Progressive 10-Q 2022-09-30

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended September 30, 2022

or

For the transition period from to

Commission File Number: 001-09518

THE PROGRESSIVE CORPORATION

(Exact name of registrant as specified in its charter)

(440) 461-5000

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. ☒ Yes ☐ No

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). ☒ Yes ☐ No

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ☐ Yes ☒ No

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.

Common Shares, $1.00 par value: 585,069,712 outstanding at September 30, 2022

PART I—FINANCIAL INFORMATION

The Progressive Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income

(unaudited)

1 See Note 12 – Goodwill and Intangible Assets for further discussion.

See notes to consolidated financial statements.

The Progressive Corporation and Subsidiaries

Consolidated Balance Sheets

(unaudited)

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I. OVERVIEW

The Progressive Corporation’s insurance subsidiaries recognized growth in both premiums written and policies in force during the third quarter 2022, compared to the same period last year. For the third quarter 2022, our underwriting profit margin of 0.8% fell short of our targets in large part due to the impact from Hurricane Ian and was better than the underwriting loss margin of 0.4% recognized during the same period last year. For the third quarter 2022, our underwriting profit was $94.3 million, compared to an underwriting loss of $46.9 million for the third quarter last year. The increase in underwriting profitability contributed to the 5% increase in net income on a year-over-year basis. Our comprehensive loss for the third quarter 2022 was $785 million greater than the comprehensive loss incurred in the third quarter 2021, due to the significant decline in the market value of our fixed-maturity securities, reflecting higher interest rates and wider credit spreads over the last 12 months. Total capital (debt plus shareholders’ equity) at September 30, 2022, was $21.2 billion, which was down $2.0 billion from year-end 2021, primarily due to our $3.3 billion comprehensive loss for the first nine months of 2022, in part offset by our $1.5 billion debt issuance in the first quarter 2022.

During the third quarter, we generated $13.0 billion of net premiums written, which is an increase of $0.6 billion, or 5%, compared to third quarter 2021, primarily reflecting rate increases taken during 2021 and the first nine months of 2022. We ended the third quarter 2022 with 26.9 million companywide policies in force, which is 300,000 more policies than were in force at September 30, 2021. Personal auto policies in force decreased 1% year over year, while our Commercial Lines, special lines, and Property products grew policies 9%, 5%, and 4%, respectively. On a year-over-year basis, new personal auto applications increased for the third quarter and were down the first nine months of 2022. During the quarter, we believe targeted advertising spend and competitor rate increases spurred the new personal auto application growth, which partially offset the decreases in renewal applications during the quarter and the decreases in new auto applications experienced during the first half of 2022 that reflected rate increases and decreased advertising spend during that period.

During the third quarter 2022, we generated an underwriting profit margin of 0.8%, which was below our 4.0% underwriting target profit goal. Catastrophe losses reduced our profit margin by about seven loss ratio points for the third quarter with Hurricane Ian, which mostly impacted Florida, accounting for 86% of catastrophe losses during the period. Excluding loss adjustment expenses, we incurred $585 million of vehicle losses and $175 million of net Property losses after reflecting the catastrophe reinsurance coverage we have on our Property business. Special Lines catastrophe losses, primarily boat losses, accounted for nearly $290 million of the total vehicle losses and personal auto accounted for about $285 million. The balance of the vehicle losses from the storm were minimal and were incurred in our commercial auto products. On the Property side, we retained $25 million of allocated loss adjustment expenses. Under our excess of loss reinsurance program, our total retention for combined losses and allocated loss adjustment expenses is $200 million.

A. Insurance Operations

For the third quarter 2022, we experienced a companywide underwriting profit margin of 0.8%, compared to our target profit margin of 4% and an underwriting loss margin of 0.4% for the same period last year. Net premiums written grew 5% over the third quarter last year, reflecting rate increases that began in the second quarter of 2021 and continued through the third quarter 2022, while policies in force increased 1% on a companywide basis. The distribution of profitability and growth varied by segment during the third quarter 2022 as discussed below.

