Q2 2023 The Progressive Corporation Earnings Call
Good morning, and thank you for joining us today for progressive second quarter Investor.
Director of Investor Relations and I'll be moderator for today's event.
The company will not make detailed comments related towards results. In addition to those provided in its annual report on Form 10-K quarterly reports on Form 10-Q, and a letter to shareholders, which have been posted to the company's website.
This quarter includes a presentation on a specific portion of our business followed by a question answer session with members of our leadership team.
The introductory comments by our CEO in the presentation, where previously recorded.
Completion of the previously recorded remarks, we will use the balance of the 90 minutes scheduled for this event for live questions and answers with theaters featured in our recorded remarks as well as other members of our management team.
As always discussions in this event may include forward looking statements. These statements are based on management's current expectations and are subject to many risks and uncertainties that could cause actual events and results to differ materially from those discussed during today's event.
Information concerning those risks and uncertainties is available in our annual report on Form 10-K for the year ended December 31 2022.
By our 10-Q reports for the first and second quarters of 2023, where you will find discussions of the risk factors affecting our businesses safe Harbor statements related to forward looking statements and other discussions of the challenges we face.
These documents can be found me the Investor Relations section of our website at investors Progressive Dot com.
To begin today I am pleased to introduce our CEO , Tricia Griffith, who will kick us off with some introductory comments Tricia.
Good morning, and thank you for joining us today.
I usually begin there.
<unk>.
Let met a progressive people expressing my pride in the results they deliver.
And this quarter will be no different.
In the face of it.
Jordan area of pressure on the industry, our people continue to take the actions necessary to succeed in this difficult environment.
While our results through the first half of 2020 three fell well short of our 96 combined ratio target.
Continue to believe in our people and our strategy.
I believe we have assembled the progressive team up nearly 59000 employees that's best in class.
I have no doubt that we're continuing to lay the groundwork to ensure that our best days are ahead of us.
We continue to manage to this calendar year target maintaining the discipline that has allowed us to grow in the past with better profitability than the industry.
At the same time, we will be pragmatic in our approach to growth and remain cognizant of long term value, which we continue to believe is served well by balancing growth and profitability.
We spent much of the first quarter call talking about actions, you'll be taking to address our calendar year profitability pressure and those actions continue.
In a quarter or two we took seven points and personal auto which puts our year to date rate and taken just over 11% and assuming regulatory approval. We plan to take approximately six additional points during the remainder of the year as we go.
Right to match loss trend.
During last quarter's call. We also said that we would reduce our media spend resulting in our corner to direct expense ratio being amongst the lowest in recent history.
These actions have had the expected effect on growth with new outgrow slower in the second quarter as compared to the first and pest growth, while still robust slowing from highs we saw in prior months.
Calendar year profitability continues to be a challenge so with the calendar year 96 goal in mind, we will continue to evaluate the rate and non rate actions, we may need to take.
Catastrophe losses were a significant part of our profitability pressures two days 2023 has been a significant catastrophic here with some estimates, suggesting that U S insured losses have already surpassed 25 billion this year.
The events. This year had been broadly felt with 44 states affected by 43 events at.
At the company level. These events have added four five points to our combined ratio year to date, which is 1.7 points higher than the impact.
A few events had on our combined ratio for the first half of 2022.
Our property business has been most affected by catastrophes, adding almost 46 points to the property loss ratio. So far this year, which is about 16 points more when compared to this time in 2022.
Historically, we have been among the best in the industry and reserve accuracy with reserve changes contributing a little to our calendar year combined ratio.
We've advanced the science of reserving unemployed team of highly experienced individuals to support our goal of being as accurate as possible with our reserves.
Accurate reserves help us to price more accurately and give us confidence to go as fast as we have over the last decade.
<unk> said that the difficult environment of 2023 has presented challenges for our reserving practices through the end of the second quarter. Prior year adverse development has contributed four points to our combined ratio and current accident year actuarial adjustments have contributed another one five points.
