Progressive Corporation (The)

Good morning, and thank you for joining us today for Progressive's fourth 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 its results in addition to those provided in its annual report on Form 10-K, quarterly reports on Form 10-Q, and a letter to shareholders, which have been posted to the company's website. This quarter includes a presentation on a specific portion of our business, followed by a question and answer session with members of our leadership team. 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 the 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 in our annual report on Form 10-K for the year ended December 31st, 2022, 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 investor relations section of our website at investors.progressive.com. To begin today, I am 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. 2022 was among the toughest years of Progressive's 85 years. The continued effects of the pandemic, high inflation, and the largest hurricane in our history all played a role in the tumultuous environment. Throughout these challenges, Progressive people came together in unity and delivered once again, beating our goal of a calendar year 96 combined ratio while growing both written premiums and policies in force. The pride that I feel in all of the people of Progressive is indescribable. We have met all challenges head on and continue to deliver the best in class results our stakeholders expect. Our ability to meet these challenges is embedded in our culture, which is built on our newly updated four cornerstones, which are who we are, which is our core values, why we are here, which is our purpose. We revised our purpose to be, we exist to help people move forward and live fully. Our modified purpose builds on the legacy of our core values and our history of challenging the status quo to accelerate progress and equity. We modified the purpose to better unify and guide our organization. Where we are headed, which is our vision. We expanded our vision to include business owners, so it now provides a more holistic view of all the customers we are privileged to serve. And how we will get there, which is the four pillars of our strategy. We've updated these two cornerstones to better reflect the evolution of our company and to ensure our culture adapts to the ever-changing environment we operate in. While our business will continue to progress, we will always seek to maintain the things that make progressive, progressive. In today's call, we will once again focus on the strategy cornerstone and specifically we'll discuss the pillar of competitive prices. Competitive prices means not just offering the best rate, but also the most accurate rate driven by pricing accuracy, expense discipline, and industry-leading segmentation. As we have said for the last few quarters, we believe the major personal auto rate increases are likely behind us. In the fourth quarter, we continue to raise personal auto rates, but at a pace slower than in late 2021 and early 2022. While some states are still waiting on filings to be approved by their respective regulators, we believe the majority of states are nearing rate adequacy, and our intent is to continue to increase rates to measure it with future loss trends. Based on public rate filings, we know that our competitors are raising rates to address their own profitability concerns, and as they have done so, we've seen our relative competitiveness improve, which has resulted in improving retention, strong quote growth, and high conversion. We've now actually seen some competitors surpass our post-COVID rate take, which should help us sustain those improvement trends. As a result, we finished 2022 with the best fourth quarter for personal auto new application volume in our history, which contributed to growing our personal auto PIFs 3% in 2022, while also running a lower acquisition expense ratio than 2021. We're continuously evaluating our media budget and will continue to use media efficiently as we enter 2023, and we will look to capitalize on this hard market. The higher direct acquisition expense ratio in January is indicative of our opportunistic stance, and it reflects the confidence we have of current rate levels in most states at this time. Of course, if the last three years have taught us anything, it's that the future is unpredictable. So we will continue to monitor the business carefully and navigate as needed to grow as fast as possible while delivering a calendar year 96 combined ratio. As I said in my annual shareholders letter, segmentation is a key facet of our competitive prices pillar, and nowhere is that more evident than in our investment in usage-based insurance products, which will be the topic of today's presentation. Progressive was a first mover in usage-based insurance. We have had a UBI offering since 1996 when we launched our first product called Autograph. This first effort was limited by the technology of the time and required a professional mechanic to install equipment in the customer's car at a considerable expense. That first attempt evolved to TripSense in 2004, which was our first self-install option. And then in 2008, we launched MyRate, which is where we first employed cellular technology to upload data to our systems. And then in 2010, we launched Snapshot, which we consider the start of our modern UBI program. We moved from our discount-only model to one that included the possibility of a surcharge in 2014. And in 2016, we launched the Snapshot app, which allowed the customer to use a mobile phone app instead of the plug-in device. Our most recent addition is continuous monitoring, which began its rollout in the summer of 2022. In parallel to our efforts in personal lines, we were developing UBI for commercial auto products. This culminated in our first broad commercial offering of SmartHaul in 2018, which allows us to provide usage-based insurance to truckers in partnership with providers of electronic logging devices. We also expanded the Snapshot program for commercial auto with Snapshot ProView in 2020, which includes fleet monitoring services to small businesses. Throughout our history of usage-based insurance, we have collected billions of miles of data and invested in a process of continuous improvement in our UBI products. Today, UBI is our most predictive rating variable, and it provides unparalleled rate accuracy to our customers. Through this, we have continuously educated our customers where today UBI adoption is at near historical highs. To highlight our UBI products on this call, we've invited two progressive leaders who have played significant roles in our UBI development. First to speak will be Jim Haas, business leader for our personal auto usage-based insurance. Jim is a 20-year progressive veteran, and for the last five years, he has led our personal auto UBI team. Jim will discuss the advances we have made in personal auto UBI. Following Jim will be Corey Fisher. Corey is a 19-year progressive veteran. For nine years, Corey has been our business leader for Commercial Lines R&D, and as of last month, Corey accepted a new role to lead our agency distribution group. During his tenure in Commercial Lines, Corey led R&D during the successful rollout of both our commercial auto UBI products. Corey will be highlighting all of the advances we have made in commercial line GBI, once again giving Progressive first-mover advantage in this important technology. Again, thank you for joining us this morning. I will now hand it over to Jim Haas. Jim?