During the third quarter 2022, Commercial Lines was our only profitable operating segment, generating an underwriting profit margin of 10.3%, while our Personal Lines business broke even and our Property operating segment generated a 25.1% underwriting loss margin due to the significant losses incurred from Hurricane Ian during the quarter. Special lines products contributed about 3 points of underwriting loss to the Personal Lines results for the third quarter. In total for the third quarter, catastrophe losses were up 0.7 points on a year-over-year basis with catastrophe losses up nearly 60% in Personal Lines and down about 35% in our Property business. Our Commercial Lines business represented less than 2% of our total catastrophe losses given the nature of the business and that most commercial auto customers move their vehicles out of the path of the storms to protect their businesses. For the third quarter 2022, our personal auto incurred accident frequency was down about 9%, compared to the prior year. We continued to see inflationary pressure in the average costs to settle a claim, driven primarily by the increase in the valuation of new and used vehicles on a year-over-year basis, which led to an increase in severity of about 13% over the third quarter last year.

In the aggregate, we raised our personal auto rates during 2021 by about 8% and for the first half of 2022 by 9%. During the third quarter, in addition to raising personal auto rates about 2% in the aggregate countrywide, we shifted our focus to evaluating underwriting restrictions, bill plans, and media spend to identify growth opportunities. During the quarter, quotes increased more than 20% in both the Agent and Direct auto channels and total personal auto new business applications

increased 20%. Our competitors continued to raise rates to address their underwriting profitability issues, which also had a positive impact on our competitive positioning and we believe contributed to our new business application growth. We currently believe that, with the exception of a few key states, the major personal auto rate increases are behind us for the remainder of 2022. However, management continues to assess new and used car prices, miles driven, driving patterns, loss severity, weather events, inflation, and other components of expected loss costs on a state-by-state basis for our personal auto business and will file for rate adjustments where deemed necessary.

We believe a key element in improving the accuracy of our rating is Snapshot®, our usage-based insurance offering. During the first nine months of 2022, the adoption rates for consumers enrolling in the program, when given the option, increased nearly 20% in Agency auto and nearly 15% in Direct auto, compared to the same period last year. Our latest model is available in states that represented about 11% of our countrywide personal auto premium. We continue to invest in our mobile application, with mobile devices being chosen for Snapshot monitoring for the majority of new enrollments.

During the third quarter 2022, we remained focused on taking rate and non-rate actions in our Property business to reduce volatility in our underwriting results, as discussed below. We increased rates in our Property businesses about 2% and 9% during the third quarter and first nine months of 2022, respectively, and 9% during the last 12 months. These targeted rate increases are continuing to be earned into the book of business.

We continue to focus our Property growth efforts in states with traditionally less catastrophe exposure and limit growth in the coastal and hail-prone states. In response to this effort, in 2021, we announced plans to non-renew about 60,000 policies in Florida, which we started doing in the second quarter 2022. This effort to non-renew Florida policies was curtailed, in part, as new legislation was introduced in Florida po

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The duration of the financial instruments held in our portfolio that are subject to interest rate risk was 2.7 years at September 30, 2022 and 3.0 years at both September 30, 2021 and December 31, 2021. The weighted average beta of the equity portfolio was 1.01 at September 30, 2022 and was 1.04 at both September 30, 2021 and December 31, 2021. We have not experienced a material impact when compared to the tabular presentations of our interest rate and market risk sensitive instruments in our Annual Report on Form 10-K for the year ended December 31, 2021.

We, under the direction of our Chief Executive Officer and our Chief Financial Officer, have established disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. The disclosure controls and procedures are also intended to ensure that such information is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.

Our Chief Executive Officer and our Chief Financial Officer reviewed and evaluated our disclosure controls and procedures as of the end of the period covered by this report. Based on that review and evaluation, the Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effectively serving the stated purposes as of the end of the period covered by this report.

There have not been any changes in our internal control over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II—OTHER INFORMATION

There have been no material changes in the risk factors from those discussed in Item 1A, Risk Factors included in our Annual Report on Form 10-K for the year ended December 31, 2021.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

(c) Share Repurchases

In May 2022, the Board of Directors approved an authorization for the Company to repurchase up to 25 million of its common shares. This authorization does not have an expiration date. Share repurchases under this authorization may be accomplished through open market purchases, including trading plans entered into with one or more brokerage firms in accordance with Rule 10b5-1 under the Securities Exchange Act of 1934, through privately negotiated transactions, pursuant to our equity incentive awards, or otherwise. During the third quarter 2022, all repurchases were accomplished in conjunction with our equity incentive awards or through the open market at the then-current market prices.

Progressive’s financial policies state that we will repurchase shares to neutralize dilution from equity-based compensation in the year of issuance and as an option to effectively use under-leveraged capital.

President and CEO Susan Patricia Griffith’s quarterly letter to shareholders is included as Exhibit 99 to this Quarterly Report on Form 10-Q.

See exhibit index beginning on page 61.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.