Progressive 10-Q 2023-06-30

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended June 30, 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: 585,333,630 outstanding at June 30, 2023

PART I—FINANCIAL INFORMATION

The Progressive Corporation and Subsidiaries

Consolidated Statements of Comprehensive Income

(unaudited)

1 Changed to a floating dividend rate in March 2023. See Note 1 – Basis of Reporting and Accounting 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 second 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 100.4 for the second quarter 2023 was 4.8 points higher than the same period last year. The variance from the prior year was primarily due to unfavorable prior accident years reserve development and higher catastrophe losses, which were, in part, offset by a reduction in expenses, mainly due to a decrease in advertising spend during the quarter, as discussed below.

During the second quarter 2023, we experienced unfavorable prior accident years reserve development of 3.4 points, compared to favorable development of 0.4 points during the second quarter last year. As discussed in more detail below, about 90% of the second quarter and 80% of the year-to-date unfavorable prior year development was in our personal auto products. In addition to prior accident years development, we implemented current accident year actuarial adjustments that added 2.0 points to the second quarter combined ratio, also predominately in our personal auto products.

During the second quarter 2023, we experienced 19 catastrophic weather events that contributed 7.1 points to the underwriting loss, compared to 4.3 points of catastrophe losses for the second quarter last year. These storms were broad-based and impacted 35 states during the quarter. Nearly 60% of the catastrophe losses were in our vehicle businesses while the remaining was in our Property segment. During the first half of 2023, only six states were not affected by catastrophic events.

First quarter 2023 profitability failed to meet our stated calendar-year goal of a 96 combined ratio, so we entered the second quarter focused on expense management. Our expense ratio was 1.7 points lower in the second quarter 2023, compared to the same period last year. During the second quarter 2023, we decreased our advertising spend 34%. The reduction in advertising spend in concert with premium growth reduced the contribution of advertising to our combined ratio by 2.0 points. We currently plan to continue to manage our expenses and discretionary spend to further our goal of achieving our target profitability.

During the second quarter 2023, companywide net premiums written grew 18% over the second quarter last year, with all operating segments contributing to the growth. We generated $14.7 billion of net premiums written, which was an increase of $2.3 billion, compared to second quarter 2022. We ended the quarter with 29.6

million policies in force, which was an increase of 3.1 million policies, or 12%, over June 30, 2022, and nearly 790,000 more policies than were in force at the end of the first quarter 2023, and 2.2 million more than year-end 2022. The increase in policies in force reflected both strong new application growth and improved retention in our personal auto products as competitors also continued to raise rates.

In addition to policy growth, the year-over-year growth for the quarter reflected rate increases that continue to earn in across all of our operating segments. While growth is an important objective, achieving our target profit margin takes precedence over growing premiums. During the second quarter 2023, we continued to take rate and non-rate actions that we believe are necessary to allow us to achieve our calendar-year underwriting profitability goal of 4%. As discussed below, we plan to continue to take actions, which could result in less premium and policy growth.

On a year-over-year basis, for the second quarter 2023, net income increased 164% and comprehensive loss decreased 92%. The year-over-year increase in net income primarily reflected net realized gains on securities during the second quarter 2023, compared to net realized losses for the same period last year. We recognized less holding period losses on securities in the second quarter 2023, compared to last year, reflecting less volatility in equity market valuations. In addition, the increase in net income benefited from a 55% increase in recurring investment income, primarily due to an increase in interest rates on floating-rate securities in our portfolio, an increase in average assets resulting from premium growth, and investing new cash and cash from maturities in higher interest rate securities given the rising interest rate environment. In addition, in the second quarter of 2022, we recorded a $224.8 million one-time, non-cash, goodwill impairment charge. See Note 12 – Goodwill and Intangible Assets for further discussion.

The quarter-over-prior-year quarter decrease in comprehensive loss reflected both the increase in net income and a lower amount of net unrealized losses on our fixed-maturity securities, which experienced a loss of $455.6 million in the second quarter 2023, compared to a loss of $822.8 million in the prior year, with both periods being primarily driven by the then-current interest rate environment, with a significant rise in interest rates during the first half of last year.

Total capital (debt plus shareholders’ equity) at June 30, 2023, was $23.6 billion, which was up $1.3 billion from year-end 2022, primarily due to our comprehensive income earned in the first half of 2023 and the May 2023 issuance

of $500 million of 4.95% senior notes, for which the funds are intended to be used for general corporate purposes.

A. Insurance Operations

Our Personal Lines and Commercial Lines businesses generated an underwriting profit margin of 0.5% and 3.6%, respectively, during the second quarter 2023. Our Property operating segment recognized a 33.2% underwriting loss margin during the quarter, which included 66.7 points due to the significant losses incurred from catastrophic weather events. The special lines products generated an underwriting profit during the second quarter 2023, which had a minimal impact on the Personal Lines underwriting margin for the quarter.

We experienced companywide unfavorable prior accident year reserve development of $489.3 million and $1,110.5 million, or 3.4 and 4.0 points, for the three and six months ended June 30, 2023, respectively. Approximately 90% of the development for the second quarter and 80% year to date was in our personal auto products. Approximately half of the personal auto product development for both periods related to property and physical damage claims, reflecting unprecedented increases in severity trends on previously closed claims, relative to comparable periods last year. The contributors to the increased trends came from a variety of sources, including longer vehicle repair times, longer periods for providing rental vehicles, and increases in the price for parts and labor rates. Florida injury and medical claims also contributed significantly to prior accident year development, as did late reported injury claims countrywide, but to a lesser extent.

These factors impacted the second quarter prior accident year development in a similar manner. Throughout the quarter, we continued to see elevating severity trends as the average costs to settle a claim increased over the same period last year. For the second quarter 2023, our personal auto incurred severity was up about 12% and accident frequency was up about 1% on a year-over-year basis.

While it is difficult to quantify the direct impact of recent insurance legislation in Florida, for all coverages Florida contributed approximately 40% to the prior accident year reserve development year to date across all personal auto product lines. We continue to believe that the Florida tort reform will likely have a positive impact on the insurance industry in Florida over the long term. We will continue to monitor the ever-changing legislative and regulatory environment and will respond a

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The duration of the financial instruments held in our portfolio that are subject to interest rate risk was 2.9 years at both June 30, 2023 and December 31, 2022, and 2.8 years at June 30, 2022. The weighted average beta of the equity portfolio was 1.04 at June 30, 2023, and 1.00 at both June 30, 2022 and 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 2023, the Board of Directors approved an authorization for the Company to repurchase up to 25 million of its common shares. This authorization, which does not have an expiration date, terminated the 24,157,257 shares that remained under the Board’s May 2022 authorization to repurchase 25 million shares.

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 second quarter 2023, 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 underleveraged capital.

• During the three months ended June 30, 2023, no director or officer of the Company adopted or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408(a) of Regulation S-K.

• President and CEO Susan Patricia Griffith’s quarterly letter to shareholders is included as Exhibit 99 to this Quarterly Report on Form 10-Q and in our online Shareholder Report located on our investor relations website at: investors.progressive.com/financials.

See exhibit index contained herein beginning on page 60, 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.