Progressive Corporation (The)

Good morning, and thank you for joining us today for Progressive's second quarter investor event. I am Doug Constantine, Director of Investor Relations, and I will be moderator for today's event. 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. This quarter marks a return to our typical format, which is a presentation on a specific portion of our business, followed by a question and answer session with members of our leadership team. The introductory comments by our CEO and the presentation were previously recorded. Upon completion of the previously recorded remarks, we will use the balance of the 90 minutes scheduled for this event for live questions and answers with leaders featured in our recorded remarks as well as other members of our management team. As always, discussions in this event may include forward-looking statements. These statements are based on management's current expectations and are subject to many risks and uncertainties that could cause actual events and results to differ materially from those discussed during today's event. Additional information concerning those risks and uncertainties is available on our annual report on Form 10-K for the year ended December 31st, 2020, as supplemented by our 10-Q report for the first and second quarters of 2021, where you'll find discussions of the risk factors affecting our business, safe harbor statements related to forward-looking statements, and other discussions of challenges we face. These documents can be found via the investor relations sections on 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.

Let me set the stage for this session. As a reminder, we use a construct we call the four cornerstones. This construct allows us to focus and make investments that drive value to the organization and all of our constituents. Who we are, which are our five core values. Peter Lewis wrote these back in 1987, and they have served us well over the decades. Specifically during this past year and a half, as we've navigated completely foreign waters and have made decisions on behalf of all of our constituents, we have used our core values as a guide. I won't go into all that we did because I've publicly written about much of it, but suffice it to say, we believe all along the way we did the right thing. Why we're here. Our purpose statement, which is true to our name, progressive. We believe this statement is about forward progress, innovation, and never resting on our past performance. Where we're headed, our vision, which is to become consumers and agents' number one choice and us to share insurance needs with us now and as those needs evolve. We know that we must earn their trust every day in order to achieve this vision. how we'll get there, our strategy, and more specifically, our four strategic pillars, which is how we think explicitly about investing to ultimately achieve our vision. I'll briefly give you a high-level overview of how we think about each pillar. People and culture. Our goal is to ensure our people and culture collectively remain our most powerful source of competitive advantage, including attracting and hiring new talent, retain the people we have, and developing everyone so that we can all have long and prosperous careers. We will support our people and culture by ensuring our people can bring their whole selves to work through our diversity, equity, and inclusion efforts. Broad needs. We will meet the broader needs of our customers throughout their lifetimes by being available where, when, and how our customers want to interact with us. Helping our customers select the best insurance for their current needs as well as their evolving insurable needs throughout their lifetime. Leading brand. We will maintain the leading brand recognized for innovative offerings and supported by experiences that instill confidence with messages that resonate. Competitive pricing. We will offer competitive prices by pricing rate to risk through our industry-leading segmentation balancing efficiency and accuracy in claims, and finding ways to continually drive costs down through process changes and technology advances. Our agenda will be in three sections, and we'll cover the commercial auto market and trends in the industry, including our performance relative to the market. We'll do a market overview that will outline our long-term growth plans. And finally, an update on market capabilities and expanding our product offerings. Before we begin our deep dive commercial lines agenda, I do want to acknowledge that we're highly cognizant of the fact that we reported a 100.5 combined ratio for June and are and have been taking steps to ensure profitability as we come out of the pandemic. Commercial lines is a huge opportunity for Progressive, so I don't want to draw attention away from the very important agenda Karen and Jochen have for you upcoming by offering prepared comments on results. I expect we'll have the opportunity in Q&A to share steps we've taken and are in the process