Commissions are more certain than insurance losses.

Those aren’t exactly the words that a Progressive executive used when he described the work the insurer has been doing to help customers meet all their insurance needs—sometimes through the policies of other insurance carriers. But the idea did emerge during a two-part presentation of Progressive’s 2023 results yesterday.

The second part of the Investor Relations event, like events hosted by other carriers, focused on analysts’ questions about how the insurer managed to grow written premiums, in Progressive’s case by 20 percent, and to achieve its combined ratio target after a disappointing start to 2023, along with questions about Progressive’s plans for growth and advertising spend in 2024. But during the first half hour, in a pre-recorded presentation, customer relationship team leaders described the growth of Progressive Advantage Agency (PAA) and a soon-to-be-introduced online tool through which customers can buy competitors’ auto insurance policies—all designed to meet customer needs whether that’s through Progressive policies or some other carriers.

“Commission revenue is a predictable annuity and has minimal exposure to the loss and cat risks that come along with underwriting insurance policies directly,” said Sean Freeman, business leader of the Direct Progressive Agency Experience team. “As agency compensation is rarely directly impacted by these risk exposures, this serves as a complimentary source of revenue to our standard underwriting operation,” he said, referring to commissions earned from other carriers by PAA, a digital agency for customers who shop for auto, home and business insurance online.

The agency currently delivers quotes and policies through Progressive’s digital platforms known as Home Quote Explorer (HQX) and Business Quote Explorer (BQX), according to Kathy Lemieux, business leader of CRM Sales Experience, who described the evolution of Progressive from the days when it simply told customers which auto insurers delivered the lowest prices to the current times in which Progressive has emerged as a provider of a broad product suite to customers that need more than one type of insurance policy—a group that Progressive refers to as “Robinsons.”

She also talked about Progressive’s next step, which will be to launch an Auto Quote Explorer (AQX) this year.

The commissions that Freeman referred to, called “service revenues” on the company’s financial statements, amounted to only $310 million in 2023—seemingly small in comparison to $58.7 billion in total company net earned premiums or $25.0 billion in direct personal lines net earned premiums for the year. But there are benefits of the digital agency beyond commission revenue that are huge, Freeman and other leaders said, referring to the benefits of strengthening the brand by meeting the broad needs of customers as they change, and ultimately driving more bundling Robinsons to buy Progressive-underwritten policies.

In fact, the benefit of stable commission revenues was the last one he mentioned, spending more time on customer retention benefits and a cycle of brand strengthening that allows Progressive to leverage—and increase—its advertising spend (discussed further below). Still, the statement about this small but growing amount of “certain” revenue seemed timely given that Progressive’s Chief Executive Officer Tricia Griffith chose “uncertainty” as the theme of her annual letter to shareholders, released in conjunction with the event.

Admitting that the theme is an unusually downbeat one for Progressive, the letter described the ebbs and flows of 2023—a year when Progressive initially thought that auto insurance was correctly priced and sought to grow, but later had to double-down on profit goals when inflation, loss severity, weather and macroeconomic trends all emerged to prompt a rethink of Progressive’s overall growth plans.

“We embraced the uncertainty and did what we do best and faced the challenges head on,” Griffith wrote, reporting that Progressive ended the year with a 94.9 combined ratio—meeting the carrier’s oft-stated profitably goal of at 96 or better—even though the combined ratio had been 99.7 during the first six months of 2023.

Strategic Pillar: Meeting Broad Customer Needs

“Picture over 60,000 employees working tirelessly hand-in-glove in order to achieve our goals and you can get a sense of our strong ‘get it done’ culture,” she wrote, describing the first of four pillars that guide Progressive’s strategy: People and Culture, Broad Needs of our Customers, Progressive’s Leading Brand, and having Competitive Prices.

During last year’s Investor Relations event, company representatives focused on the pricing pillar and how telematics helps Progressive match rate to risk. (See related article, “Telematics Master Class: How Progressive Offers Competitive Prices,” March 7, 2023.) This year, the focus was on the customer pillar, with Lori Niederst, president of Customer Relationship Management, leading off.

“This pillar is synonymous with our strategy to become a destination company,” said Niederst.

The annual report describes Progressive’s “Destination Era strategy” in personal lines, noting that it encompasses efforts to “form deeper and longer-term relationships” with customers through both Progressive’s direct channel (via PAA and the Explorer tools) and the agency distribution channel—in particular, bundlers who stay longer and generally lower claims costs.

Bundling “Robinsons” represent just under half of the personal insurance direct written premium in the United States, by Progressive’s estimates, and the carrier itself now has these “Robinsons” accounting for almost 13 percent of its direct written premium.

“Even before the introduction of the Destination strategy, in 2006, we began offering homeowners insurance from other carriers in our Progressive Advantage Agency or PAA,” said Niederst, revealing the first effort that fueled the growth of multiproduct customers. She when on to preview Progressive’s development of HQX and BQX, and its decision to buy a stake and later acquire property insurer American Strategic Insurance, now branded Progressive Home, among others.

