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Progressive earnings: A fast response on loss trends is what sets it apart

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Progressive’s September results reflected the prior trend line of elevated loss trends, with the underlying loss ratio of 76.2% higher than pre-pandemic levels.

The firm reported $0.07 in operating EPS, down from $0.57 year-on-year, with a combined ratio of 100.1% vs. 88.3%. Progressive has now missed its 96% combined ratio target for the past four months.

CPI data released earlier this week detailed the inflationary trends that have caught carriers off guard and triggered worsening severity this year.

Despite assurances from the Federal Reserve, underlying inflationary pressures are likely to continue for the coming year. The inflation increase, combined with reverting frequency and other negative news (including recent reports of more auto theft), is weighing on margins in the line.

While short-term personal auto results are widely expected to disappoint, Progressive has been consistently quicker to react to changing circumstances than its competitors.

Sometimes it’s easy to get caught up in the monthly up/down discussion but taking a step back, Progressive has done a better job responding to changing loss-cost trends than peers.

Progressive has had the lowest combined ratio among the top personal auto carriers four out of the past five years (and seven out of the past 10 years). While a changing market dynamic is always possible, there’s no reason to believe the company has lost its ability to respond to changes in the market quickly.

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It appears the company is well positioned in relation to other personal auto carriers to manage spiking severity and normalized frequency trends. In addition, the firm seems to have pulled back on advertising expenses, with September’s expense ratio a couple of points lower than 2019/20.

Last month’s slowdown in personal auto policies in force growth continued, with PIF up 7.9% YoY, meaningfully lower than the double-digit growth the company has posted over the past two years.

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PERSONAL AUTO: DIRECT UNDERPERFORMING AGENCY

The personal auto segment has seen slowing growth as the loss ratio has ticked upwards this quarter.

While last month’s underlying loss ratio suggested a slight improvement, September’s results deteriorated once again. While volatility in monthly results is typical, this month’s results are likely a reflection of the delayed rate in reaction to worsening loss-cost trends.

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The chart below shows that the direct-to-consumer combined ratio, which has traditionally tracked closely with the agency-driven policies ratio, jumped to 106% in September, a full 6% over the agency ratio. The direct-to-consumer expense ratio is consistently slightly higher due to more attention being paid to advertising, which Progressive had previously pledged to lower in response to worsening loss-cost trends.

However, September’s results also showed a significant gap in loss ratio between the segments, with September’s loss ratio for the direct-to-consumer segment 5 pts higher than the agency channel.

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Rate filings showed limited approvals in September, with a weighted average rate change of only 0.7%. However, Progressive’s rate filings for October have seen a pick-up, with an average rate of 4.7% so far this month.

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COMMERCIAL SEGMENT: FULL STEAM AHEAD

Progressive’s commercial lines segment continues to grow consistently, with PIF growth in September at 18.5% YoY, slightly edging PIF growth from August and July, which was 18.4%.

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The commercial lines segment’s combined ratio of 89.5% remained below the target of 96% for the third month in a row, with the commercial combined ratio enjoying a year and a half-long stretch below the 96% target broken up by an anomalous June ratio of 96.7%. Of the three segments detailed here, personal, commercial, and property, the commercial lines segment has been the most consistent in remaining below the 96% combined ratio target.

As we have previously discussed, severity is on the rise for the trucking industry, which analysts have attributed to supply chain issues and the availability of new vehicles and replacement parts. Progressive’s commercial auto strategy, which focuses on smaller commercial auto companies with fewer, smaller vehicles, such as courier businesses and small contractors, has maintained strong performance. Rate on the line has been steadily increasing, even prior to the Covid economy.

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PROPERTY SEGMENT: MOVING ON FROM IDA

Performance in Progressive’s property segment has been primarily influenced by catastrophe activity. September’s results recovered from Hurricane Ida-related catastrophe losses in August, lowering its loss ratio to 59% from 197.4% last month.

Property’s underlying loss ratio for September was 50.7%, down 2.1pts YoY and 15.9 pts from last month.

PIF continues to grow, albeit at a slowing pace. Property’s PIF growth for September was 13% YoY, down from 13.4% last month, 13.3% in July, and 13.7% in June. The slowdown aligns with the pullback in personal auto.

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Although the consolidated combined ratio exceeded the target due to the larger personal auto segment, property’s combined ratio of 87.6% dropped below the firm’s target combined ratio of 96%.

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Although, in the short term, the company is missing its stated 96% target, longer-term we anticipate that it will be able to respond faster than its peer group to pressure from inflationary and loss-cost trends.

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