The Progressive Corporation
Q4 2021 Earnings Call Transcript

Published: 1 Mar 2022

[Doug Constantine:]

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 in the letter to shareholders, which have been posted to the company’s website. This quarter, we will have a presentation on a specific portion of our business, followed by a question-and-answer session with members of our leadership team. The 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 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 31, 2021, 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 sections 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?

[Tricia Griffith:]

Good morning and thank you for joining us today. As I stated in my letter, 2021 was a year like no other. We were forced to confront the new normal imposed on us by the pandemic. We faced business challenges unlike those we have ever previously seen, all while continuing to serve our customers at the level they have come to expect from Progressive. Our people are flexible. They can see the challenges coming and react appropriately to ensure we meet our business objectives. Our ability to respond like this is supported by our corporate culture, which is built on our four cornerstones

[John Curtiss:]

Thanks, Tricia. Today, Kanik and I will give an update on the rate-making process in our Personal Auto business. We have structured our discussion in a Q&A format based upon common questions we receive from our investors. There are many facets to managing rate level in our Personal Auto business. And today, we are going to focus on two key aspects. First, we will share how we determine our rate need to support our operational goal to grow as fast as we can at or below a 96 combined ratio. This can broadly be categorized into two areas

[Kanik Varma:]

Thanks, John. The goal of the product management organization is to deliver profitable growth at our target margin through adapting Progressive’s products to win in our local markets. This organization comprises of highly talented individuals. They are results oriented and were attracted by profit and loss ownership. They want accountability and decision rights and we empower them to make decisions at the local level. Think of them as Chief Operating Officers of their own businesses. There are several aspects to our Product Manager’s job at Progressive. Each product, state, channel is different and our Product Manager’s design strategies to meet our goals within the individual businesses. Compliance is mandatory. Profit is our second priority. Growth at target margins comes next. Managing legislative, regulatory developments and relationships are key levers in order to respond to economic conditions and the competitive environment within their states. Today, I am going to focus on one aspect of their role, tactics to deliver our target margins. And this is especially relevant in the current environment. The first step in consistently hitting our target margins is to give our product managers very clear operational goals. You know it as our grow as fast as you can at a 96 objective. Just a reminder, that’s a composite calendar year target number. Product Managers manage to their respective targets within their channel product or geography down to the line coverage level. Each business fulfills their role within the overall portfolio to meet this composite goal. Our product managers have multiple tools that help us operationalize this goal. We call it the product manager toolkit. Product managers actively monitor results with daily reporting on volume measures and monthly data across all other KPIs. The toolkit affords both diagnostics and informs actions to ensure we deliver segment level results that roll up to our aggregate objectives. At the macro aggregate level, operationalizing this objective is like riding a wave. It requires a very delicate balance, go do fast with rate and you will be ahead of the market in compromise growth. However, if you move too slowly and fall behind on rate, it’s incredibly hard to catch back up and you will miss profitability targets. Product managers continuously adjust rate level to match changing conditions and the capability to be nimble is a source of competitive advantage for Progressive. Our product managers are not just trying to hit 96 at the macro level, but are making sure they are pricing each individual segment the same target margins. That’s very important. We don’t have a bias towards any specific customer segment. We want to drive growth across the spectrum, provided those risks of price accurately. This approach enables us to deliver on our broad acceptance or what we call take nearly all comers philosophy. Our heritage starting out writing less preferred customers required us to align our entire business around matching rate to risk. And as we have expanded our aperture over the past decades, this approach remains foundational to our strategy. We have to make sure we are continuously matching rate to risk. Our scale provides us credible data and to make data-driven decisions at the micro level, which is a competitive advantage versus many industry competitors. Product upgrades in each state allow us to add new rating wearables to our algorithms that feeds the virtuous cycle of risk selection. We have talked about this at length in the past. So today, I will just focus on how product managers manage profitability at the macro level. The aggregate rate level is determined for each state and channel. Each product manager decides how much rate to take and how often to take that rate for the state and channel they manage. This decision-making relies very heavily on the advanced analytics John talked about earlier. Product managers also incorporate multiple local inputs into their decisions. I’d like to group these local inputs into three broad categories

[Doug Constantine:]

This concludes the previously recorded portion of today’s event. We now have members of our management team available live to answer questions, including John Curtiss and Kanik Varma, who can answer questions about the rate level presentation. We will now take our first question.

[Operator:]

Our first question comes from Elyse Greenspan with Wells Fargo. Your line is open.

[Elyse Greenspan:]

Hi, thanks. Good morning. My first question – thanks for all the disclosure just on the rating side of things. Given where you guys are now, the rates that you mentioned, the 8 points that you guys took last year as well as just what seems like continued elevated severity, when do you think you will potentially be at your target margins within Personal Auto? If I remember from last – the call last quarter seemed to indicate perhaps it would take 6 months or longer. I just want to understand kind of where we are in the time frame of you guys thinking we will have enough rate to kind of get back to where you want your margins to be in auto, just in Personal Auto.

