Progressive 10-Q 2023-09-30

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

For the quarterly period ended September 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: 585,040,907 outstanding at September 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 third 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. During the third quarter 2023, we generated an underwriting profit of 7.6%, which was better than our 4.0% companywide calendar-year underwriting profit goal and 6.8 points better than the third quarter last year. The underwriting profit variance from the prior year was primarily attributable to lower catastrophe losses in the current quarter, compared to the third quarter last year, along with our pricing decisions and non-pricing actions that we put in place to help us achieve our stated calendar-year goal of a 96 or better combined ratio.

During the third quarter 2023, we experienced catastrophic weather events that contributed 3.2 loss ratio points, compared to 7.1 points for the third quarter 2022, which primarily resulted from Hurricane Ian. During the quarter, our personal auto products profitability benefited by about five points from prior rate revisions that have earned in. In addition, our companywide expense ratio was 2.5 points lower in the third quarter 2023, compared to the same period last year, in large part due to a 52% decrease in advertising spend in the third quarter 2023, which brought our year-to-date advertising costs to $1.3 billion, compared to $1.6 billion for the first nine months of 2022. We currently plan to continue to manage our rate levels and discretionary spending to further our goal of achieving our companywide calendar-year target profitability.

During the third quarter 2023, companywide net premiums written grew 20% over the same period last year, with all operating segments contributing to the growth. We generated $15.6 billion of net premiums written, which was an increase of $2.6 billion, compared to the third quarter 2022. We ended the quarter with 29.6 million policies in force, which was an increase of 2.8 million policies, or 10%, over September 30, 2022, and nearly 33,000 more policies than were in force at the end of the second quarter 2023, and 2.3 million more than year-end 2022. While companywide policies in force increased during the third quarter 2023, total personal auto policies in force were down compared to June 30, 2023, reflecting the decrease in new business applications discussed below, which were, in part, offset by the increase in renewal applications as our retention lengthened. The increase from the year-end 2022 policies in force reflected both strong new application growth in the first half of the year and improved retention in our Personal Lines and Property products.

As a result of the rate and non-rate actions we have taken to manage profitability, new applications decreased during the third quarter 2023, compared to the same period last

year. While new business is down year over year, policy life expectancy, which is our measure of retention, has lengthened in our Personal Lines products demonstrating the competitiveness of our products in the marketplace. As discussed below, we plan to continue to remain diligent in our efforts to achieve our target profitability and will take the necessary rate and non-rate actions, which could result in less premium and policy growth.

On a year-over-year basis, for the third quarter 2023, net income increased $1.0 billion and comprehensive income increased $1.5 billion, from a comprehensive loss in the same period last year. The year-over-year increase in net income primarily reflected an increase in underwriting profitability as discussed previously. During the quarter, income also benefited from a 53% 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.

The quarter-over-prior-year quarter increase in comprehensive income 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 $388.6 million in the third quarter 2023, compared to a loss of $920.3 million in the same prior year period, with both periods being primarily driven by the then-current interest rate environment, with a significant rise in interest rates last year.

Total capital (debt plus shareholders’ equity) at September 30, 2023, was $24.3 billion, which was up $2.0 billion from year-end 2022, primarily due to our comprehensive income earned in the first nine months of 2023 and the May 2023 issuance of $500 million of 4.95% senior notes.

A. Insurance Operations

During the third quarter 2023, we experienced a companywide underwriting profit margin of 7.6%, compared to an underwriting margin of 0.8% for the same period last year. Our Personal Lines, Commercial Lines, and Property businesses generated an underwriting profit margin of 8.8%, 0.9%, and 11.8%, respectively, during the third quarter 2023. Our special lines products experienced an underwriting loss during the third quarter due to seasonality. In total, the special lines products contributed a 0.8 unfavorable point impact to our Personal Lines combined ratio. The strong underwriting results in the third quarter moved our year-to-date combined ratio to a 97.2, which is just 1.2 points from our companywide calendar-year goal of a combined ratio of a 96 or better.

We strongly believe that achieving our target profit margin takes precedence over growing premiums. With a focus on achieving our calendar-year underwriting profitability goal of at least 4%, in the face of continued volatility in our severity trends that influence higher vehicle and repair costs, we will continue to reevaluate our rate plans and intend to continue to raise rates through the fourth quarter 2023, with planned increases of about 3% in our personal auto products and about 5% in our commercial auto products. Some of these rate increases will be subject to regulatory approval. We will continue to monitor the factors that could impact our loss costs for both our vehicle and Property businesses, which may include new and used car prices, miles driven, driving patterns, loss severity, weather events, building materials, construction costs, inflation, and other components, on a state-by-state basis, and could change our current plans for rate increases.

In addition to rate action, we routinely monitor non-rate actions, including our advertising spend. During the third quarter 2023, we reduced advertising costs 52%, compared to the same period last year. On a year-to-date basis, we have spent $1.3 billion in advertising, compared to $1.6 billion for the first nine months of 2022. During the quarter, we also continued implementing measures to support the goal of achieving our target profit margin that included slowing new business growth through verification activities, bill plan offerings, and through ongoing general operational expense discipline. We expect to continue to reevaluate our actions through the remainder of the year and may take additional measures as necessary.

For the third quarter 2023, net premiums written grew 20% compared to the third quarter last year, with all segments showing strong growth. Personal Lines net premiums written grew 23%, with the Agency and Direct distribution channels growing 19% and 25%, respectively. Commercial Lines net premiums written grew 7% and Property grew 16%. Changes in net premiums written are a function of new business applications (i.e., policies sold), business mix, premium per policy, and retention.

While we experienced significant new application growth during the first half of 2023, due to the actions taken to address profitability there was a decrease in Personal Lines new applications, compared to the third quarter 2022. Du

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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 September 30, 2023 and December 31, 2022, and 2.7 years at September 30, 2022. The weighted average beta of the equity portfolio was 1.03 at September 30, 2023, 1.01 at September 30, 2022, and 1.00 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 2023, 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 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 under-leveraged capital.

• During the three months ended September 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 shareholders’ 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.