since we went public in 1971, so nearly 50 years. You can see from the data on the chart that that formula works, and we'll continue with that. So now I'd like to introduce you to Andrew Quigg, our Chief Strategy Officer. You've probably seen him on the stage a few times over the years. A little background on Andrew. He has a bachelor's degree in applied mathematics and economics from Yale and an MBA from Harvard. He came to Berkeley in 2007 as a product manager in the agency division, and he's done a couple of states as a product manager in both agency agency, and direct channel. After that, he ran our direct media business, and more recently, he was a general manager of our customer experience organization in the CRM, and really focusing on retention. He's done a great job there. Last year, we named him our first ever chief strategy officer, and so here he is here today to talk about Horizon 3. Andrew?

Thank you, Tricia. Today, I have the pleasure of sharing some additional details around Progressive's growth strategy. For our agenda, I'll first walk through our four strategy pillars and provide more details on the growth strategy framework, which Tricia discussed earlier. In this area, I'll underscore the mission of the strategy group, which I lead. Second, we'll discuss the important balance we are striking between being aggressive with the opportunities available to the company and our long history of using capital prudently. Finally will be our high level framework for evaluating horizon three areas of opportunity. So let's get going with Progressive Business Strategy. Executives, investors and analysts all discuss company strategy, but it can take on a variety of meanings and approaches depending on the context. Definitions for the word strategy generally fall into realms. Broadly, strategy can be any plan. Narrowly, Strategy can be known as a plan for military action. But neither of these really correspond to strategy in the context we're discussing today. I feel the topic was well examined in a Harvard Business Review article from 1996 by Michael Porter, appropriately titled, What is Strategy? In this article, Professor Porter asserts that differences in performance between companies is the result of the many, many activities that companies undertake. A company can outperform its rivals if it executes similar activities better. This is operational effectiveness. An example of this is segmentation. Every auto insurer segments their pool of risks. A company can also outperform if they choose different activities than rivals. This is strategic positioning. A historical example for progressive has been snapshot. Progressive uniquely invested in telematics starting in 1998 and continues to differentiate ourselves in this space today. Professor Porter also argues that operational effectiveness is necessary, but not sufficient over the long run for outstanding performance. This is due to the rapid diffusion of best practices through talent movement, consultants, and benchmarking. Instead, Porter and many academics believe that choosing different activities is the basis for prolonged differentiation in performance. In particular, Porter detailed a method of looking at the activities of the firm and how they reinforced the strategy, the activity map. Strategic positions are strongest for firms where the activity map demonstrates a high degree of fit and internal consistency. On the screen is the activity map for Southwest Airlines in 1996 from the Porter paper. Each circle represents a strategic position of Southwest that was different than at least some of their competitions. As a low-cost carrier, activities like automatic ticketing machines and quick gate turnarounds were important to keeping costs in check. However, not all of the activities were low-cost if viewed in isolation. Southwest paid their employees more than others, recognizing high-quality employees would help keep asset utilization high. With that background, let's turn to Progressive's business strategy. We have four general strategy pillars at Progressive. People and culture, competitive prices, broad needs, and leading brand. Our core values, purpose, and vision also sit at the middle of these strategy pillars as a unifying focal point. Progressive has provided webcasts over the years to our investors outlining additional aspects of our organization. The webcasts provide a good overview of the additional activities and the fit of Progressive's activities. For example, in the fourth quarter of 2017, marketing and acquisition leaders discussed our leading brand and the supporting marketing tactics and innovations. In the first quarter of 2018, our business unit controllers discussed operational efficiency from many different lenses, including how technology and automation play a role in reducing our expense ratio. In the second quarter of 2018, CRM President John Murphy and CIO Steve Rose outlined investments in relationships with our customers as we continue to refine our customer-centric approach. In the third quarter of 2018, Personal Lines President Pat Callahan demonstrated how the speed of innovation in product development creates a competitive moat. In the fourth quarter of 2018, our CHRO Lori Neidhurst outlined how our people and culture creates sustainable competitive advantage for the company. And finally, in the first quarter of 2019, our portfolio managers Rich Madigan and Jonathan Bauer discussed how our investment approach supports our strategy pillar of competitive prices. The choices we make in these interlocking activities represents our unique strategic position, which is not as simple as low cost or focused on one segment. In my role, I have the fortune of interacting with external advisors, consultants, and partners. Each of