[Tricia Griffith:]

Thanks, Elyse. And I think that’s very dependent on each state. So we feel good where we’re at now. So we took the 8 points last year, took another 3 points in Personal Auto in January. And we’ve had some successes with some of the regulators. So let me give you an example. In Texas – I think that came up in the last call. We – they had some objections. We went back and forth with a lot of data, came to an agreement earlier this month, and both of those prior – those approvals are done and effective, I think, on the 24th. And then we’ve put another rate increase in February. So we feel good about states like Texas where we’ve had great conversations with our regulators, and we can get the rates on the street. And that allows us to open up local advertising, our bill plans that we might have restricted underwriting guidelines and – our underwriting restrictions, I should say. And so it’s a mixed bag depending on each state. So we will continue to watch the trends. The trends in used cars and new cars still continue to actually outpace even pre-COVID levels. And of course, a lot depends on frequency. So we saw vehicle miles traveled down more in January. We think that might have been through Omicron. So they were down about 11% to 14% compared to our percentage of about 7% to 8% since May. Now that we’re seeing more states open, we will watch frequency closely. So we’re watching companies open. And what the new normal is of how people go back to work, I think, is yet to be determined. I know with Progressive, we are just figuring that out as well. There’ll be a lot more people that work from home or work from home part of the time. So we’re going to watch frequency once things stabilize a little bit more. So the real answer is we don’t know for sure. But hopefully, John and Kanik let you understand that the propensity to have the majority of our auto policy 6 months allow us that flexibility to get the rate in more quickly.

[Elyse Greenspan:]

Thanks. And then my follow-up. Tricia, you did kind of touch upon in your answer. When I look at your results January versus December, typically, there is been some better seasonality in January, but this January saw almost 6 points of better underlying loss ratio relative to December, and severity remains high, as you guys noted. So did frequency drive a net benefit in your January numbers perhaps from Omicron? And then is there anything that you can say about February as Omicron has waned and just the impact perhaps in that month?

[Tricia Griffith:]

I think that’s probably part of it. I think there is a lot of seasonality in January. So I wouldn’t read into that too much because we still have a lot of that rate to earn in. What I would say, early results from February from vehicle miles traveled, they are going back to what we saw before January. So we could see frequency go up a little bit. Again, that’s yet to be determined, and we will have those results in a few weeks.

[Elyse Greenspan:]

Okay, thank you.

[Tricia Griffith:]

Thanks, Elyse.

[Operator:]

Our next question is from Mike Zaremski with Wolfe Research. Your line is open.

[Mike Zaremski:]

Hey, good morning. Great presentation. First question, Tricia, to your comments about in the past, during times of industry disruption, you’ve been able to – the company has been able to make great strides. Just curious, is – obviously, every cycle is different, as you all mentioned. Is the window of opportunity just very different this time given that it appears Progressive results have deteriorated much more so than peers, which maybe could be due to being overweighted non-standard drivers? Are you seeing kind of a bifurcation of results, non-standard versus standard, which might make other peers less likely to need as much rate?

[Tricia Griffith:]

Well, when we kind of strip away at the Q4 results from some of our competitor, we feel like we’re in a pretty good company. It looks like almost everybody needs a similar rate than we do. So we’re monitoring that. I mean as far as our book of non-standard, of course, that’s – that was our humble beginnings, but we are – we continue to grow more on the preferred side. When you think about new business, our apps are down more on the Sams, which makes total sense because they are very sensitive to price. We define them as inconsistently insured. And of course, a lot of the PIF growth on the Sam side comes from the new apps because their PLEs are really short. So I wouldn’t say – I would say I think everybody in these rates. The trends changed as you saw dramatically. And so I feel like we’re in a really good position. We continue to work with regulators where we don’t have the right rates on the Street yet to prove that out. And if we need to, we will slow growth for a bit until we get there.

[Mike Zaremski:]

Okay. Understood. Thank you. My follow-up is just trying to – maybe if you can try to unpack some of the severity statistics a little bit more. You focus on the Manheim in the deck it looks like. But just curious, we’re also hearing about supply chain issues requiring cars to be taking longer to fix, higher rental car prices. Just curious, are you – are any of the other issues that have been impacting severity, are they getting better? Are they decelerating? Or is there still a lot of uncertainty? Thank you.

[Tricia Griffith:]

Mike, there continues to be a lot of uncertainty, but I think you hit the nail on the head. So we’ve got the supply-demand issues with chips. So we have parts prices continue to increase. Because it’s taking longer to repair those, our rental prices have gone up. We’re watching labor rates in body shops closely and working with our MSOs to understand what we think about that. But when you think about severity, we look at it in a couple of different ways, but I’ve been focusing on looking at it from this last quarter, quarter four of 2021 compared to ‘19. And let’s take collision as an example, and we don’t usually share at this level. But in the aggregate, we are up in severity about 11.9%. Collisions, up substantially more than that. And actually, frequency is down less than pre-COVID, and severity is up. So we’re watching very specific line coverages to understand the trends and how they relate to the increases that we need specifically.

