Progressive 10-Q 2023-03-31

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended March 31, 2023

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: 585,366,448 outstanding at March 31, 2023

PART I—FINANCIAL INFORMATION

The Progressive Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income

(unaudited)

1 Changed to a floating dividend rate. See Note 1 – Basis of Presentation for further discussion.

See notes to consolidated financial statements.

The Progressive Corporation and Subsidiaries

Consolidated Balance Sheets

(unaudited)

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I. OVERVIEW

During the first quarter 2023, The Progressive Corporation’s insurance subsidiaries recognized strong growth in both premiums written and policies in force, compared to the same period last year, but the underwriting margin fell short of our goal to earn 4% on an aggregate calendar-year basis.

Our combined ratio of 99.0 for the first quarter 2023 was 4.5 points higher than the same period last year. The variance from the prior year was due, in large part, to unfavorable prior accident years reserve development of 4.6 points for the first quarter 2023, compared to 1.6 points in the prior year first quarter. The development during the first quarter 2023 was primarily in our personal auto products and reflected higher than anticipated severity, more late reported injury claims than expected, and increased loss costs in Florida due, in part, to recently passed legislation in the state, as discussed below.

During the first quarter 2023, companywide net premiums written grew 22% over the first quarter last year with all operating segments contributing to the growth. We generated $16.1 billion of net premiums written, which was an increase of $2.9 billion, compared to first quarter 2022. We ended the quarter with 28.8 million policies in force, which was an increase of 2.3 million policies, or 9%, over March 2022, and 1.4 million, or 5%, over year-end 2022. We believe that the growth during the quarter, in part, reflected our price competitiveness as many competitors continued to take rate increases. While growth is an important objective, achieving our target profit margin takes precedence over growing premiums. As discussed below, we plan to take actions that we believe are necessary to allow us to achieve our calendar-year underwriting profitability goal of 4%, which could result in less premium and policy growth.

On a year-over-year basis, net income increased 43% for the first quarter 2023. This growth reflected increases in both our recurring investment income, which grew 73% over the first quarter last year, as well as recognizing $104.4 million of net holding period gains on our common equity portfolio this quarter, compared to $388.6 million of net holding period losses for the first quarter last year. These strong investment results were offset, in part, by a 78% decrease in our underwriting profit due to the reasons discussed above.

For the first quarter 2023, we recognized comprehensive income of $1.1 billion, compared to a comprehensive loss of $1.1 billion in the same period last year. The fair value of our fixed-maturity securities increased by $0.6 billion during the first quarter, compared to a decrease in fair value of $1.4 billion for the first quarter 2022. The change in fair value reflected a modest decline in interest rates

during the first quarter 2023, compared to a significant rise in interest rates in the first quarter last year.

Total capital (debt plus shareholders’ equity) at March 31, 2023, was $23.3 billion, which was up $1.0 billion from year-end 2022, primarily due to our comprehensive income earned in the first quarter 2023.

A. Insurance Operations

During the first quarter 2023, our Personal Lines and Commercial Lines businesses generated an underwriting profit margin of 1.3% and 1.6%, respectively. Our Property operating segment recognized a 5.5% underwriting loss margin during the quarter, which included 24.3 points due to the significant losses incurred from tornado, wind, and thunderstorm catastrophe losses. The special lines products profitability during the first quarter 2023 contributed about a favorable 2 points to the Personal Lines underwriting margin for the quarter.

During the first quarter 2023, we experienced companywide unfavorable prior accident years reserve development of $621.2 million, or 4.6 points, as a result of claims settling for more than reserved and changes in our reserve estimates. Throughout the quarter, we continued to see volatility in our severity trends as the average costs to settle a claim increased over the same period last year.

Nearly 70% of the unfavorable development was in our personal auto products and primarily resulted from higher than anticipated severity and increases in incurred losses on previously closed claims. For the first quarter 2023, our personal auto incurred severity was up about 10%, while accident frequency was relatively flat on a year-over-year basis.

In addition, to a lesser extent, the unfavorable personal auto development reflected the impact of the recently passed legislation in Florida that resulted in a significant number of lawsuits being filed prior to its March 2023 effective date. While this tort reform could have a positive impact on the insurance industry in Florida in the long term, during the first quarter we increased our reserves for the potential exposure on existing claims, which had less than a one-point impact on our companywide combined ratio for the first quarter 2023. Since its passage, legislative efforts have arisen that, if adopted, could undo or dilute the potentially positive long-term benefits of the March legislation. We will continue to monitor the ever-changing regulatory environment and will respond as necessary.