of undertaking to ensure we achieve our calendar year 96 or better underwriting margin objective. Let's kick off the first section by talking about the addressable market. When we began these webcasts many years back, we started with showing the property and casualty addressable market, and we discussed our plans for both personal lines and commercial lines. Our commercial lines offerings have evolved over time. And of course we recently acquired protective insurance. So we thought this was a good time to give you a more detailed update to summarize the entire market. You'll see in the center of the slide that the total property and casualty market is 730 billion. The progressive share 5.7% is reflected in both the blue section of the donut and the blue percentages. The gray reflects the industry on the personal line side, We have a 9.6% of the $366 billion market, split between personal auto at 12.9% share and homeowners at 1.7% share. We have had massive growth here, but still plenty of room to grow. The commercial lines addressable market is $364 billion and includes a wide array of opportunities. The commercial auto opportunity alone is a $46 billion market where we hold the number one position with plenty of room to grow and at 12.1% share, with a large other commercial addressable market of $318 billion. At this point in time, the market that we believe we can both play and win in is approximately $78 billion. If you start near the top of the circle and go clockwise, that entails monoline commercial auto, small fleet, transportation network companies, commercial auto bundled with GL and BOP, small business with GL and BOP, medium and large fleet with protective, and workers' comp with protective. The addressable markets that we aren't currently in include public transportation, larger commercial multi-parallel businesses with over 20 employees, and products like Mortgage Guarantee and Marine, just to name a few. We are very excited about the opportunities that lie ahead and that we started investing in many years ago to set us up for future growth. We've shared these two-by-two charts a few times. As a reminder, the x-axis is the combined ratio on an inverted scale, so you want to be to the right of 100. The y-axis is net written premium growth, so you want to be above the black line showing positive growth. Together, you want to be in the top right-hand shaded area where we're growing market share at or below a 96 combined ratio. The blue dot is progressive, the black dot is the industry, and the gray dots are the others in the top 10 each year since 2015 through 2020. As we reflect on the past six years, we've consistently been in that area, growing market share and achieving at least a 96 combined ratio. In fact, on both profitability and growth, We frequently beat the industry and any individual competitor by wide margins. I'd like to get into the meat of the program, but before I do that, I'll give some background on our speakers. I think many of you have met Karen before. Karen Bailo is our Commercial Alliance President. She's been with Progressive for over 30 years with her most recent role as General Manager of Acquisition and Small Business Insurance. Karen has held several other significant leadership positions, including personal lines GM, commercial lines controller, and most notably, she spent nine years building our agency distribution organization and positioning Progressive as a preferred supplier in that channel. Karen started her career in customer service as a management trainee, and like others on our executive team, she was a claims rep early in her Progressive career. A graduate of the University of South Carolina, Karen earned a bachelor's degree in psychology with a minor in statistics, and she went on to earn an MBA from Case Western Reserve University. Jochen Schoenther began his career at Progressive in 2006 after moving to Cleveland, Ohio from Southern Germany. He's an alumnus of both the University of Dayton, where he earned an MBA, and of the Friedrich Alexander University, Erlingen Nuremberg, where he earned bachelor's and master's degree in the arts. After doing rounds in both the accounting and analyst rotational programs at Progressive, Jochen joined Commercial Lines in 2008. He started out in various pricing and control functions and then moved into product management. First, he managed several states, including California, and our market entry into Hawaii, and then took on bigger responsibilities as the leader of our truck product. During his tenure, he significantly contributed to increasing our market share by rolling out numerous product enhancements and also improving segmentation. Now, as Commercial Line's controller, Yochan leads the organization responsible for ensuring we run a profitable business. This includes strategy and performance monitoring, risk analysis, data and analytics, rate setting, compliance and recovery, as well as finance and accounting. I'll now hand it over to Karen to outline our commercial lines trends.

