With loss reserve actions moving Progressive’s first-quarter calendar year combined ratio up to 99, the company is tightening underwriting, cutting advertising spend and taking more rate actions, the chief executive announced yesterday.

Speaking on a first-quarter earnings conference call, Tricia Griffith said that Progressive expects to hike personal auto rates another 10 points this year on a countrywide basis—on top of 4 points taken already in the first quarter and 13 percent jumps in personal auto rates for all of last year.

“We are not on track to meet our calendar year goal of a 96 combined ratio,” she asserted. “It’s perhaps poetic that three years post-pandemic, we continue to have to manage through the unexpected in our business,” she said. “In the end, I’m confident that our resilience will see us through,” Griffith added, leading off the call with prepared remarks setting forth the three courses of action to try to get to the goal and addressing anticipated questions about the reserve charge from analysts.

“Predicting the future is hard, [and] we didn’t fully predict trends that developed during the quarter,” she said, referring to the reserve charge. “We saw higher than expected severity trends in previously closed claims in personal auto, primarily in ‘fixing-vehicle coverages.’ While I won’t speculate on why these trends changed, I can tell you that we reacted quickly and decisively to adjust our reserves for these short-tailed coverages,” she said, expressing confidence that the company is adequately reserved, and noting that for the five years ending 2022, prior-year reserve development had averaged just 0.25 points vs. the 4.6 points for first-quarter 2023.

Progressive’s stated goal is actually to “grow as fast as we can at a 96 combined ratio,” and analysts’ questions later in the call were more focused on growth than on what happened with loss reserves. With the carrier hitting record growth levels in the first quarter, Griffith said that she expects growth to continue, as other carriers lift prices too and customers shop around.

In fact, she said that growth was at “an all-time high for the company” in the first quarter. According to a 10-Q filing also published yesterday, personal lines (auto and specialty) net written premiums jumped 25 percent to $12.1 billion in the quarter, and policy counts grew 10 percent, with new personal auto applications up 83 percent. The filing attributed those growth numbers to a combination of increased advertising spend in first-quarter 2023 at a time when competitor rate hikes were coming through, in contrast to the opposite actions in first-quarter 2022—when Progressive itself took significant rate increases and reduced ad spend.

During a November 2022 investor call, Griffith signaled that Progressive’s major rate jumps started winding down in most states after first-quarter 2022 last year, and that as competitors belatedly started playing catch-up, the company started to see new business applications vault by double digits.

This week, she said, “We are still in a very hard market with lots of consumers quoting their insurance. We also continue to see ambient shopping. While policy growth may be slowed by our actions, we still anticipate there will continue to be robust demand for our products,” she said, declining to give specific growth predictions since competitors’ actions—which Progressive cannot forecast—will also factor into Progressive’s growth numbers for 2023.

Enumerating Progressive’s go-forward actions, and putting decreased ad spend at the top of the list, Griffith said the company plans to react as it always has—”with speed and decisiveness.” The company’s “largest controllable variable expense” is advertising spend, she said, offering a lower expense ratio as the first lever to deliver target calendar year profitability while also noting the likely impact of reduced growth.

“Once we are confident that we can deliver our target calendar year profitability, we will consider resuming our spend. While we won’t provide details on which segments of media we are reducing, or how this may affect growth going forward, I will tell you that we’ve invested in bringing the same industry-leading science from the pricing side of our business to the acquisition side and will continue to spend in the places that we believe have the greatest benefit to the business,” she said.

Moving to the next step in the plan to get the 99 combined ratio back down to 96, Griffith said that non-rate actions—”tighter verification and underwriting standards and limiting bill plan options”—should shrink growth in a targeted manner—impacting growth “in the segments we believe we can’t currently write at our target margins.”

Describing the prospective rate actions as the “slowest moving lever” in Progressive’s arsenal, she said that while the prior-year rate increases earn into results, the carrier plans to “take aggressive rate increases where needed across all lines through the balance of 2023.”

But Will You Grow?

Griffith was asked to address the question of whether growth would continue in 2023 a number of times during the call. “Our actions, all else equal, will certainly adversely affect growth—less advertising dollars, higher rates for sure,” she said, although she highlighted the distinction between policy growth, which will drop, and premium growth, which will drive premiums upward. Still, “last year, as the competitive marketplace was in a bit of disarray, even with our aggressive actions, we saw growth,” she noted, reporting that Progressive grew premiums by more than $5 billion throughout the course of last year. “That’s the size of a top 10 carrier,” she asserted.