The majority of personal lines adverse development can be placed into two categories, Florida and fixing vehicle coverages.
Florida prior year adverse development accounts for just over 40% of the four points of prior year development.
While we continue to be optimistic that marches, new legislation will result in lower loss cost over time, there's a short term effect has been a significant increase in attorney representation largely in medical coverage as our data has matured each month since the bill passed which has allowed us to continue to fine tune reserving in the face of change.
As to Florida, its ultimate loss costs.
And fixing vehicle coverage is unforeseen severity trends deepening on previously closed claims continues to be the major driver of prior year adverse development countrywide.
The contributors to the steeper trends coming from a variety of sources, including longer vehicle repair times longer rental times higher parts prices and labor rates and changes in subrogation trends.
Fixing vehicle coverages are short tailed which explains why over 80% of the total year to date prior year development from the 2022 accident year.
In fact, excluding Florida accident years prior to 2022 have developed favorably.
Our current year actuarial adjustments are primarily due to fixing vehicle coverages so to speak.
Fixing vehicle coverages are short tail and most of the claims that are affected by emerging trends have happened in the recent past.
As we have moved deeper into the year the news deeper trends in fixing vehicle coverages have increasingly affected claims that occurred in the current accident year.
Florida litigation has been a relatively small part of current year actuarial adjustment since the increase in attorney representation rates largely affected claims that occurred before March of 2023.
We continue to monitor loss trends across all states and coverages and we will adjust if necessary to ensure we're always adequately reserved.
While both reserving and pricing have been a challenge this year I have great confidence in the teams and our strategies, which have delivered results better than the industry for a very long time.
To showcase these skill sets. This morning, we have two senior leaders to speak to these two topics for our presentation.
First Gary trade costs, our corporate actuary business leader and head of our reserving group will discuss reserving practices at progressive and how we endeavor to accurately sat and adjust reserves scary is a 28 year progressive veteran and has led our reserving group for almost 11 of those years.
After Gary Jim Curtis, our personal lines controller will discuss cohort pricing.
Core pricing is our term for managing to both our calendar year and lifetime 96 target when new business and renewal business have different expense and loss characteristics.
Jim has been with progressive for 28 years and in his current role for four.
Again, thank you for joining us this morning, I will now pass you to Gary Gary.
Thank you Tricia and good morning, everyone I'm excited to talk to you today about loss reserving at progressive.
I'll first cover some key definitions and metrics and our general process.
Walk through an example on how our overall reserve levels are determined and finally walk through an example of the reserving lifecycle.
Of an individual claim and how it would flow through the actuarial categories of the earnings release.
Let's start off with the size of our loss and loss adjustment expense or LAE reserves.
Columns represent our carried reserve balance at the end of each calendar year from 2013 through 2022 and at June 30th 2023 for the right most column.
On the left side of the graph, we can see that in 2013 progressive had about $8 $5 billion in our reserves on a gross of reinsurance basis at year end 2013.
This would be the sum of the orange and blue sections within the bar with our growth as a company preserves before reinsurance.
As of June 30th 2023 is now almost $33 billion and almost four times greater than what it was in 2013, while our premium growth was a little less than.
Three times greater over the same time period.
Much of this difference in reserves outpacing premium growth related to our growth in longer tailed products and commercial lines over this period.
This means that we believe for all accidents that have occurred through June 30th of 2023, our ultimate future liabilities.
Holding almost $33 billion the Orange section of the bars represent how much of our reserves are seeded for reinsurance.
Examples of this include state regulated plans, such as Michigan Catastrophic claims Association and the Florida Hurricane Cat Fund and private reinsurers are ceded reserves now make up about 16% of our gross reserves versus just over 12% in 2000.
13.
Much of this increase and the higher proportion of ceded reserves related to newer products that have been added over time, including property and protective which have more reinsurance needs than our historical products. The.