[Mike Zaremski:]

Thank you.

[Tricia Griffith:]

Thanks, Mike.

[Operator:]

Our next question comes from Jimmy Bhullar with JPMorgan. Your line is open.

[Jimmy Bhullar:]

Hi, good morning. First, I just had a question on the sort of – if you could discuss what’s going on in California. It’s a small state for you guys, but I don’t think the state has approved any pricing request yet. So what’s the reason for that? And do you think that, that will change as you have more of the sort of weaker margins in your actual experience that gets built into their analysis?

[Tricia Griffith:]

Yes. I mean we continue to work with regulators in California. It can be a challenge, and we’re up for the challenge. We – how they might look at rates versus we are looking at them prospectively, I think, is a little bit different. And so we’re sharing data regarding what we’re seeing and the trends we need. Here’s the bottom line for any regulators. They should demand adequate rates. And we need to get adequate rates on the street in California in every jurisdiction for that matter. So we’re going to continue to work with California. And there is a handful of other states where we continue to go back and forth. And our goal is to be open and available for all consumers. And if we’re open and available, that helps with affordability in the long run. So in the meantime, we have some levers that we can use to slow down growth, whether it’s local advertising or build plans, underwriting restrictions and some agents incentives, we will do that in the states where we need rate. We do need rate in California, but we will continue to work with the regulators there to prove our case.

[Jimmy Bhullar:]

Okay. And then on the competitive environment, are you seeing competitors take similar price hikes? And – or are some of them not doing the same? And as a result, like as we’ve seen your premium growth slow down a lot, bit growth slowed down a lot recently, but not sure if that’s because other companies are not raising to the same extent or they have more 12-month policies where they can’t implement the price hikes?

[Tricia Griffith:]

Yes. There is a lot of variables like that. Some you hit the nail on the head with 12 months, some are not increasing at the rate we are. We are usually first to market, and we talk about that a lot in order to get ahead of trends. We do see competitors definitely taking rates. And so we knew taking action aggressively early on when we saw the trends changed so dramatically. We knew that would affect our new business apps. We’re seeing that, but we feel good about getting those rates on the Street. And as more and more companies see those rates, the competitive environment will improve. And hopefully, as people shop, they’ll come to us and we will be in a good position to have stable rates. So it’s really across the board. Some are taking a different approach because they have 12-month policies, some run their companies differently than we do. We have a very specific goal to make that $0.04 of underwriting profit. And so that is our primary goal and growth a second. So we will continue to watch. We believe that we feel like we’re in a good position for the most part.

[Jimmy Bhullar:]

Okay, thank you.

[Tricia Griffith:]

Thank you.

[Operator:]

Our next question, Michael Phillips with Morgan Stanley. Your line is open.

[Michael Phillips:]

Thanks. Good morning. I wanted to ask about your comments on getting ahead of the trends and being first to market and then your comments of taking larger bites. Question really is, do you classify what you took any time in 2021, maybe 4Q, the 6.8 in those 19 states? Was that a larger bite or was that more of the smaller bites? And the reason I asked, Tricia, is curious if you think that 6.8 in those 19 states, was that enough to offset and provide some profit provision in that? Or is there more needed from even that 4Q number?

[Tricia Griffith:]

It’s very dependent on each state. So there are some states where there is more needed. I gave you the example of Texas where we had two rate revisions and we put another one in play, a double-digit one in February. So I think it’s very dependent on the jurisdiction. I would say when we define small bites, it’s nice for consumers to have stable rates. So small bites to me, and I don’t think there is any great definition, is 1% here, 1% there. So I never like to take 6.8% or ever double-digit percentage because we see then that, one, it affects our new business and could ultimately affect our renewal business as people get increases. So that, to me, is a larger bite. But again, we saw these dramatic trends, and we needed to get out in front of it.

[Michael Phillips:]

Okay, thanks. Kind of a related question, I guess. But some of their comments here where we’re starting to feel good about where we are today, going to wait for that to earn in. What do you think that means for how we should expect to see the marketing spend this year relative to last year?

[Tricia Griffith:]

Yes. So we will plan to spend as much as we can on marketing as long as we feel like rates are – the rates we have out there are appropriate as well as the fact that our acquisition costs go within our target – we want to have our targeted acquisition cost. So what the levers that we will use in places where we don’t think we have the rate just yet will be to turn off or slow down local advertising. We have some great plans around marketing. Again, we will – that will be dependent on each jurisdiction and where we feel we are as far as rate adequacy.

[Michael Phillips:]

Okay, thank you.

[Operator:]

Our next question comes from Greg Peters with Raymond James. Your line is open.

[Greg Peters:]

Good morning. I guess the first question, I’ll go to the projected loss ratio slides. I think that’s like Slide 21 – 20, 21. Well, you know the slides. You put them together. There is two pieces in there. There is the new business piece and the renewal piece. And I’m just curious about your perspective on new business. Traditionally, there is been a new business penalty. And I’m curious what your views are on new business penalty in this environment. And I’m wondering if it differs between, say, the agency segment and the direct segment, etcetera.