We'll be sharing a number of charts and graphs to highlight our business performance during this presentation. While our June results include protective based on our closing date of June 1st, for the purposes of this presentation, unless otherwise stated, the numbers exclude protective. I'd like to begin with a look at our performance relative to the industry. This is a 20-year time series of progressive commercial auto net written premium growth rate versus the rest of the industry. During this time period, our results have really diverged from the industry. There are a couple of observations around growth that I'd like to highlight. First, commercial auto has some cyclicality to it and tends to move with the larger economy. And second, when the market grows, progressive has historically grown at a faster pace. In fact, since 2016, we've doubled the business and gained almost four points of market share. And that equates to more than 20% compounded growth rate and achieving more than 12% market share. The more significant divergence from the market has been in underwriting profits. We've outperformed the industry by 8 to 10 and as much as 20 points over those 20 years. Our objective is to grow as fast as we can at target combined ratios. And we've had a track record of success and outperformed the industry on both growth and profit over those 20 years. There's a number of contributing factors, but perhaps most important has been the intense focus on commercial auto as a core line of business for the company. We've shared this information in the past and wanted to provide a brief refresher on how we approach our auto business. We segment our business into what we refer to as business market targets. And we introduced these business market targets for commercial auto in 2014. Since introduced, BMTs are now operationalized across virtually every aspect of our business. That's important because we see meaningful and actionable differences between these BMTs. For example, the demand function is different by BMT, and how that demand function responds to changes in different economic conditions is different. We also see that losses present differently and how they develop, attorney representation rates, and litigation outcomes differ by BMT. Certainly, frequency and severity trends and other factors change at different rates and at different times by BMT, all of which are critical inputs to determining rate level. This granular focus allows us to develop insights faster, be more responsive with strategies and tactics to profitably grab market share. I want to talk about what we're observing in shopping, loss trends, and how we're positioned for continued success. We have the benefit of over 10 billion miles of driving data with our telematics data. This chart shows patterns in driving miles, highway congestion, and highway speeding pre and post pandemic. you can see that as stay at home orders were issued, there was a significant decrease in miles driven and congestion on the highway. At the same time, there was an increase in highway speeding. Now, while the impact from COVID on small businesses was severe, when we look at our business class level data, it's also clear that different businesses were affected differently. For example, in the truck space, Fully a third of our smart hall customers saw their mileage increase, while about 8% were shut down completely. Landscapers and most construction trades were still working, and other service businesses were not. Looking at more recent trends, while we see mileage and congestion back to pre-COVID levels, speeding events haven't dropped back to where they were. This raises the question around whether COVID brought a permanent change to truckers' driving habits, and is something we'll keep a close eye on in the months to come. In addition to our own data, we look to other macroeconomic trends to develop a deeper understanding of shopping and small business trends, especially during challenging economic conditions. This chart shows our insurance shopping trends, in this case agency quote growth, for businesses that tie to goods and services sectors indexed to 2019. Progressive quote data is in the solid line, and consumer spend data is in the dotted line. Our experience tracks closely to the rate of consumer spending on goods and services, so this is data we have and will continue to monitor. The macroeconomic data shows spending on goods recovered more quickly, while the services sector has lagged and has been more depressed relative to goods sectors. Some of that is because services sectors were more affected by stay-at-home orders, and goods spending has been supported by federal government stimulus. That intuitively makes sense, and we see that in our underlying data. Businesses that were considered more essential, plumbing or sanitation services, or those that tie to the transportation of goods like agriculture hauling or livestock hauling, responded differently versus those that are tied to services industries like airport shuttles, food trucks, and entertainers. The positive news is that as the service businesses reopen, we're seeing a recovery in spending toward 2019 levels. This increase in spending on services should drive a rebound in insurance shopping for businesses related to that sector. Again, food trucks, restaurant delivery, airport shuttles, just to name a few. In summary, different businesses have been affected differently, and this is important in terms of how we think about trends, the implications for frequency and severity, and ultimately rate level going forward. In our last update in 2019, we shared a historical perspective that provides a good illustration of how we will approach today's environment. Back in 2016, we saw a marked increase in frequency between May and November. At the same time, some prior year reserve development was contributing to an already positive severity trend. We responded quickly to address those trends, raising rates by more than 10%. and made a series of underwriting changes in about three months. And we've continued with a series of changes and adjustments since. Fast forward to recent trends, you can clearly see the impact of COVID on frequency. We saw a sharp decline in frequency as stay-at-home orders went into effect. And as I shared earlier, driving miles from our usage-based insurance data shows driving miles and congestion levels are back to pre-pandemic levels. And the services