The Blue section of the columns represent how much of our reserves are retained after reinsurance almost $28 billion as of June 30th of 2023.
Next let's look at some metrics and how our reserves are distributed the chart on the left shows that 67% of our net reserves are in loss case, 17%, Los <unk> and the remainder under Leigh any.
Any open claim will be assigned to case reserves that may be set by a claims adjuster or an actuarially derived estimate set by the actuarial team.
We will discuss this in more detail in a future slide.
<unk>, which stands for incurred but not reported it makes up about 17% of our net reserves.
<unk> may have different meanings across companies for most of progressive products. One can think of <unk> as the future liabilities to cover claims that have already happened and are currently not recorded as open case reserves.
This would include late reports.
<unk> opens and salvage and subrogation recoveries.
Anticipated salvage and subrogation recoveries can be thought of as a contra reserve and as a reduction to future liabilities.
For most of our products IBM does not cover any anticipated development in case reserves. This is because since our case reserves are a combination of adjuster estimates and Actuarially sound case reserves.
The majority of our products our IV in our reserve does not cover expected case development.
L. A reserves make up the remaining 16% and typically cover the anticipated expenses needed to settle claims that have already happened such as defense console costs and claims adjuster salaries.
The Middle chart shows the distribution of our reserves by product.
As expected reserves will index more to longer tailed products with higher limits relative to premium size. Thus our commercial lines business that makes up almost one third of our total reserves for a smaller proportion of premium.
The graph on the right shows that in personal auto 83% of our reserves are set to cover injury and medical costs and 17% to cover the cost of fixed vehicles. Again. This is due to the longer tailed nature and higher severity cost to injury and medical coverages versus fixing vehicle coverage.
And reserves are over indexed to injury in medical relative to premium.
In addition, fixing vehicle coverages have a higher proportion of contra reserves from salvage and subrogation compared to injury and medical.
One additional point this data is as of year end 2022 and is on a net of reinsurance basis.
While the previous slide gave a high level overview of the distribution of our reserve mix by various parts.
We review the reserves at a much more granular level.
We typically review reserves by some combination of product geographic areas, such as group of states individual states and even down to a region or a subset within a state.
Further breakout typically include individual line coverages, such as bodily injury uninsured motorists bodily injury and property damage and even by limit to.
To determine these breakouts, we weigh the credibility of the data homogeneity and the data and additional value of segmenting the data at a finer level.
For example in personal auto bodily injury, almost all states are reviewed separately with the majority of states reviewed quarterly.
State level data is credible and many states have different development patterns, which warrant the data to be reviewed separately.
In personal auto collision, while state level data is credible.
Any states exhibit similar data patterns and several clusters all states are reviewed together.
About 25% to 30% of our reserves are reviewed at this in depth level of monthly and about 85% of our reserves quarterly.
About 700 reviews, which is some combination of product state wine et cetera are reviewed over the course of the year.
By reviewing reserves at the detailed level, we are able to adjust reserves more accurately at a granular level, which helps our pricing teams better match price to risk. We also have a robust roll forward process that we will discuss later on which allows up to a 100% of the reserves to be adjusted monthly.
The roll forward process allows us the time to do a deeper analysis on a portion of the reserves monthly while still feeling comfortable that all of our reserves are being updated monthly.
Here is an example of how an in depth review schedule will look over three months in the first month of the quarter 57 reserve reviews were completed.
Each reserve review as either a loss or let you review, which is further broken down between defense cost containment or DCC and adjusting in other expenses are.
Some combination of product such as personal auto.
C L or one of our core commercial auto products, our TNC, which represents transportation network companies.
<unk> coverages, such as bodily injury and some combination of state is reviewed.
These 57 reviews would make up about 25% to 30% of our total reserves.
In the following months 60 reviews are completed again, there was some combination of type of product coverage and state, but all 60 reviews are independent of reviews completed during the first month and represent another 25% to 30% of our total reserves.