[Tricia Griffith:]

Yes. Well, I think of the new business penalty, for me, more on the direct side in terms of front-loading our acquisition costs in the first 6 months of the policy. As far as the projected loss ratio, I mean, I’m not – I’m hoping to answer your question. I mean I think that our new business, obviously, is negative right now in, I think, every single segment. We saw it initially in the agency business. I think they are very susceptible to any price increases based on the fact that they have a lot of opportunity to put business with their customers with others. I’m not sure if I answered your question or if you want to add anything.

[John Sauerland:]

I can add a little bit there. So there is really two objectives in pricing the business. One is the lifetime profitability of a customer and the other is hitting our calendar year targets, and we’re trying to achieve both, and sometimes there is a balance there to be had. As Tricia was noting in the direct business, new business runs a lot hotter than renewals. So because of that advertising expense that we incur completely upfront, less so in the agency channel, but we also see differing new versus renewal loss ratio differences across segments of customers. So there is a bigger new business penalty when you’re in the non-standard end of the spectrum relative to the preferred end of the spectrum. So we’re trying to balance the lifetime profitability of those customers as well as the calendar year profitability of the entire business when we’re making those decisions. As we were noting earlier, there are certainly markets right now where the underlying base rate level, if you will, is not adequate. And so those cases, we are restricting as much as we can because we’re pretty confident that we’re not going to hit our target margin on a lifetime basis for that business. There are other markets where we’re closer, and that’s where we’re playing the underwriting, the advertising levers to manage that again to the calendar year, but also to the lifetime targets.

[Greg Peters:]

Thank you. That was actually an excellent color on my question, which was kind of vague. Thank you. The second and follow-up question and I’m going to go off script here, if you’ll allow me, because I’d like to pivot to the commercial lines business for a second. And we get so few opportunities to talk with you. And the Commercial Lines business continues to, one, grow rapidly; two, produce results that are well in excess of your targets. Can you give us an update on what’s going on there? What areas of the market you’re having success in? And just give us a state of the union on the Commercial Lines business, please?

[Tricia Griffith:]

Yes. Absolutely. We feel incredibly proud of our results, both on the growth and profit over the last couple of years. One of the biggest areas in Commercial Lines where we’ve been able to grow is in our for-hire transportation segment, which makes a lot of sense. During COVID, goods need to be transferred across the country. Many of us stopped shopping and ordered. And so we really we’re in a great position to improve and increase our market share in that specific segment. We’ve been writing that for a lot of years. So the good news is we knew the underlying cost structure. We were conservative in our take rate. So we feel really good about that. Obviously, there is a couple of other things. We continue to grow in our TNC business. We added Protective as another part of our fleet. And across the board, we feel pretty good about growth – really good about growth in all of our BMTs. So just a really great part of the story where we saw an opportunity, we had the background and experience to write a lot more of that, and we took advantage of it.

[John Sauerland:]

I get excited talking about Commercial Lines, so I’ll tack on here. We’ve got a number of other things going on there, I think, are not as appreciated in the market as perhaps they should be. So usage-based rating in Commercial is going really well. It’s really predictive. Obviously, those trucks are driving a lot of miles. So the differential across those who are good drivers and those who are less good is pretty significant, and we’re pricing to that. We also have that information for a large group of customers at new business because truckers now have electronic logging devices that have that information, and we can input that into the new business rate. Relative to the Personal side where predominantly, we’re still using the information we gather at renewal versus new business. So Smart Haul is going really, really well. We also have a program we call Snapshot ProView that is also working well for smaller fleets. The other piece of Commercial that I think is pretty exciting is the direct channel. So we’ve all been sort of wondering when Commercial customers will sort of follow the Personal side and start shopping a bit more in the direct channel. COVID certainly, I think helped accelerate that and we are seeing great growth in our direct channel and commercial lines. I could go on into the BOP program as well. So, I think you are right to say, hey, it’s a very exciting segment of the business right now, the core, what we call business market targets, the trucks, etcetera, are doing really well, and we have got a lot of long-term runway to play in commercial lines beyond that.

[Tricia Griffith:]

Yes. Our BOP program is now in 34 states. We added 17 this year. So, obviously still small, but something, as I outlined, probably last year, a few years ago, our different horizons, we are excited about helping ensure those small businesses. So, that’s something that we think there is a lot of runway.

[Greg Peters:]

Got it. Thank you for the answers.

[Tricia Griffith:]

Thanks Greg.

[Operator:]

Our next question comes from Josh Shanker with Bank of America. Your line is open.

[Josh Shanker:]

Yes. Thank you. Looking through the 10-K, I was surprised at how much ad spending you did during 2021. And that tells me there is probably more seasonality in there than I am understanding, I assume it was heavily first half weighted. So could you, a, talk about the normal seasonality of ad spending at the firm? Talk about how that differed in 2021. And then the third part is that means that most of the savings that you guys did on the expense ratio really came from the G&A expense. How much of that expense can you save into ‘22 and later?