“Customer bundling doesn’t end with home and personal auto or commercial auto and BOP [businessowners policies]. We have a whole suite of offerings, which includes Progressive-underwritten special lines, renters, and umbrella products,” she said, also noting that efforts to expand the product portfolio have resulted in almost one-fifth of U.S. households (19 percent) having “at least one Progressive-sold product.” That household penetration figure in the personal lines (auto and special) and property segments has increased 80 percent in the last 10 years, she said.

We now estimate that 19 percent of households in the United States have at least one Progressive-sold product, an increase of over 80 percent in the last 10 years.

Lori Niederst, Progressive

“The top-line growth from increased sales of Progressive-underwritten products and commissions earned from sales of partner products is just the beginning. The more products a customer purchases from Progressive, the stickier the customer becomes, leading to higher lifetime profits and lower per policy acquisition costs fueling the virtuous cycle that results in greater market share,” she said.

Freeman later gave details of the “virtuous cycle” that ultimately allows Progressive to spend more on advertising, further strengthening the Progressive brand and attracting more carriers:

  • “With access to a multi-carrier model, we can offer consumers more choice that meets their needs.”
  • “In doing so, this elevates our sales yield per visitor to or into our call centers.”
  • “Getting a more efficient return on every visitor to Progressive allows us to increase our media spend while still hitting our target economics. This increased spend drives greater awareness of Progressive’s offerings, driving traffic to, our call centers as well as our appointed independent agents.”
  • “This in turn increases the volume available to Progressive and the carriers within our network, incentivizing more carrier participation within our agency, strengthening the multi-carrier model further.”

“This virtuous cycle is valuable to ensuring Progressive can rationally be in the top tier of marketing spenders, and further widens the financial moat with lesser known brands.”

Sean Freeman, Progressive

Freeman reviewed the ways in which the PAA operation benefits Progressive’s top line. Directly, net earned premiums include premiums from Progressive-underwritten products and the top line is further “impacted by the agency’s brand and consideration lift, the household retention improvements, increased additional protection sales, and the increased media spend associated with the PAA operation.”

“Our success in penetrating the Robinson customer segment rolls up within these figures,” he added, indicating that as Progressive has expanded the PAA’s product offerings, it has also seen premiums for ‘Robinsons’ outpace other customer segments. An accompanying slide showed that the compound annual growth in auto premiums for Robinsons was 19.9 percent over the last five years, and only 14.9 percent for non-bundling “Wrights.”

Niederst stressed that while much of the presentation at the Investor Relations event centered on the direct channel, “like many efforts Progressive has undertaken, we often leverage the direct channel to test learn and perfect new ideas…We’re always looking for ways to deploy our successes in direct to benefit our independent agents,” she said, noting the vital role that the agency channel plays in Progressive’s growth. “Independent agents will continue to be the face of Progressive for millions of customers,” she said, before introducing Lemieux and Freeman to discuss the PAA and Explorer tools.

If Our Rate Isn’t Lowest…

Lemieux reviewed Progressive’s history of offering comparative rate information of competitors, predating the development of both. Looking back to the days when the carrier told auto insurance customers in the 1990s, “If our rate isn’t the lowest, we’ll tell you whose is,” she explained how the “industry-altering idea” resonated with customers and helped build a brand around comparison rates, setting the table for the development of quote-and-bind tools.

During the course of her presentation, she described enhancements to HQX (including a prefilled data capability from a third-party provider that cuts quote time by 20 percent), and the standards that carriers have meet to be on the HQX and BQX platforms. (See related sidebar, “How Network Carriers Benefit from the Progressive Advantage Agency.”) She went on to show screenshots from a pilot of AQX that’s been going on since third-quarter 2022.

“You’re almost there,” announced the words of one image of an AQX display, prompting the customize coverage under a policy from Nationwide priced $30 less than a Progressive offering.

“Early results give us confidence that the comparison quote and purchase experience with a reputable set of carriers will give us the opportunity to better meet consumer needs—starting new customer relationships in those cases where insurance shoppers would not purchase a Progressive policy, getting their auto insurance needs met elsewhere,” Lemieux said.

That scenario is the opposite of one that Lemieux referred to when she began her presentation. She started off highlighting the insurance buying journey of a real insured, a single man, who originally bought an auto policy from Progressive, later getting married and seeking motorcycle insurance, renters insurance and ultimately homeowners insurance. This insured bought “a home policy underwritten by one of our network carriers several years after acquiring their Progressive auto insurance and built a bundle, becoming one of the more than a million Robinsons we insure through the PAA,” Lemieux said.

During a third-quarter 2019 Investor Relations event, Progressive CEO Tricia Griffith and Chief Strategy Officer Andrew Quigg described how the PAA fits into the carrier’s “Three Horizons” strategy, a model of growth and innovation popularized by McKinsey. Some of their past remarks from that conference are captured in the CM article, “Life Insurance Next for Lemonade: Auto on the Horizon”

Freeman noted that selling each additional policy doesn’t just increase sales and potential profits but also improves the expected retention of the original policy dramatically. “Across all products within our portfolio, the policy life expectancy grows meaningfully as you add products to the relationship and by a magnitude of up to 2X or more.”