them views Progressive differently and believes that some aspect of this activity map is the most important. I know I speak for the entire executive team when I say that it is truly the internal consistency of all these activities that makes Progressive special. It is extremely hard to duplicate the success of Progressive by replicating one bubble without the full tapestry. Along the bottom of this page are parts of our strategy that have emerged over the past decade and a half. Broad needs in particular became more pronounced as we entered into the destination era. We want to solve the broad needs of our customers over their lifetimes. This requires us to investigate the needs of our customers and adjacent areas where we can serve them. Bra Needs also provides Progressive with an avenue for diversification as we look to disrupt other products and as we monitor changes in the mobility environment. Tricia articulated this investigation of new products and services in Progressive's growth strategy utilizing three horizons. We think of Horizon 1 as executing on our current core products within property and casualty insurance. On the right-hand side, you can see that the market share we currently have today, only 8% of personal lines and 2% of commercial lines. We are fortunate to have ample headroom to grow. Horizon 2 includes expanding to adjacencies within property and casualty insurance. And beyond Horizon 2, Horizon 3 represents an opportunity to explore close-in opportunities to leverage our core competencies. We think of this area as generally being outside of property and casualty insurance. As an example of Horizon 2, we have commercial lines. In August, John Barbagallo and Karen Bailo discussed how the commercial lines business is expanding their addressable market from $14 billion to more than $50 billion. On the right-hand side are the efforts underway in commercial lines. Some of these reflect improvements in our core commercial auto product, but a large part of the expansion is from new products, general liability and BOP, that are Horizon 2 initiatives within commercial lines. For Horizon 3, the executive team decided to invest in a small group, the Progressive Strategy Group, to focus on Horizon 3 in order to keep the vast majority of Progressive employees and resources focused on Horizons 1 and 2. The vision for the Strategy Group is building an enduring Progressive for future generations, always growing. Our mission is to create lasting value by leading and establishing businesses beyond the core and supporting expansion of our property and casualty businesses. With that introduction to Progressive Strategy overall and the strategy group's mission within this, I'd like to turn to the important balance we are attempting to achieve in Horizon 3. We have enormous growth potential as a company as we increase scope. We saw this play out in our acquisition of ASI, now Progressive Home, where we generated revenue synergies and leveraged our data footprint. On the revenue synergy side, you have heard over the past few years how we've created additional opportunities to sell the Progressive Home product. This included expanding their state footprint from 27 to 44 states, adding thousands of agent groups and establishing the Platinum Program, and finally, investing in direct sales through our Progressive Advantage Agency, adding an online quote and buy process, and adding analytical triggers for our customers. In total, the impact is impressive, as you can see on the right-hand side of this page. As we abstract away from this example, our basic customers will help us generate revenue synergies from new efforts. As a reminder, we have existing relationships with about 15% of U.S. households and hundreds of thousands of small businesses. Our proven ability to extend relationships is the first component of our growth value as a company. Possibly even more important is our data footprint. As an example on the screen, we have two auto policy attributes and their impact on homeowners' loss costs. We continue to find that auto behaviors are predictive of homeowners' losses. In general, We see product upgrades at Progressive Home, including auto methods and variables, are much more powerful than using isolated product information. To build on this further, we have historically seen our data footprint as driving data. What we found with Progressive Home is that we have responsibility data. Our data seems to be predictive of a number of behaviors, and our data footprint is larger than just our current insurance. We believe we have data on about 30% of U.S. households when we combine our quote data, active customers, and recently expired policies. This is a second facet of our growth potential as a company. If we go back to our activity map, we can see that to execute on the progressive home synergies, we were able to leverage the entire network of activities and by reinforcing new activities. An ability to market additional protection to our customers and to leverage responsibility data for broad needs. While growth potential is exciting to consider, we are very cognizant of the fact that we have a historic reputation for being prudent stewards of capital. Progressive has an excellent reputation for efficiently generating returns for our shareholders and returning capital. Our comprehensive ROE since 2010 has been consistently high, especially in the past few years. And we have returned these earnings to shareholders at a high rate. More than 50% of comprehensive income is returned to our shareholders. This reputation has provided the company with a solid valuation and low cost of capital. Continuing to add to these high returns is a daunting task that is ever present in my mind. It is our goal that these additional