sectors are also rebounding. Given all of those conditions, we're seeing loss frequency rising relative to COVID lows when frequency fell dramatically. And at the same time, we continue to see a steady increase in severity trends that we've been accounting for in our rate level indications. Given the variation in how businesses were affected by the pandemic, some slowing down and others seeing an increase in business, we have been and plan to continue to be cautious in our actions. We haven't lowered rates and we've been conservative in our pricing and underwriting decisions. The trends we're observing now are lining up with what's forecasted in our rate level indications. We have planned for frequency recovery and a continued steep severity trend and have kept pace with net trends with a combined rate increase of 29% from the beginning of 2016 through the first half of this year. The additional segmentation we've built into the product over the last five years has proven effective and driven better than industry underwriting results and growth. And I would suggest having a granular approach to the business and reacting decisively to what we see, while much of the market is slower to react, has been an important part of maintaining strong underwriting margins and growing a business over the years. So we continue to advance our product segmentation and underwriting capabilities and we plan to continue to respond appropriately to lost trends going forward. I'd like to shift to a discussion on expenses and efficiency. Now, we know from experience that companies that can achieve a lower cost structure gain share at a greater rate than the overall industry. We've seen that in the personal lines market and believe it matters in the commercial lines market as well. The correlation of efficiency, aiding, and growth isn't lost on us, and we're well positioned on this chart. Now, 2020 results show that we're nearly 11 points lower than the industry average in LAE and expense ratio. In a very price-sensitive industry, that 11-point advantage is significant. But there's a balance. We don't necessarily want to be the lowest because we believe in also investing in what matters, quality outcomes for customers that earn loyalty, and investments that foster great work environments for our employees. To that end, I'd like to highlight where we're making investments to improve on both those fronts. This is a view of our expense ratio track record over a 10-year time period. And over that time period, we've seen a seven to eight point expense advantage compared to the industry. That advantage was six points in 2020 due in part because COVID credits flowed through expenses rather than premium, resulting in a slight elevated expense ratio. While we've had an expense advantage over this time period, we're prioritizing initiatives to extend our leadership position. There are a number of levers that drive expense ratio advantages, and while we don't have enough time for a comprehensive review of all the efforts underway, I wanted to share with you two examples that demonstrate active cost management efforts to drive expense reductions and improve experiences at the same time. These both highlight our focus in managing expenses related to our growth and improving our operational efficiency. We maintain a disciplined focus on managing overhead and growth and headcount as we grow the business. This chart is designed to represent a few things. The solid blue line represents overall net earned premium growth. The solid orange line represents employee costs and real estate costs are represented in the solid black line. you can see that while employee costs and real estate costs have gone up, they've grown at a lower rate relative to net earned premium. And there are a couple of reasons for that. One is being disciplined and judicious in decisions to increase staff. We've added the dotted lines here to represent volume driven and non volume driven employee growth. And while we've grown our volume driven counts in line with our net earned premium pace, We've been very targeted in adding non-volume driven resources, and our non-volume driven employee count has grown at a much lower rate. This discipline has resulted in growing our total employee costs, the orange line, less than net earned premium growth. The second is related to real estate. Like personal lines, prior to the pandemic, our customer and agent services organization enabled real estate expense savings by implementing a home-based consultant model. This model has a number of benefits. It provides broader access to talent and improved our ability to increase staff to support our growing business, especially last year. And it's also provided flexibility that employees value. In addition, this model allows us to grow our business without a commensurate growth in space. In 2019, almost 40% of our commercial lines agents and customer services consultants were working from home. Now, we're still working through our plans as we transition back to the office post-pandemic, but we expect the portion of our customer and agent services consultants that work from home to grow materially as people make the decision to remain working from home going forward. This will support our ability to grow without significantly growing our real estate footprint. The second example of our cost management efforts highlights investments in systems and technology to deliver the products and services our agents and customers value while focusing on increasing operational efficiency. We've been investing significantly in systems to support our core auto business and in expanding our business with our BOT product and direct small business capabilities. Despite significant investments in technology and systems, we've been able to maintain our expense advantage. Now, we acknowledge and expected this relatively short-term increase in technology costs to lower our costs in the long run with gains in efficiency and new lines of business. Now, improving efficiency to push our expense advantage is a key objective. Two examples of progress are shown here. We've shared in previous annual report commentary that we're transitioning to a new policy administration system, and this new system is a significant driver of our technology expenses and rolling out the new system is a big part of our ability to drive more efficiency. The new system introduces more modern functionality that enables faster