Progressive’s Flo won’t reappear on TV screens in every state, but the insurer she pitches for is comfortable pursuing business growth, company leaders said yesterday.
That means potentially using more advertising to lure auto insurance shoppers who are looking to replace competitor policies. Other carriers’ policies are now getting pricey as they take rate actions and cut media spend to counter inflationary claims cost trends.
According to Progressive Chief Executive Officer Tricia Griffith, the fact that her company made similar moves to stay ahead of inflation before competitors started to act puts Progressive in position to take advantage of the situation now. And new business applications already are soaring by double digits as Progressive eases up on the pricing accelerator while other carriers continue to push rates up aggressively.
“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 percent 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,” she reported.
“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,” she said.
Griffith’s remarks came during an investor call, following the publication of Progressive’s 10-Q filing for the third quarter, which revealed a $760 million hit to underwriting profits from Hurricane Ian losses and $152 million of holding period losses on securities that impacted net income. Net income still grew 4.7 percent to $124.1 million. And even with 7.1 point of catastrophe losses (6.1 points for Ian) included, the combined ratio improved 1.2 points to 99.2 from 100.4 in last year’s third quarter, which included 6.4 points of cat losses. (Related article: “Progressive Loses a Bundle: Nearly $2.0B Gross Ian Losses; $760M Net)
Griffith pointed to the 1.9-point improvement in the non-cat combined ratio as evidence of the significant work the carrier has done to combat the effects of inflation. “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,” she said, noting that Progressive hiked personal auto rates in 20 states at an average of about 5 percent per state in the quarter, for a countrywide premium impact of around 2 percent.
With $585 million of incurred but not reported vehicle claims from Ian impacting the auto underwriting results, the personal auto combined ratio came in just at breakeven—100.0—for the third quarter of 2022.
In a letter to shareholders accompanying the results, Griffith wrote: “As our non-catastrophe personal auto profitability improved, we shifted focus in the quarter to evaluating underwriting restrictions, bill plans and media spend to identify growth opportunities.” (Related article: Why You May See Less of Progressive’s Flo In Your State)
Back in April, Progressive had reported that it wasn’t spending on local media ads in 26 states, but that number is down below 17 states now, analysts and executives said during the investor call.
Personal Lines President Patrick Callahan, responding to an analyst seeking expense ratio guidance related to media spending changes, noted that there are seven elements of local media, including digital, paid social and direct mail. “We will spend when we can afford to spend based on the calendar year targets, when the spend is efficient relative to lifetime performance on the media and frankly when we need to spend to drive growth,” he said, noting that the outlays are “pretty dynamic at the channel level.”
“Right now we have some states—a couple big ones on the coasts—where we don’t yet have adequate rates on the street. We’re optimizing the efficiency of our expenses there, given our loss ratios are high because we can’t get the rate that we need,” he added.
While Progressive is seeing better personal auto claims frequency trends than competitors are reporting—down about 9 percent in the third quarter compared to the prior year—analysts worried about the impact of lower gas prices and claims severity drivers like medical inflation would force Progressive to change course on a growth strategy.
“We’re watching inflation very closely, but we do feel confident that in most venues we have the rate we need to grow. We’ll try to propel that growth where we can and slow it where we don’t believe our rates are adequate,” Griffith said in response to one questioner.
Highlighting a long-term strategy to “grow as fast as we can at or below a 96 combined ratio” for another, she said: “That will continue. That’s something that’s worked for us for 85 years, or at least since we went public in 1971, when we first started talking about the 96… We watch trends very, very diligently and take actions quickly when and decisively when we need to. Unfortunately, in this last year we’ve had to take rate increases that we normally don’t like to take. We don’t like to take huge rate increases. We like [taking] smaller bites of the apple, which we believe we’re now in the position to take as things change in each venue.”
“So, our strategy hasn’t changed. We’re going to try to grow as fast as we can,” she said.
In the quarter, auto written premiums grew 9 percent to $10.3 billion compared to $9.5 billion in third-quarter 2021, with premiums written through agents growing 6 percent and direct premiums up 12 percent.
At one point during the investor call, Chief Financial Officer John Sauerland weighed in on the question of why Progressive is seeing better frequency trends than others in the industry, pointing to earlier underwriting efforts to ensure that only profitable business came into the company. “When you do that, you’re going to first seek to apply underwriting efforts against the highest frequency business—likely that is producing the highest loss ratios,” he said. In addition, “we’ve also had some challenges getting price in some very large markets that have fairly high frequency as states,” he said, suggesting that other actions helped shrink the book in those markets.
During the hour-long session, Griffith also described Progressive’s strong capital position, ongoing efforts to move the property book out of Florida and take-up rates on telematics-based policies in personal auto.
Progressive posted a 125.1 combined ratio for its property book in the quarter, and one analyst asked about the potential that the carrier will face higher reinsurance costs. Noting that Progressive can pass the impact of higher reinsurance costs on to policyholders, Griffith also updated listeners on a plan to nonrenew 60,000 Florida homeowners policies—an effort she said started in earnest in May 2022 after customer notifications. “Then there was a special legislative session, and there was a Senate Bill that allowed homeowners to renew their policy as long as they could prove through an inspection that they had at least five years of useful life left on their roof, which was great…That’s OK with us…At least we know the rate to risk when we know how old the roof is.”
“So, we knew that it would be less than 60,000 policies and it would take a little bit longer,” she said, noting that Hurricane Ian also impacted the timeline. “There’s been a moratorium on nonrenews and cancellations from Sept. 28 to Nov. 28…Suffice it to say that it’s going to take us a little bit longer to de-risk…I will say that we are not open for new business in HO3, DP3 or HO6,” she said, referring to home dwelling, fire and condo policies. And we will not be open for new business until the executive order is lifted,” she said, noting one exception for a select group of builders. “The punchline is it’s a volatile environment, but we remain focused on achieving our goal—having our portfolio of homes across the country based in all the risky areas.”
The executives also addressed questions about whether advertising or some other factors increased take-up rates for Progressive’s Snapshot telematics offerings. Griffith, who revealed that Snapshot customers represent 45 percent of new direct-placed business, highlighted the introduction of a continuous monitoring product, which has a deeper flat participation discount and higher maximum discounts and surcharges, in talking through her response. “I don’t know [if the continuous model] is a big factor, but we do believe people see this as something where they can control part of their insurance costs.”
Callahan agreed. “We believe Snapshot is not only a personalized way to save money but to get rewarded for safe driving behavior. And we think that’s resonating with the greater number of consumers and the agents who sell our products over time,” he said, although neither executive would share the take-up rate on agency business.
A final question revolved around the quality of the new business applications landing on the desks of Progressive underwriters, and how many policy renewals it would typically takes to eliminate a “growth tax” on new business profits.
“We believe the power of our segmentation helps us select the right risks at the right rate for lifetime profitability,” Callahan said.
Sauerland added that Progressive has different policy life expectancies for different business segments. For example, an inconsistently insured customer—referred to as a “Sam” at Progressive—isn’t “going to stick around long. So, we need to make our 96 in a very short period of time. Robinsons stick around a lot longer,” he said, referring to families that bundle home and auto policies. “So, we have a lot more time to make up the combined ratio over a hundred, perhaps, on new business for a Robinson,” he said, adding that Progressive’s recent growth has come more in the Robinson segment than the Sam segment.
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