“We’re not putting on the brakes. We’re definitely going to reduce our media spend, but our intentions are that we would want to grow,” she said, in a response to an analyst who suggested that because Progressive’s first-quarter combined ratio minus the reserve charge was less than 96, that the corrective actions were unwarranted. “I just want to say that normally when we reduce media [spend], it could have the anticipated slowing in growth,” Griffith said.

Responding to another analyst who observed that when Progressive announced the same trio of actions to improve profitability in 2021, the actions had the impact of stopping growth immediately, Griffith and other executives contrasted an environment where both competitors and regulators were slow to act to today’s “very hard market.” Regulators are responding to data on inflationary trends that they now see from many carriers.

“Growth has been unbelievable. We don’t think it’s going to come to a screeching halt,” she said, clarifying her comments one last time for an analyst who protested that he was getting incoming emails from investors trying to reconcile the “sense of urgency and aggressiveness” to take corrective actions being communicated on the one hand with the idea that reserve adjustments, similar to those that knocked Progressive out of its target range, won’t be needed going forward.

“It’s really all about our calendar year goals .…We’ve had a very long-stated goal for our long-term holders, for our investment community that we will do everything we can to reach a calendar year 96, and we’re not there. We’re at a 99. So, that’s why we’re taking aggressive action,” she said, adding that if trends turn around dramatically in the next four months, the carrier can nimbly shift with them.

‘Fixing Vehicle’ Severity Trends

While Progressive’s March Results announcement, released in mid-April, provided a glimpse of the quarter’s results and attributed the bulk of unfavorable reserve development for the month to the passage of legislation in Florida, Griffith said reserve boosts taken throughout the rest of the quarter were largely the result of severity trends.

“Our reserve strengthening happened largely in the short-tailed fixing vehicles coverages. In these coverages, we can recognize and react to new trends relatively quickly and we feel good about our reserve levels today,” she said.

In the letter to shareholders for the first quarter, she explained that loss severity rose 10 percent in the quarter compared to first-quarter 2022, contributing to most of the unfavorable development for property damage, collision and comprehensive coverages. Frequency was relatively flat.

During the investor call, she explained the severity situation, stating that the industry is struggling with shop capacity—the “ability to get cars in, and the throughput to get them out,” which impacts the time to repair and rental periods. As to specific components of loss trend, she said that parts prices are up just under 3 percent, while unemployment—and specifically the employment trends for mechanical techs in the body shops—is pushing repair rates up between 4.5 and 5 percent. Progressive’s president of claims is working with body shop partners to open up capacity and get cars in and out, she said, noting that weather exacerbates the severity trends. While the used car (Manheim) price index actually went down a bit, the high levels over several years have been extraordinary.

“Those are the trends we’re reacting to…. The good part about this is these [coverages] are short tailed, so we can react to them really quickly, which we have,” Griffith stated.

Responding to a question specific to property damage severity trend, she also noted that some older claims are now working their way through inbound subrogation.

Griffith was also asked a question about how much of the 10 percent rate increase projected for the year is reactionary “catch up,” and how much will be needed to keep pace with trends going forward. Decling to provide a split, she said, “We believe at this point, with what we’re seeing, that that [10 percent] will get us both of those. It will get us to the point where we are at our target profit margin [and] to stay ahead of trend specifically.”

Chief Financial Officer John Sauerland said, “Our pricing is always forward-looking.” Referring to Griffith’s opening remarks, he added, “We clearly were a little off in terms of severities for fixing cars coming into the year, and that obviously was dialed into our [rate] indications. We’ve seen additional data points, [and] we are dialing that into our future trend select[ions],” he said. He added that Progressive’s prior forecasts of the Manheim index assumed it would come down more aggressively than it has. “Car pricing, in general, has stayed higher than we had anticipated a while back. That all goes into our future trend select[ions] when we are doing our pricing indications. We’ve obviously dialed those up recently, and that’s where we’ve arrived at the conclusion that we need to get more aggressive on rate,” he stated.

As for the impact of passage of Florida House Bill 837 in March, Griffith noted the legislation triggered a flood of lawsuits before it was officially signed into law. “The reserve increases we took in March represented our best estimate of what we believe would be the full effect of the lawsuits on loss costs for pre-bill accident periods,” she said. The Florida tort reform impact accounted for 1 point of the overall 4.6 points that reserve changes added to the combined ratio in the quarter.

Addressing specific questions about the impact of the law, Griffith said that the long-term impacts of bill provisions like a changing a modified comparative negligence system (which means a plaintiff more than 50 percent at fault doesn’t collect damages), a shorter statute of limitations (going from four years to two), a safe harbor for bad faith, and the repeal of one-way attorney fees will ultimately be positive for consumers and insurers. “In the meantime, we’re very familiar with the plaintiff bar, and we don’t know that they will not try to challenge those” changes in the short term, she said.