delivery of our products and enhancements and the ability to improve customer experiences and self-service capabilities. The initial launch of this new system in a state brings consumer online buy capabilities. The chart on the left shows the total lift in direct online sales yield with our new system. Now, completely isolating the effects of the online buy capabilities is difficult, but we're seeing an 80% improvement in online sales yield after introducing this new system. And that would translate to more than a 20% increase in direct auto sales. Now, while direct is still a relatively small portion of our business, we expect this added functionality to bring long-term economic benefit to us in terms of improved sales yield, and lower acquisition costs for that part of our business. And that's very important as this business grows. A second way we're gaining efficiency is via process automations. On the right is a representation of improvements that we've already made reducing the manual work associated with millions of documents we receive every year via fax, email, or paper mail. Until recently, each document had to be manually reviewed and categorized for action, either to be attached to a policy and sent directly to storage or put in queue for additional processing. Over half of these documents are in that first group. They don't require any action beyond archival. We have a project underway to automate that workflow by the end of the year using optical character recognition technology, to review those documents automatically and attach them to a policy and send them to storage without human intervention. And this frees up resources to focus on other, more value-added work. These are just two examples to illustrate how we will focus future investments. Now, while we're pleased with our early progress, we're just getting started, and we have a robust roadmap ahead of us that will target more efficiency improvements and self-service capabilities designed to meet customer and agent's expectations. Investments in product, experiences, and more efficient workflows combined should enable us to reduce the drivers of cost to service our customers. We anticipate that by lowering our costs, we will be able to further extend our expense advantage and position us well for any market conditions. Now, moving on to the other part of our expense advantage, we believe our claims organization provides us with a significant competitive advantage on commercial auto vis-a-vis our competition. We've doubled the core auto business while maintaining very competitive loss adjustment expense ratios and good quality. Our claims advantage comes from a surgical focus on claims accuracy and efficiency. And back in 2019, we shared how our claims organization leverages the scale of our broader personal lines claims organization with a focus on specialization for high impact and complex claims. We continue to push commercial lines specialization as we grow our business. And we also see significant potential in leveraging technology and analytics to increase productivity and claims handling segmentation along with improving accuracy. I wanted to share a brief example to illustrate how we're leveraging data, data science, and advanced analytics to monitor and react to claims activity and exposure changes. The image on this slide represents a homegrown tool developed to inform leaders of claims that need review. The tool is powered by a file intervention program that uses analysis and data science to populate the tool and is designed to improve a leader's focus on at-risk files. This helps improve claims accuracy through better coaching and supports timely claim handling efforts. We know handling delays can result in unfavorable outcomes, and the alerts are prioritized and trigger on the best date for the leader to intervene for the most favorable results. In this example, you see a code FS13 with the description potential for delayed total loss resolution. In this example, an alert triggered on March 19th with a message indicating a potential delay in resolving a total loss settlement. The leader intervenes by providing guidance to the claim rep on the open activity on the file. And since the leader intervened, the trigger is programmed to return two days later to make sure the claim rep is following up on the guidance provided. The next alert triggers on March 21st. The leader reviews the file and sees that the claim rep followed up on the direction provided, so no additional intervention is needed at this point in time. the leader indicates no to the intervention question in the lower left, and once no intervention is selected, an alert is programmed to return eight days later if the total loss is still not resolved. In this case, the total loss resolved on March 25th, and so the alert didn't return for the third time. This is a powerful tool that helps our claims teams efficiently run the business of claims and contributes to more timely and accurate claims handling. A final point on our performance relative to the industry is related to reserving, where our philosophy is to be as accurate as possible with minimal variation. This chart shows our commercial auto reserve development versus the industry, and we have a much tighter variance. And we see two primary reasons for this. One contributing factor is the claims organization we just talked about. Leveraging technology and advanced analytics to increase productivity and get the right claims to the right resource more quickly leads to more timely and accurate claims handling and better outcomes. The other contributing factor is the highly segmented approach we take to loss reserving for commercial auto, as we do with our other products. We've operationalized that BMT structure in addition to the usual loss cost cuts, and it allows us to see pattern changes sooner and react appropriately. Having more consistent and predictable loss cost estimates through accurate reserving lets us understand our true ultimate cost faster and be more responsive with pricing and product refinements. So that's a little background on what we've been seeing in our commercial auto results recently and why we've been able to produce some different outcomes relative to the industry. I'd now like to turn it over to Jochen Schenter, who will share a little about our plans for extending our leadership in commercial auto, including how and where protective insurance fits into those plans.