[Tricia Griffith:]

Well, it’s a multifaceted question. I would say, normally, we do spend a fair amount in the first half of any year, but we did dramatically reduce spend because of our profitability issues at the end of 2021. So, we wouldn’t have normally reduced it by that much. We did that as a reactive position based on what we saw with trend. And so we spend depending on when we believe that people are open to shopping, and that can vary. So, we did spend more in January of this year. I don’t know if Pat, do you want to add anything more to what we are feeling about from a media perspective.

[Pat Callahan:]

No, I think your response on the seasonality of ad spend is absolutely right. We spend when that will be efficient, media spend, and frankly, when we think we are priced adequately for the new business coming in. So, once – as Kanik and John laid out, severity started to take off with frequency in the second half of last year. We had some rational pullback there just simply because we weren’t comfortable with our rate level. Now, when we come into this year, as Tricia mentioned, we typically will spend more in Q1 ahead of what’s typical shopping season. And that’s what we saw in January, but it is more state-specific where we are open for business and turning on some media spend. Now, on a year-over-year basis, we had our best quarter ever in Q1 of 2021. So, from a spend and an efficiency perspective, we have got some tough comps coming ahead of us at this point in time. But really, our full year spend is 12 individual months of spend, highly controllable, on and off as we are comfortable with the efficiency of the spend and frankly, the adequacy of the underlying business we bring in for that spend.

[Josh Shanker:]

Thank you. And the permits of the G&A expense production in 2021?

[John Sauerland:]

So, we think of our non-acquisition spend as what we call our non-acquisition expense ratio, which generally you can think of as G&A expenses, the long-term trend there has been really good. So, we have taken out over the past, I don’t know, probably decade maybe four points in our non-acquisition expense ratio. Obviously, that allows us to be really competitive. And our goal is to continue to reduce that number. So, we obviously have scale at our advantage. We obviously are investing heavily in technology to continue to get consumers to self-service and be happy doing so. So, a lot of efforts around continuing to be competitive in our cost structure outside of acquisition, we would – if we are priced adequately, we would love to spend more on advertising. Obviously, we are going to have competitive commission for our agents to place as much business as they can with us. But the underlying G&A or non-acquisition expense ratio is where we focus on continuing to get more competitive.

[Josh Shanker:]

Thank you.

[Tricia Griffith:]

Thank you, Josh.

[Operator:]

Our next question comes from Paul Newsome with Piper Sandler. Your line is open.

[Paul Newsome:]

Good morning and thanks for the call. Covered a lot of ground, obviously, and very helpful. But I wanted to ask on the home business, how impactful could it be that on the auto business that you are trying to improve the profitability of the home business at the same time?

[Tricia Griffith:]

Yes. I mean I think we like to bundle, but we also want to make sure that we are positioned well for the long-term growth in the property channel. And we have continued to increase our Robinsons. We are proud of that. We want to do that – we just want to do it in – spread across more non-volatile weather states, so that we can make our target margin on those bundled customers. So, will we lose some customers from some of the de-risking decisions we are making in Florida on the auto side, likely, that might happen. We will wait to see how that happens. And of course, that also depends on what’s happening in the environment. So, when people shop, are they getting the same or better rate if they go to another competitor. So a lot of that, specifically in Florida, will be dependent on what the competitors do as well. So, I think people that want to bundle, you may take both your auto and home with you. We will work on trying to keep as much of the auto book of the property that we lose. But that’s yet to be known as we continue our plan to de-risk.

[John Sauerland:]

And in the direct channel, we do have the luxury of having multiple other companies that we work with, the place property business, and we will proactively work with those companies to try and place business that we no longer want to be writing on our own paper. And obviously, in the independent agency channel, most agencies have multiple options. So, I mean you are right. As Tricia noted, we will likely lose some auto business as we reduce the risk in our homeowners book, but we also expect to keep a lot of those auto customers because of the options that we have in the direct channel as well as that – which our agents have.

[Tricia Griffith:]

Yes. And I should do a shout-out because we have really invested a lot over the years in HomeQuote Explorer, where you can – we can go online, and now we have 34 states where you can have an online buy, which makes it just easier for consumers as well if they are shopping. So, they may have auto with Progressive, and the home could be with Progressive property, but then they could switch over to another one of our unaffiliated partners. So, John is right on point.

[Paul Newsome:]

And then I wanted to read the commercial auto business, but in the context of – you gave us some wonderful detail and information about private passenger auto and the frequency and severity trends that you have seen. But my sense is that, that result has been quite different in commercial auto. And I was wondering if you might touch upon those differences and why that might be?

[Tricia Griffith:]

Yes. The severity on commercial is up. When you look at the trailing 12 over the prior 12, up right around just under 14%, and frequency has come back to pre-COVID levels for the most part. We see a lot with our – as John said, we have our telematics on the commercial auto side. We see that speeding for some of our truckers are up about 10% to 20%. And we see that sort of correlated when there is more congestion out versus less congestion. So yes, those are higher limit policies. Obviously, we have talked in the past about social inflation around more attorney rep claims. So, we are seeing an increase in those trends in the commercial lines product as well.