Thank you, Tricia. As Tricia mentioned, my name is Jim Haas, and I lead Progressive's personal lines telematics efforts. Today, I'd like to tell you about how we've built on that long history in telematics that Tricia discussed. Starting with how we've continued to improve our core snapshot program. Then moving on to discuss how we can now bring in data from outside sources to improve rating accuracy during the new business quote. And finally, wrapping up with a discussion of some value added services we'll be bringing to market soon. First, let's recap how our program has worked for a number of years. Individual states may vary a bit, but I'll describe here how it works in most places. We or the agent present the customer with the offer to enroll in Snapshot during their initial quote. If the customer elects to sign up, they'll receive an immediate discount of up to 10% for participating in Snapshot that will be applied to that quote. So long as the customer stays in Snapshot, that discount stays on the policy during the whole first term. During the quote, the customer also elects whether they want to monitor using a plug-in OBD2 device that we send them or via an app on the smartphone. The customer then has 45 days to plug in the device or get the app set up. At that point, all they need to do is drive. We'll let them know how they're doing along the way. Just before their policy comes up for renewal, we'll use the driving data collected during that first term to calculate the renewal discount or surcharge. That rate adjustment will be included in the renewal quote and will be applied to future policy terms. At that point, the customer can delete the app or send us back the device and they'll be done monitoring. I mentioned that the rate could go down or it could go up. That is, we would apply a discount or a surcharge. But that's not how our program started. In the early days, the program was structured a little bit differently, but a customer's rate couldn't get worse by participating in Snapshot. Customers could receive a discount of up to 30%, but their rate couldn't go up, no matter how risky their driving looked. Many companies still employ a model like this today. Of course, no rating variable in insurance only suggests giving discounts. It's about segmentation and matching rate to risk. So the data would suggest that some customers should see the rate increase while others should see it decrease. While only offering discounts might encourage more people to participate in the program, it makes the economics a lot more challenging and limits the accuracy of the overall pricing. We all know that pricing accuracy is critical in auto insurance. So starting in late 2014, we began introducing a surcharge. We set our factors so that about a fifth of customers received a surcharge, a share that we've kept about the same over time. The surcharge was smaller first, but started us on the path to greater accuracy. It's also when we introduced the participation discount, which is down 10% in most states. Over time, we've moved the price closer and closer to what the data would tell us, first by increasing the maximum surcharge from 10% to 15%, then increasing it to 20%, And finally, to where we are today. We offer larger discounts than we did in the past, now up to 30%. But we also have larger potential surcharges than in the past, too, now up to 40%. We've come a long way since the days of only offering a discount, but it's important to note that about 75% of customers still receive a discount and only about a fifth receive a surcharge. Not surprisingly, we see better retention on customers who earn a discount and worse retention on those who earn a surcharge. Renewal rates for the safest drivers who are earning the biggest discounts are about 6% higher than average, while they're about 16% lower for the riskiest drivers who aren't receiving a discount. So the program systematically helps us retain lower-risk drivers and shed higher-risk ones. And because of the changes we made to our snapshot pricing over the years, we're more accurately priced than ever before on those customers that do stay with us. While these changes have certainly improved the accuracy of our pricing, there are still limitations to our approach We only used data from a single term, typically four to five months, to set the price for the life of the policy. This made it so we wouldn't know about material changes in an individual's driving behavior and would lead to less accuracy over time. We had experimented with a continuous program a long time ago, back in the late 2000s. At the time, though, consumer acceptance of telematics generally was still growing, and collecting data on an ongoing basis was quite expensive, so we decided to move forward with a partial model. Things have changed a lot since then, and in early 2022, we started migrating to a continuous version of Snapshot. The basic process isn't all that different. Customers still choose whether and how to participate in Snapshot during the quote, and they still receive a participation discount. They still have 45 days to plug in the device or set up the app, and then they can just drive. The difference comes after the renewal, as instead of sending the device back or deleting the app, we ask them to continue to monitor. and we'll adjust their rate at each renewal to reflect their more recent driving. Additionally, that participation discount is larger now, at 15% instead of 10%, which