business lines will add to these impressive results while growing the company. We also know that diversification is inherently risky. As an example, Bain has produced some insightful research on growth diversification. Let me describe this chart. Along the left-hand side are different dimensions by which a new business can be judged. The dimensions are the five Cs, customers, costs, channels, capabilities, and competitors. As the new business shares less and less of these aspects, they are defined as being further steps away from the core. Bain finds that each step away reduces the probability of success by about 60%. This work and others like it has caused us to isolate certain factors like customers, channels, and capabilities as we think about new products and services. To summarize, we see both immense opportunities for Progressive and we'll continue to balance these with a sober perspective of the challenges. With that background, I now like to spend some time explaining how we will identify and execute on Horizon 3 ideas. We think about high potential ideas in three ways. First is market attractiveness. We want to invest in Horizon 3 businesses where the overall market makes it more likely that we'll have success growing. We look at a number of factors here. Trends, We track a number of trends and have a subset of macro trends, which we believe will impact our industry and adjacent industries. Market metrics, factors such as size, profitability, and market concentration can be observed and evaluated for industries. Market dynamics like Porter's Five Forces provide greater insights into the power structure of value chains. Next, we look at Progressive's ability to win. For any possible area, there needs to be a fit with progressive. Here we examine the fit with our strategic pillars and our activity map. We look at assets that we could leverage, like relationships and data. Finally, we consider the proximity to our core and the likelihood of success. In the intersection of these two areas, we also need to find an unmet consumer need. These Horizon 3 potential opportunities appear at the top of our Horizon 3 process. Our strategy process team, led by Naveen Verma, generates and researches these opportunities. Once we have an area of interest and a consumer need, we have two approaches to execute that are not mutually exclusive. We have formed a corporate development team under Irvin Wraith to investigate external organizations that fulfill our ideas. We also have an internal growth incubator led by Asve Hardeman to build new businesses. We believe building has a longer timeline, but with lower risk. I do want to pause for a moment on corporate development, given that Progressive has not traditionally been an acquisitive company. We still believe that this will be a rare event. Beyond acquisitions, the corporate development team has two additional methods to engage with companies. strategic alliances, and strategic investments. Progressive has a long history of alliances through Progressive Advantage. On the screen, you can see 15 Progressive Advantage relationships that stretch across many products. We continue to believe that our Progressive Advantage organization is a well-suited path to meet the needs of our customers and provide income without capital requirements. An example of a successful Horizon 3 product is life insurance, specifically term life insurance. On the left-hand side, you can see our view of the market attractiveness. It has medium to low attractiveness from a market perspective. However, Progressive's ability to win is higher given that it is proximate to our core and could leverage our pillars and assets. We also find in our research that many families go unprotected due to a complex research and purchase process. In addition, based on our brand, customers at Pullus, they can see us offering the product more than other leading brands. Finally, we've been able to work with a carrier to distribute life insurance products and have increased sales by about 10X over the past eight years. In addition to protecting consumers, Progressive has generated millions in commissions and materially increased retention for bundled customers on our core auto product. In addition to strategic alliances, we leverage strategic investments in the corporate development group. As you may have noticed in our quarterly and annual reporting, we do own a small amount of non-redeemable preferred securities in private companies. Today, these preferred securities represent strategic investments from Progressive. On the screen, you can see two of our representative investments so far. In Upstart, our personal loans partner, and Keep Trucking, our commercial UBI partner. Strategic investments allow Progressive to better understand industry dynamics where Progressive has interest and better strategically and economically align with key partners. My purpose today was to keep you apprised of our investments, approach, and progress in Horizon 3. I hope the past 20 minutes have been helpful in providing this context. As we reach material milestones in this exploration, we'll certainly provide additional updates. To recap our conversation, we believe that we have a robust strategic position that has been underscored by previous investor presentations. We have generated impressive revenue and data synergies with Progressive Home and believe this will continue as we consider additional products and businesses. We balance this with a recognition that growth beyond the core is challenging, and we will continue to be prudent with our capital. Finally, we have a framework to evaluate opportunities and make them actionable, both through external and internal approaches. I'll now turn it back over to Tricia and John Sauerland for Q&A.