“It is important to note that we see this retention improvement, whether they are Progressive-underwritten policies or network carrier policies,” he added.

“In the current environment, while rates are rising and underwriting is more restrictive, the ability to shop several carriers across the same product produces significant value to the customer, and in turn, Progressive,” Freeman said at one point.

Freeman used much of his time to underscore benefits of the PAA to customers, such as gaining confidence that they getting good coverage, service and rates and feeling in control of their insurance decisions, going on to describe the “virtuous cycle” media benefit to Progressive and network partners.

“As we have especially seen in recent years, marketing spend is an important tool to stand out in the crowded insurance marketplace. This virtuous cycle is valuable to ensuring Progressive can rationally be in the top tier of marketing spenders and further widens the financial moat with lesser known brands,” he said.

Certainty Ahead: Media On, Underwriting Restrictions Off

During the live Q&A session with insurance analysts, Griffith described the ability to open the throttle on marketing spending as a third component of a “trifecta” of activities that will drive premium growth for Progressive-underwritten auto policies in 2024.

“We have a continued hard market. Ambient shopping is still up… We know our competitors are still getting rate, so those customers are shopping and we’re able to get that at a really inexpensive acquisition cost,” she said.

“We are [also] unraveling a lot of our non-rate actions,” she said, referring to underwriting actions that slowed policy growth in 2023. “The third part of that trifecta is our ability to be able to spend a lot on media.”

She continued: “We are really excited about heading into 2024. My whole theme for the [shareholders] letter was uncertainty. We feel much more certain and much more confident,” she said. “We think there’s an opportunity to open up this spigot and get more business in the door. We feel like we’re in a really prime time now, especially with our rate,” she said.

Griffith and Personal Lines President Pat Callahan shared that Progressive personal auto rates increased 19 percent last year, with about half of that yet to earn in.

Responding to an analyst asking for details of the media budget by quarter, Callahan said, “We’ll fish where the fish are. And when there’s a lot of people out there in market, we want to advertise to make sure they know we’re available and to bring them to Progressive…If the hard market prevails and continues, then we will want to continue to spend up to our allowables to capitalize on growth while people are looking for a new provider of auto, home or commercial insurance.”

Asked about changes in commissions that Progressive and other carriers paid to agents during last year’s periods of uncertainty, Callahan said, “We’ve definitely seen competitors use commission cuts as a profitability or margin restoration lever. We haven’t done that. We’ve maintained our commission. We do have a contingent component which self-cures when we’re not making money,” he said, referring to the alignment of incentives that allows agents to be paid well when the business performs well. “When it doesn’t, we correct without having to change commission structures and contracts.”

While this commission structure remains out in the market for Progressive, competitors who have lowered commission rates face agents with “long memories,” Callahan suggested. “We think that will potentially hinder their ability to restore growth when they want to come back in the market later in ’24 or beyond.”

(Editor’s Note: During a separate investor call for Zurich Insurance Group, Zurich’s CEO Mario Greco highlighted management actions, rate actions and expense measures among factors leading to a dramatic improvement at the U.S.-based Farmers Insurance unit in the U.S. “There is a piece of cost improvements, which still has to be seen in the numbers—the reduction in the commissions,” Greco said. “While the cost cuts that have been taken [in] the Farmers structure are already in the numbers of end of year, the renegotiation of the commissions hasn’t yet taken effect. And so this will be a further improvement starting with this first quarter of this year,” he said.)

Florida Position Unchanged

The Progressive leaders were asked specifically about rate actions in big states like California and New York for personal auto, and several analysts asked about Progressive’s actions on property insurance in Florida.

“We are still in the midst of moving our book a little bit away from Florida,” Griffith said, referring to 115,000 nonrenewals notices sent out in January. “Those will start to nonrenew into another company that we’re working with to take those should they want them in May of this year.”

Related article: “How Loggerhead Moved to Snap Up 110,000+ Progressive Policies in Florida”

During a discussion of loss reserve takedowns, Griffith expressed some optimism about tort reform changes in Florida. (In 2023, higher attorney representation rates in Florida precipitated by House Bill 837 had fueled some reserve boosts for the carrier.) “I don’t want to get ahead of my skis…, but we believe, especially the [comparative] negligence law should be very helpful,” she said. “It’s still new and there’s a lot of things that can unfold, but we’re positive about the changes that have been made in Florida.”

Does that mean that a de-risking strategy in the state could change, one analyst asked.

Griffith said it does not. “When we think about the de-risking of the Florida property book, half of those were rental properties, coastal properties—those were things that I feel like we should have de-risked anyway regardless…I wouldn’t go back from that,” she said. “I want to de-risk the book, and right now we’re open for business really in Florida with new construction on homes,” she said.