[Paul Newsome:]

Okay. Thank you very much.

[Tricia Griffith:]

Thank you.

[Operator:]

Our next call is from Yaron Kinar with Jefferies. Your line is open.

[Yaron Kinar:]

Thank you. Good morning. First question, going back to the ad spend. In direct, I think we saw over three points of sequential increase in the expense ratio in January. How much of that is from the marketing and advertising seasonality versus other seasonality and maybe just other?

[Tricia Griffith:]

Yes. I would say a portion of it, I said – I wouldn’t take one month, like you said, for much. I think expenses are usually up in January regardless, and a portion of it was media, but not a huge amount.

[Yaron Kinar:]

Okay. And then in the 10-K, bodily injury severity has been elevated all through 2021. Why would we see the year-over-year increases in ‘21 when I think we already saw the impact from greater speeding and kind of more material accident velocity, if you will, in 2020. So, what’s driving the increase in ‘21? And how much visibility do you have into the bodily injury severity going forward?

[Tricia Griffith:]

Yes. A lot of it in – at least in Q4 would be around attorney rep rate, and so a lot of the medical inflation. We also, as we have been hiring on new claims reps, that – the propensity to how the handling is done and the accuracy can be a little bit different as those claims reps get trained. And so that was probably a part of it as well. So, that’s what we are seeing in quarter four. But a lot of the inflation is around attorney rep rate. And it will be interesting to see as more and more treatment facilities open up if that changes as well. So, we will watch that closely.

[Yaron Kinar:]

Thank you.

[Operator:]

Our next question comes from Tracy Benguigui with Barclays. Your line is open.

[Tracy Benguigui:]

Thank you. Good morning. On insurance, I really like your rate-making presentation, super helpful. So, I have a quick numbers question, and then my follow-up is more conceptual on the numbers in your 10-K. You mentioned it’s better to assess 2021 loss trend versus 2019 and year-over-year. So, if I just zero in on your reported severity auto physical damage, what is driving the more muted 8% for ‘21 versus ‘19, then the 9% in 2020 versus 2019? I guess I would assume supply chain disruptions would take a larger toll in 2021 on auto physical damage.

[Tricia Griffith:]

Yes. I think just used car parts similar to collision, but you might see it a little bit of a delay. But used car prices, parts prices, rental car increases, all those things are coming into play as well. We just think that it’s good to look at, especially – I even think not even just year-over-year when we compare to ‘19. We obviously have that data. But there is so much changing right now that I am really looking at quarter-over-quarter comparison. So, that’s where we are at on physical damage. We believe we will see similar trends continue to emerge from – similar the collision.

[Tracy Benguigui:]

So, there is a delay in recognizing that? Is that what you are saying?

[Tricia Griffith:]

Well, yes, there is a little bit of a delay in recognizing that. I think on – I think we see that from our competitors as well. We see that in our subrogation files of getting some of the data in from other companies in inbound sub, so a little bit of a delay, yes.

[John Sauerland:]

So, just a little clarity on what we are saying there. So, when we have a first-party total loss collision, we are going to pay that immediately. We are going to recognize the elevated cost of new and used cars right now when we are settling that claim. When we have a property damage claim, some of those claims we pay directly, and we would recognize that expense. Some of those claims – the parties are going through their personal auto carrier, and then that auto carrier reaches out to us and subrogates us, meaning they ask for the payment, and that is when we will see some of the increase in the total loss rate. We try and project that, obviously, in our reserves to be as accurate as possible in a world where it is moving as quick as it is right now, we don’t always have that perfect. So, as we see more of those demands for total loss settlements from other insurance carriers, we are going to – we expect to see some similar experience in the property damage.

[Tricia Griffith:]

I had mentioned that overall severity was up comparing ‘19 quarter four to ‘20 – to ‘21 quarter four at about 11.9 property damages. I said collision was up significantly from severity. Property damage is up as well, not as significant as collision, but it is higher than the 11.9.

[Tracy Benguigui:]

Okay. Thank you so much. And I guess my next question is more conceptual. So, is my understanding that more Midwest states are on-board with the rate increases, and it just feels like the catastrophe prone states are driving their feet more. So, I am thinking that might be a function of regulators being sensitive to higher homeowner rates. So, they are trying to cap the auto rate increases to put a lid on the overall insurance premiums for its constituents. I am also seeing in regulatory filings, some states do not think miles driven is going to snap back to pre-pandemic levels, reflecting a secular shift in a hybrid work environment. So basically, this is my long way – long and good way of asking you the psychology of rate increases by state and how that may impact your ability to achieve your indicated rate need?

