Progressive Corporation (The)

Good morning and thank you for joining us today for Progressive's third 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 the letter to shareholders, which have been posted to the company's website. Although our quarterly investor relations events often include the presentation on a specific portion of our business, we will instead use the 60 minutes scheduled 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 minutes scheduled for this event for live question 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 reports for the first, second, and third quarters of 2023, where you will find discussions of the risk factors affecting our business, 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 Griffiths, who will kick us off with some introductory comments. Tricia?

Good morning, and thank you for joining us today. At the end of the second quarter, we were in a difficult place. Rising loss costs, adverse development, and catastrophic weather events meant we were facing a significant uphill battle to deliver on our calendar year 96 combined ratio target, while facing a very uncertain future. We made difficult decisions to steer the business through this challenging time. Despite the headwinds, I believed in our strategy and the leaders who were in charge of delivering that strategy. While we knew it wouldn't be easy, we knew that if we executed properly, we'd come out better on the other side. While there's still much uncertainty in our future and more work to do, the results in the third quarter suggest our strategy is working. Before discussing what did happen in the third quarter, let's first discuss what did not happen. First, unlike the first half of the year, the third quarter saw modest company-wide reserve development of only 0.2 points unfavorable across all lines. As we discussed in our presentation during our last call, our reserving group adjusted reserves in the first half to react to many things, including higher severity caused by steepening trends in our fixing vehicle coverages and higher attorney representation rates in Florida precipitated by House Bill 837. In contrast to the first half, in the third quarter we saw some flattening in the lost cost trends for fixing and replacing vehicles. We also now believe we have adequately reserved for the higher severity related to pre-House Bill 837 lawsuits. Second, in the third quarter, catastrophe losses were 1.3 points lower in total after reinsurance than the first half of the year. We do not write homeowners in Hawaii, so our exposure to the heart wrenching Maui fires was limited. After reinsurance, our property catastrophe losses in the third quarter were 28 points lower than the first six months of the year. And while Hurricane Adelia was devastating to the people caught in its path of destruction, the density of homes and autos we insured in that path was relatively low. What did happen in the third quarter is that our rates and non-rate actions had a positive effect on premium and profitability. Including the four points of rate we took in the third quarter, we have now taken approximately 16 points in personal auto year to date with more of that rate earning in every day. Both commercial lines and homeowners also took rate as we look to address lost trends in those lines. We continue to adjust and refine non-rate actions across the portfolio to help the business we are writing to meet our profitability targets. In addition to improved underwriting results, our net income is also benefiting from the higher interest rate environment. For the first nine months, our investment portfolio yield is 90 basis points higher and recurring investment income is 59% higher than the same period last year. With sustained higher interest rates, we expect yields to continue to increase as securities with lower interest rates mature and those funds are reinvested at higher rates. Many of the actions we took and continue to take to address profitability have an adverse impact on unit growth. New apps and personal auto were down 20% in the third quarter compared to the prior year and contributed to a decrease in PIFs compared to the end of the second quarter. This is a reflection of our self-imposed pullback in media spend as we seek to manage our combined ratio through the acquisition expense ratio and find the right balance in cohort pricing, which we talked about at length in our last quarterly call. We continue to assess our marketing spend, and as always, we endeavor to find the right balance between profitability and new business growth. While new applications shrank year-over-year in personal auto, retention reflected through our PLE measure continues to be robust at 35% in personal auto on a trailing three basis. We believe robust retention, especially in the face of higher rates than a year ago, is an indicator that many of our competitors are still tight on underwriting and we remain competitive in the marketplace. Despite the headwinds created by our profitability actions, our year-over-year growth was very strong. Through September, company-wide PIFs were up 10% year-over-year. Positive year-over-year PIF growth plus higher rates means our premium growth was spectacular with net written premium up 20% year-to-date or $7.9 billion. To put the first three quarters premium growth into perspective, we've added the premium equivalent to a top eight personal auto insurance carrier, which is a truly amazing statistic. Despite the successes that occurred in quarter three, we are not yet declaring victory. Our calendar year combined ratio currently stands 1.2 points above our 96 target. While lost trends have flattened, they are still elevated. Macroeconomic indicators suggest inflation is abating, but we are vigilant. Given the geopolitical and macroeconomic environment, our view of the future could change overnight. We continue to refine our plans for the rest of 2023 and 2024 as new information comes in. We have built a business where we can quickly take advantage of the opportunities the market offers us, so I'm confident that as things change, we'll react with the goal of delivering the best-in-class results we expect of ourselves. Finally, as a reminder and as we've previously announced, beginning this fourth quarter, we will move to reporting results on a Gregorian calendar basis versus our historical approach of a 5-4-4 convention. Consequently, for the next year, we will limit historical comparisons on a monthly basis and will continue such comparisons on a quarterly basis. 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.