Progressive Corporation (The)

Good morning and welcome to the Progressive Corporation's third quarter investor 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. Acting as moderator for the event will be Progressive Director of Investor Relations, Doug Constantine. At this time, I will turn the event over to Mr. Constantine.

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

Thanks, Doug. Good morning, and thank you for joining us today. When our customers interact with us, they're often doing so on their worst day. Maybe their vehicle was just stolen, maybe they were injured in a car accident, or their property damage was vandalized. This fact comes into even sharper focus during a major catastrophe such as Hurricane Ian. While watching the footage of devastation, my heart went out to all those who were affected by the storm. For millions, it was truly their worst day. And I'm proud of the part Progressive plays to help people recover from such a calamitous event. Within hours after the storm, Progressive had over 1,500 people ready to help our customers start to rebuild their lives. And while we cannot always replace what was lost, our people are in place to make it as easy as possible for our customers to return to normalcy. Thank you to all the progressive customers who trust us to make their worst day more manageable. In my letter, I shared some of the Herculean efforts that our employees were making on behalf of our customers, and there are many more where that came from. Needless to say, I am very proud of so many. While Hurricane Ian was the largest single event in the third quarter, it was not the whole story. Excluding catastrophe losses, our third quarter company-wide combined ratio improved 1.9 points year over year and illustrates the significant work we've done to combat the effects of inflation and working towards achieving our goal of an underwriting margin of at least 4%, specifically in personal auto. As we stated after the first quarter, With the exception of a few markets, our major personal auto rate revisions are behind us, so we continue to be vigilant and adjust rates as our loss experience develops. In the third quarter, we increased personal auto rates in 20 states at averages of about 5% per state for a total countrywide premium impact of plus 2%. The third quarter rate action brings our countrywide year-to-date rate increases to nearly 12%. We continue to closely monitor frequency and severity trends to ensure we stay true to our stated goal of profit before growth. Though we have continued to take rate, we believe we took rate earlier than the industry, which initially negatively impacted volume, but more recently has created opportunities for growth. Consumer shopping and quoting has increased more than 20% in both the agency and direct channels. In fact, in both channels, we had the best July, August, and September in our company's history for quote volume. This prospect growth is despite a lower acquisition expense ratio as compared to 2021, allowing us to be a beneficiary as competitors have pulled back on marketing spend. This combination of lower competitor spend and our continued advancement of the science of media planning and buying led to an incredible increase in efficiency in our media spend and has helped propel this quarter's growth. Auto quote growth, coupled with continued improvement in conversion as our competitors raised rates, led to auto new application growth of 20% on the quarter, including the highest August and highest September combined to channel new application volume that we've seen in the company's history. Total personal auto year-over-year PIF growth is still negative, but we've now seen several months of sequential monthly PIF growth led by the growth in the direct channel and flattening in the agency channel. The sequential growth has been bolstered not only by new application growth, but signs of improving retention. In last quarter's call, we spent considerable time talking about our property business and efforts we are taking to return to profitable growth. The losses incurred from Hurricane Ian further highlight the need to shift our mix to less volatile states. As expected, PIF growth in property slowed in the quarter as we make progress in this multi-year goal. RSS continue unabated with rate and non-rate actions as we work towards a mix that is more reflective of the market. Given this volatile backdrop, it's only natural that the insurance industry would be facing questions regarding capital. So we thought it would be useful to quickly summarize our strong capital position. As discussed in our annual report, we view our capital position as consisting of multiple layers. First, in our insurance operating subsidiaries, we maintain adequate surplus to support growing as fast as we can at or below a 96 combined ratio. Our extreme contingency layer includes capital in excess of regulatory capital that ensures on a model basis a less than 1 in 200 probability that we will need to raise additional capital. We have $4.2 billion that we held at quarter end in a non-insurance subsidiary of the holding company level, which is well in excess of that contingency layer and is highly liquid due to mostly being comprised of short-term securities and treasuries. While we have incurred temporary losses in our investment portfolio due to the significant move in interest rates, our fixed income portfolio is extremely conservative, with over half of the portfolio in cash or treasuries and a portfolio duration at the end of the quarter at 2.7 years. Throughout the year, we have taken proactive measures to prepare the portfolio for various scenarios by reducing interest rate, credit, and equity risk. Another proactive measure we took was to raise $1.5 billion of 5-, 10-, and 30-year debt in March at an average 3% interest rate. Due to the highly uncertain outlook, we felt it was prudent to have extra capital at what we viewed as very attractive borrowing rates. As we sit, we have no near-term bond maturities that we have to address in this higher interest rate environment. The combination of the borrowing along with significant increase in interest rates have been the primary drivers in moving our debt-to-total capital ratio over 30% at September month end to 30.2%. We expect underwriting gains, changes in the value of our bond portfolio as bonds approach maturity, and investment income to bring us back below 30% in time. We are currently taking no additional actions to bring the ratio below 30% and have no near term plan or need for raising further capital. Again, thank you for joining us and now we'll take your questions.