encourages more people to participate in the program. Having more recent data also improves the predictive power of UBI, which means we can price even more aggressively. We've increased the size of the maximum potential discount to 45%, and the maximum potential surcharge to 60%. we're one of the few companies to combine a continuous model with the possibility of surcharges. As of the end of 2022, we had deployed this new continuous model in 12 states, representing over a quarter of our net written premium, and plan to roll out to most of the rest of the country during 2023. So while we've been steepening these factors and requiring longer monitoring to make our pricing even more accurate, what's happened to take rate? The answer is that the share of our personal auto customers participating in StaffShot has moved steadily upward. In fact, it's up nearly 40% across both channels combined since January of 2019. So today, more people participate in Snapshot than ever before, providing data for longer periods of time that we can use to price more accurately than ever before. So that's the update on what's been going on with our core Snapshot program, which provides great incremental segmentation over what is available via traditional rating variables on renewal policy terms. Now I want to talk about how we're working to bring this pricing accuracy to where it's most useful at the time of the new business quote. Since in this scenario the customer is only now just coming to us, we'll have to use telematics data that was collected by others. Our long telematics experience has helped us learn how to use this data and how to make it predictive. We currently have two initiatives in market. The first is a lead generation program that works by inviting good drivers to come and quote with us. While the other begins when a customer comes to Progressive directly to get a quote, and we find and incorporate driving data from third parties into the rate we present them. Let me start with the lead generation program. Here, a partner like Credit Karma invites their customer to opt in to collecting driving data to see if they can save money on their car insurance. In a privacy-friendly way where we don't receive personally identifiable information, we can let Credit Karma know who's likely to receive a discount so they can invite them to quote with us. Only when the customer chooses to quote are we able to personally identify that data and are then able to apply that discount to that individual's quote, improving pricing accuracy immediately. Our second program involves working with data collected by automakers. Over the last several years, more and more of them have been equipping their vehicles with technology to collect driving data. They've been working to show the value of these programs to their customers so that they'll sign up to share that data with them, and we've been able to tap into that. When a customer comes to us to quote and their driving data is available, we'd ask the customer if they'd like us to use it to determine their price. They say yes, we bring that data in and apply the UBI discount or surcharge to their quote immediately. Again, pushing that rate accuracy to where it matters most, the new business quote. Because of our long experience with UBI and working with both OBD and mobile data, and the fact that we attract so many insurance shoppers every year, we're well positioned to execute and benefit from this. To be clear, automakers are in various, often early stages of getting the necessary equipment into their cars and making this data available to insurers. Additionally, just because new cars coming off the assembly line have the hardware, it takes a long time for the fleet to turn over. So this isn't common yet, but we're excited about the opportunity it represents. We're already working with two of the largest automakers, General Motors and Toyota, and it's clear that this population will grow over the coming years. Lastly, I'd like to share some exciting news that doesn't involve using Telematics data to more accurately rate policies, but instead builds upon our Telematics heritage to provide a valuable service to our customers. Over the last couple of years, we've experimented with offering a service to detect and respond to major accidents to some of our Snapshot customers to learn if they value the service and to better understand how it could be useful in handling claims. We've been encouraged on both fronts, as customers have consistently told us that this kind of service is something that they really do value, and our claims representatives have seen that Telematics data can help them settle claims more quickly and efficiently. Still, we know that despite how times have changed, there is a large segment of customers who don't want their insurance premium to be based on their driving data. That means that if we limit this just to our snapshot customers, we'd be leaving out a lot of others. So in March, we plan to start making accident response available to all of our auto customers, not just those who are in snapshot. We'll use data from the sensors on the phone to detect when a serious crash is likely to have happened. We'll reach out to the customer to confirm the accident and to see if they need help If we don't hear from a customer at all, and it seems particularly serious, we'll request that the police conduct a well check to make sure our customer is okay. Since we know the customer's location