[Tricia Griffith:]

Yes. I mean I think that we are all watching vehicle miles traveled and frequency closely. And it’s not back to pre-COVID amounts. That said, severity is so far outpacing that from all the things we talked about. Whether it’s medical inflation, car price, rental cars, et cetera, that we need rate and I have said this in the last call. And so there is – each individual like John and Kanik said, there is 51 jurisdictions we work with to try to make sure that our rates are adequate and not excessive and not unfairly discriminatory. I do believe that regulators care a lot about their constituents. And so they want to be very careful as they increase the cost because there is other inflationary things that are happening in each household. So I can’t get into the psychology of it because we are just such a data-driven company that – that’s what we look at. And so we will continue to do so. And our hope is that we get a handful of states where we still need rate. We get that in short order. So, we can be open and available and affordable for every constituent in the entire United States.

[Tracy Benguigui:]

Would it be fair to say you have to almost change the playbook by state just considering each nuanced concern?

[Tricia Griffith:]

Absolutely. Yes. That’s the fun part of working in a regulated industry because there is a lot of different personalities of each state. And we – and that product management relationship that we talked about is so integral to that success. And so we actually think that’s a great advantage. And yes, each state is very different.

[Tracy Benguigui:]

Thank you.

[Operator:]

Our next question comes from David Motemaden with Evercore ISI. Your line is open.

[David Motemaden:]

Hi. Good morning. Susan, you spoke a bit about some of the states where you are feeling good about in terms of what rates you have right now on the Street. Could you give us a sense for how much of the book right now is priced to where you think you can start turning on more ad spend and other growth levers? And also, any thoughts on timing of rolling out more ad spend across the rest of your brokers?

[Tricia Griffith:]

Great question, difficult to answer. Like we said, we look at each state, and we were able to turn on local advertising – turn on and off local advertising pretty quickly. So, I mean as soon as we believe we have the rates right and that we can turn on media to get more new business at our allowable cost, we will do so. But it’s really dependent on each state. We want to do that. We want to open up each lever to do that, but it really is dependent on getting not just in the states that we just talked about, but in every state to make sure we continue to stay ahead of trend.

[David Motemaden:]

Got it. Thanks. And then I was hoping maybe you could talk a little bit about some of the drivers of the deterioration in personal auto PIF growth in January. It took a step down, was kind of around like 6% year-over-year in the fourth quarter, and then it took a step down to 4% year-over-year in January. And I am specifically talking about personal auto. I am just wondering, is that still – is that just still mainly new business that is driving that deterioration, or are we starting to see some of the renewal book start to get impacted by some of the rate increases, because I did see that the PLEs are still up, but that was obviously for 2021, and I am specifically wondering about January.

[Tricia Griffith:]

Yes. We still are seeing new business shrink, and that makes sense with our pricing. And from the renewal perspective, I think we talked about in the K that trailing three was dropping a little bit. And so it’s reasonable to believe that trailing 12 could drop as well. But again, that’s all dependent on what our competitors do as well. When we look at elasticity, it’s not just what’s happening here. It’s what the competitors are doing. And we look at our renewal rates in sort of tranches of if we take plus 5%, 5% to 10%, etcetera, to see what happens. And we are seeing some – we believe some improvements from slowing down in some of the tranches where our competitors are taking rate. And that could mean we – there is a lot of variables here, that could mean that they are taking rates as well. So, when our customers get an increase in their renewal rate and they shop, they might stay because they can’t get a better rate. Again, we are not seeing that play through yet in the trailing 12. The trailing three can be an indicator. And that’s why we want to get out ahead of this to sort of get the rates stable as quickly as possible in 2022, so we can all focus on doing our job as an industry and be really competitive, drive down those costs so people have affordable ways to buy insurance.

[David Motemaden:]

Great. Thank you.

[Operator:]

Our next question comes from Alex Scott with Goldman Sachs. Your line is open.

[Alex Scott:]

Hey. Thanks for taking the questions. I thought I would ask a high-level one. I mean Slide 26 and 28 seem to pretty clearly show there is a significant range of outcomes here. And that would logically sort of make it harder to lean into your confidence on the lifetime value of customers and hitting the growth pedal. As I think through that dynamic, what would you need to see in terms of the range of outcomes and getting a little more certainty around at least how wide the range of outcomes is to be able to have confidence in that? I would think even at a adequate level of pricing for your base case, thinking through lifetime value still could be challenging with a wider range of outcomes. Can you just talk high level about how you think through that and when we could expect to have enough clarity to kind of lean in harder on growth?

[Tricia Griffith:]

It’s so hard to say because there are so many moving parts constantly. So, where we would think, okay, we come into February, the weather is going to be nicer, places are opening up, but then you have the invasion of Ukraine. So, what happens with fuel prices, although that’s usually a small part of our frequency trend. We – I would say, if you have a couple of quarters of some stability in seeing what’s happening as an example, to see if used car prices and the chip shortage starts to ease up, we would start to follow that and feel better about that. But we – our math, we believe, is accurate of what we need now, and that’s really what we focus on in order to make sure that we ultimately have that lifetime value of that profitable growth of the 96.

[Alex Scott:]

Understood. And then I just wanted to make sure I am interpreting Slide 28 right. I know these cones are probably just rough guides. But in your base case, are you sort of inherently assuming here that the used car prices will go up, and that will have an incrementally worse impact on severity? Is that what’s being embedded in sort of your base case right now?