Our Commercial Lines business represented almost 25% of the unfavorable development and was mainly due to late reported claims from prior accident periods and changes in reserve estimates (e.g., aging of the reserves, changes to estimates by adjusters, and inflation factors). The

remaining unfavorable development was primarily in our Property business with our special lines products experiencing minor unfavorable development during the quarter.

During the first quarter 2023, we increased personal auto rates in 31 states, with an aggregate countrywide increase of about 4% and we continue to earn in the aggregate countrywide net increases of 13% that we took during 2022.

Returning to profitability in our Property business continues to remain a priority for us. In addition to our focus on shifting our concentration mix between states, we continued to adjust rates to address profitability concerns. In the first quarter 2023, we increased rates by about 3% across our Property product lines, bringing the trailing four quarters close to an aggregate rate increase of about 20%.

As stated above, we strongly believe that achieving our target profit margin takes precedence over growing premiums. With focus on achieving our calendar-year underwriting profitability goal of 4% and the fact that inflation has not abated, we are re-evaluating our rate plans and intend to be aggressive with raising rates over the remainder of the year in both our personal and commercial auto products. Of course, some of these rate increases will be subject to regulatory approval. We will also continue to monitor the factors that could impact our loss costs for both our vehicle and Property businesses, which can include new and used car prices, miles driven, driving patterns, loss severity, weather events, building materials, constructions costs, inflation, and other components, on a state-by-state basis, and these factors could change our current plans for rate increases. In addition, we routinely monitor our advertising spend and have recently begun to reduce these costs based on performance against our underwriting targets in certain markets and in certain types of advertising. As a result of these actions to address profitability, growth in premiums and/or policies in force could be adversely impacted.

For the first quarter 2023, net premiums written grew 22% on a companywide basis over the same period last year, primarily driven by new business applications and rate increases that continued through the first quarter 2023. Personal Lines grew 25%, Commercial Lines 15%, and Property 17%. Changes in net premiums written are a function of new business applications (i.e., policies sold), premium per policy, and reten

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The duration of the financial instruments held in our portfolio that are subject to interest rate risk was 3.0 years at March 31, 2023, 3.1 years at March 31, 2022, and 2.9 years December 31, 2022. The weighted average beta of the equity portfolio was 1.02 at March 31, 2023, 1.04 at March 31, 2022, and 1.0 at December 31, 2022. 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, 2022.

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

Item 1. Legal Proceedings.

For a discussion of legal proceedings see Note 11 – Litigation to the consolidated financial statements, which is incorporated herein by reference.

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, 2022.

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 first quarter 2023, all repurchases were accomplished in conjunction with our equity incentive awards at the then-current market prices; there were no open market purchases during the quarter.

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 underleveraged 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.

• On April 28, 2023, The Progressive Corporation entered into an Amendment to Discretionary Line Documents (the Amendment) to its unsecured, discretionary line of credit dated April 28, 2017, as amended (the Line of Credit), between The Progressive Corporation and PNC Bank, National Association (PNC), to renew the Line of Credit. The Amendment increased the Line of Credit to a principal amount of $300 million from $250 million and extended the expiration date to April 30, 2024. Subject to the terms and conditions of the Line of Credit documents, advances under the Line of Credit (if any) will bear interest at a variable rate equal to 1-month term Secured Overnight Financing Rate (SOFR) plus 1.10%. Each advance under the Line of Credit must be repaid on the 30th day after the date of the advance or, if earlier, April 30, 2024, the expiration date of the Line of Credit. Prepayments are permitted without penalty. The Line of Credit is uncommitted and, as such, all advances are subject to PNC’s discretion. The Progressive Corporation also entered into an Amended and Restated Discretionary Line of Credit Note (the Note) substantially in the form filed herewith reflecting the increased amount, the new interest rate and other terms and conditions as more fully set forth therein.

The foregoing description of the Amendment and the Note does not purport to be complete and is qualified in its entirety by reference to the Amendment and the Note, copies of which are filed as Exhibits 4.1 and 4.2 hereto and are incorporated herein by reference.

See exhibit index contained herein beginning on page 57, which is incorporated by reference from information with respect to this item.

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.