Progressive Corporation (The)

Good morning and thank you for joining us today for Progressive's first quarter investor event. I'm 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 website. Although our quarterly investor-relation events often include a 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. The introductory comments by our CEO were previously recorded. Upon completion of the previously recorded remarks, we will use the balance of the 60-minute schedule for this event for live questions and answers with members of our leadership 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 can 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 31, 2022, as supplemented by our 10-Q report for the first quarter of 2023, 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. 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. One of the enduring lessons since the onset of the pandemic is the uncertainty of the future. Since March 2020, the world and our business have been pummeled by unforeseen events. In that vein, it's perhaps poetic that three years post-pandemic, we continue to have to manage through the unexpected in our business. In the end, I'm confident that our resilience will see us through. Through the first quarter, we're not on track to achieve our calendar year goal of a 96 combined ratio. Given our extensive history of meeting our stated goal, this has prompted many questions about how we got here and where we're going. As such, in lieu of a more traditional opening statement, I'll instead provide answers to some questions that have been asked by the investment analysts. My hope is that you will gain a clearer understanding of how we are addressing the challenges as well as the urgency with which we are acting. The first question is, how are you reacting to being above your target of a 96 calendar year combined ratio? The answer to that is we will react the same way we always have, with speed and decisiveness. The three largest levers we have to manage our margin are to decrease our expense ratio, tighten our verification and underwriting scrutiny of new business, and increase rates. I'll address these in that order. Our largest controllable variable expense is advertising spend, and we are taking action to reduce these costs, which we expect could both slow growth and help to reduce our expense ratio. Once we are confident that we can deliver our target calendar year profitability, we will consider resuming our spend. While we won't provide details on which segments of media we are reducing or how this may affect growth going forward, I will tell you that we've invested in bringing the same industry-leading science from the pricing side of our business to the acquisition side and will continue to spend in the places that we believe have the greatest benefit to the business. Using non-rate actions such as tighter verification and underwriting standards and limiting bill plan options will reduce our growth in the segments we believe we can't currently write at our target margins. Finally, our largest but slowest moving lever is rates. In quarter one, we took four points of rate in personal auto on an aggregate countrywide basis, and we are still earning in some of the prior year rate increases. We plan to take aggressive rate increases where needed across all lines through the balance of 2023 to ensure we're pricing to deliver our target profit margin. The next question, given the actions we will take to meet our profit target, is what will this do to growth? First and foremost, keep in mind that growth in the first quarter of 2023 was an all-time high for the company, and we are very proud of that. Secondly, we are still in a very hard market with lots of consumers quoting their insurance. We also continue to see ambient shopping. While policy growth may be slowed by our actions, we still anticipate there will continue to be robust demand for our products. Of course, the actions of our competitors also play a role in what growth will be, so I won't speculate on specific growth predictions. However, you can rest assured that we are focused on growing policies that we believe will meet or exceed our target margins. Lastly, we've received many questions like this one. Do you now believe your reserving is adequate? Or said another way, you said that you were confident that the biggest rate increases were behind you. What changed? The answer is fairly basic. We started seeing data come in over the last few months that was not in line with what we were anticipating, which caused us to increase reserves and react with rate increases. In personal lines, our reserve strengthening happened largely in the short-tailed fixing vehicle coverages. In these coverages, we can recognize and react to new trends relatively quickly, and we feel good about our reserve levels today. That being said, reserves are estimates and change over time based on evolving trends. As for the effects of Florida House Bill 837, in March we estimated the reserve changes we believe we needed to capture the effect of the legislation, including the flood of lawsuits triggered by the law change. The reserve increases we took in March represented our best estimate of what we believe would be the full effect of the lawsuits on lost costs for pre-bill accident periods. Going forward, we believe the legislation takes positive steps to help manage the cost of auto insurance for Florida consumers. However, the situation is evolving, and we will continue to assess and react to information as it develops. In commercial lines, again, we believe we are adequately reserved today and are monitoring trends in frequency and severity to ensure we remain adequately reserved. Of course, any assumption on reserve adequacy comes with a caveat that trends can change. If they do, we will react to them as appropriate. The follow-up to the reserving adequacy question is, how did you miss reserving trends in the recent past? And given that, how can you be confident in your current reserve adequacy? I'll address these questions individually. The business of insurance is predicting the future. We never know our full cost of goods sold until years after premiums are collected. As such, our reserves are by nature estimates of our exposures based on assumptions. We use historical data, extensive knowledge about our business and customers, and advanced analytics to predict ultimate loss costs usually with an extremely high degree of accuracy. Predicting the future is hard, however, and we didn't fully predict trends that developed during the quarter. We saw higher than expected severity trends in previously closed claims and personal auto, primarily in fixing vehicle coverages. While I won't speculate on why these trends changed, I can tell you that we reacted quickly and decisively to adjust our reserves for these short tailed coverages. I'm confident in the people and processes we have in place to ensure we're adequately reserved. For the five years ending 2022, prior year reserve development averaged about 0.25 points unfavorable on our year-end combined ratio, which I believe supports the statement that we always strive to set reserves adequately. Hopefully these questions and answers address some of the most sought after explanations of the first quarter. Rest assured that no one is more acutely aware of the results of the first quarter than myself, my team, and all the people at Progressive. I continue to be confident in the long-term direction we're headed, and I have little doubt we'll continue to do everything we can to achieve our goals. Thank you again for joining us, and I will now take your questions.

This concludes the previously recorded portion of today's event. We now have members of our management team available live to answer questions. Questions can only be submitted over the phone by pressing star 1 on your keypad. In order to get to as many questions as possible, please limit yourself to one question and one follow-up. We will now take our first question.