from the telematics data, we know just where to send them. We know there are other accident response services available. We think what we're offering has several key benefits, though, that distinguish it. First, many services come at an additional monthly expense. Ours will come included in the policy. There is no additional charge. This adds value to the customer's relationship with us and can become another reason to choose and to stay with Progressive. Additionally, while other insurers offer crash detection to their UBI customers, we'll be making it available to all of our personal lines auto customers, whether they're in Snapshot or not. Third, we're deliberate about dispatching EMS. We certainly want to get EMS dispatched as quickly as we can when a customer needs it. But we also don't want to waste EMS resources and bother the customer when they don't. This can be challenging since the sensor data for a near miss and an actual accident can look awfully similar. So we try to contact the customer more than once using different methods so they can let us know if there was an accident and if they need help. We only send help if the customer has requested or if we haven't been able to reach them after several tries and the accident looks severe. While most customers in these accidents don't actually need an ambulance, many do need a tow truck. We're able to build on our roadside assistance experience to meet this need. We'll understand that these tows are even more urgent than a typical roadside request. We can also help customers notify their family members. Lastly, after an accident, one of consumers' top concerns is how to get their medical bills paid and how to get their car back on the road. As their insurer, we're the ones positioned to help them get there. By detecting these accidents and having this telematics data available, we're able to get their claim started more quickly and able to handle it more efficiently. In fact, if an ambulance for tow is dispatched, we'll actually get that claim started on their behalf. Let me show you an example. This is a real claim that was detected via accident response. In the loss pictured here, our customer was driving on an urban boulevard when they hit some ice, lost control of the vehicle, first striking a barricade to their left before striking the barricade to the right. Fortunately, no other vehicles were involved. As you can see, the airbags deployed, and there was pretty severe damage to the front of our insured's vehicle. In fact, this vehicle is a total loss. Additionally, our customer and two of their passengers were injured in the crash. Within two minutes of the impact, we reached out to our customer. While they didn't respond to our initial push notification, they did respond to a subsequent call from a live agent, which occurred less than five minutes after the accident. That agent dispatched an ambulance and a tow truck to the scene. Only a few minutes later, the claim was filed. Altogether, it took only 10 minutes from the time of the accident to when we had a claim in our system. We've surveyed some of our accident response customers, and we've gotten some great feedback. For instance, this customer shared that they were, quote, unable to call for help at the time, but help called me. This service helps us help our customers when they need it most. It's not just the immediate response to the accident that can help customers, though. Here's another example. This customer collided with another vehicle when changing lanes. We detected this accident as well, dispatched a tow for them, and had the claim filed within 12 minutes of the accident. What I want to highlight in this case, though, is that this customer had this accident just two days after buying their policy. Some of the first steps in handling any claim include establishing the facts of loss and determining if the loss is covered. Unfortunately, there are people who buy insurance after they've had an accident and then try to make a claim for it. This means that honest customers are inconvenienced, as we need to take the time to verify that the accident happened when they told us it did. That was pretty easy in this case, however, since we detected the accident in the first place and arranged for the tow truck to pick up the car. And we could see from the telematics data that the crash happened where, and importantly, when our customer said it did. Therefore, we were very confident that this loss did occur after and not before the customer purchased the policy, which let us move forward more quickly with getting the customer back on the road. So it's not just the accident response service itself, but it's promised to improve the claims experience that can benefit our customers. They've told us they value accident response, and we're excited to make it available to them. We'll start that process in March and expect to make it available to all of our personal auto customers over the next year or so. To wrap up, we're not just jumping on the Telematics bandwagon. We have decades of experience here. We're clear-eyed about the challenges, but also see the great opportunities Telematics offerings present. But this is just the Personal Line side of the story. My colleagues in Commercial Lines have been developing their own approach about how to use telematics data in their markets. And Corey Fisher, who's led Commercial Lines R&D for the better part of the last 10 years, is here to tell us about it. Corey?