[Tricia Griffith:]

Not necessarily. In fact, we have seen a small amount of data that says they are leveling off and maybe even decreasing a little bit. Again, that’s very early data. And there is a lot of economists that can – could talk either up or down. But no, that wouldn’t be an assumption.

[Alex Scott:]

Okay. Thank you.

[Tricia Griffith:]

Thank you.

[Operator:]

Our next question comes from Gary Ransom with Dowling & Partners. Your line is open.

[Gary Ransom:]

Yes. Good morning. A few years back, you talked about a feature in your product that increased the rates automatically month-to-month. Is that a product that is still in use today? And if so, is the impact of that included in the 8% that you gave us for the full year rate increase?

[Tricia Griffith:]

Yes. I will start, and then, Pat, you can weigh in. We do have monthly rating factors, and they are baked into the rates you are seeing. Do you want to add anything else?

[Pat Callahan:]

Sure. We don’t have them in all jurisdictions. So, we would love to, but regulators don’t approve it everywhere. So, I think we have it in roughly half of the country. And as you can expect, we don’t tweak those trend factors as probably as sensitively or quickly as we might. So right now, I think it’s at below what we are seeing with current net future trend. Now it helps because we are picking up every month additional rate without a filing in roughly half of our states, but it’s not set to what we are seeing in this sort of super steep current trend environment, but it is helping. So yes, still on the products, still available, and our product managers are using it.

[John Sauerland:]

Well, I would add to Tricia’s comment that December’s take rate for Snapshot were the highest we’ve seen ever. So yes, there were some influence from the pandemic on take rate there. But I think overall, there has been a growing acceptability in usage-based as a rating variable for auto insurance. And I think our December take rate in both channels, as Tricia mentioned, are indicative of that. So, we also obviously see competitors continuing to grow there, their UBI programs as well, which I think in aggregate enhances acceptability perceptions as well. So, we think that is definitely part of our future and even more so as the technology and vehicles allows us to get that new business. I was mentioning our ability to do that in the commercial space. And we have very limited ability to do that in the personal auto space, but we are doing it with data right from vehicles, but it’s a small percentage of what we do. So, I think I would characterize take rate as continuing to grow. And with technology evolving, it’s going to be an integral part of the product going forward.

[Tricia Griffith:]

And it’s a great way for our customers that they do see increases and they believe they are driving less to be able to get some discounts.

[Gary Ransom:]

Right. Can I clarify the 10% and 40% numbers that you gave, that’s 10% of new business apps in agency were Snapshot and 40% in direct were Snapshot, is that what you meant?

[Tricia Griffith:]

Correct.

[Gary Ransom:]

Correct. Okay. Thank you very much.

[Tricia Griffith:]

Thanks Gary.

[Operator:]

Our next question comes from Meyer Shields with KBW. Your line is open.

[Meyer Shields:]

Thanks. Two, hopefully, really quick questions. First, there was a fair amount of exit today on the six-month policies as being away from pointing changes faster and earning them faster. The proportion of 12-month policies have been going up at least in agency. And I was wondering whether we should expect an effort to maybe convince some of those drivers to move to six-month policies.

[Tricia Griffith:]

Yes. It’s still a small percentage. It’s less than 10% of our overall auto book. It’s in the agency channel. Basically, we gave it to our 4,100 Platinum agents because many people, when they do want to bundle want to have the dates align. So, we will continue to watch that percentage, but it is something that, as we rolled out for our preferred customers for our Robinsons, it was something that our agents asked for in order to write more of that business.

[Meyer Shields:]

Okay. And then if I can go back to the cones on Slide 28. Obviously, I guess you have to select a point within there. Does the position of the point within the cone depend on the volatility of the input?

[John Sauerland:]

I can try that. This is simply an illustrative way to say we are not totally sure where the value of used cars is going. It’s obviously been going up dramatically. As Tricia noted, we have seen some recent signs that it might be leveling off. We are certainly not pricing in our indications to anywhere towards the top of that cone. I would characterize our pricing assumptions more so towards the middle of the cone. But the reality is we – only time will tell where we ultimately fall in those cones. And that’s the challenge of our business, and that’s the point we are trying to get across in John and Kanik’s presentation. And when we are trying to price for the future. The future is unknown, but we are not pricing towards the top of that. I would characterize our pricing assumptions as – towards the middle of that cone.

[Tricia Griffith:]

Yes. Meyer, our hope is, obviously, like John said, it was illustrative. But our hope is that as we have more data and as things stabilize, that cone narrows as well.

[Meyer Shields:]

Okay. Thank you.

[Doug Constantine:]

We have exhausted our scheduled time. And so that concludes our event. Janet, I will hand the call back over to you for the closing scripts.

[Operator:]

That concludes the Progressive Corporation’s fourth quarter investor event. Information about a replay of the event will be available on the Investor Relations section of Progressive’s website for the next year. You may now disconnect.