Finally, a third month of the quarter had 68 reviews completed which are all different from any reviews completed during the previous two months and represent an additional 25% to 30% of the total reserves.
Over the course of the quarter about 85% of their reserves were reviewed typically between 50 to 70 reviews are completed per month.
Now, let's talk about how the overall reserve level is determined.
Several different methods one of the methods that we use what's called the accident period chain ladder method and a standard industry practice.
In the example above each row represents a six month period when the accident occurred in each column represents how much in paid losses had been paid out for those accidents at certain time periods after the accident.
For example, the top row represents all accidents that occurred from July one of 2021 through December 31 2021.
The $100 in column, one means that the $100 was paid out as of December 31, 2021 for those accidents.
Moving to the right of the same row column two of $120. It means that for accidents that occurred during the last six months of 2021.
As of June 2022, cumulatively that $120 had been paid out.
Thus an additional $20 was paid out during the first half of 2022.
The increase of $20 can be due to payments on known claims late reports or reopen activity.
The increase of 20% from $100 to $120 as shown in the loss development factors section in the December 2021 row and column one.
Similarly, the loss development factor of 1.08 and column two of the December 2021, ROE is calculated by taking the paid loss of $130 in columns three divided by the paid loss of $120 in column two for the December two.
Isn't 21 row.
Next the actuarial analyst selected a one point to seven in the first column at the predicted column one loss development factor for the accidents happening in a six month period ending June of 2023.
We can see that in the June 2023 row $120 had been paid out by the end of June 2023.
The analysts are predicting that paid losses will increase by 27% or $33. During the second half of 2023 and cumulatively be at $153 by December 2023.
Multiplying the $153 by an additional 8% predicts that an additional $12 will get paid out by the third column for a cumulative of $165.
Thus the shaded numbers in blue our predictions of what will be paid out in the future the.
The indicated reserve is then calculated by taking the ultimate estimated paid losses minus what has already been paid as of June 2023.
Reserves are to cover future liabilities.
Indicated reserve is $45 for accidents happening and the six month period, ending June 2023, and $13 for accidents happening during the second half of 2022 in total the indicated reserve is the sum of all accident periods or Roe.
And adds up to $58.
This example, illustrates an accident period chain ladder approach using paid data.
Triangle similar to this byproduct and grouped by line coverage can be found in our annual report.
Other approaches that we typically employ include using case incurred data developing severity and frequency separately and stratify the data by size of loss layer.
In addition data is also segmented by late report and reopened lag time from the date of loss to the date of late report and reopen and hindsight testing to prior reserve amounts are considered as well.
Additional AD hoc analysis is typically completed to understand changes in the underlying data and loss development factors.
Based off the indications from the multiple reviews completed during the month. The actuarial team will then decide how much of an overall reserve changes needed and adjust reserve factors accordingly.
Those changes will show up in the earnings release under the actuarial adjustment section and be reported showing the breakout for the current accident year and all prior accident years. For example in June of 2023 based off of scheduled reserve reviews, which represented between 25% to 30%.
Reserves, the actuarial team increased reserves $139 million for accident years, 2022, and prior and increased reserves $163 million for the 2023 accident year for a total change of 291.2.
Million dollars.
The $139 million increase to prior accident years directly impacted the prior accident year development.
In addition, due to other change is not related to actuarial reviews.
Fire accident years developed an additional $6 $9 million unfavorably.
For a total amount of unfavorable development of $137 $8 million.
Next we will discuss what are some of the other items that are in the all other development.
Now, let's go through an example of the pathway or a case reserve over time and the impact on our monthly earnings release remember case reserves to make up about 67% of our total reserves.
This example, a claim happens on December 15th and as reported and opened in our claims system on December 19th since the claim was reported in the same month as the occurrence of the accident.
Not be considered an IV in our claim.
Adjusted does not have much information about the claim at this point.
And so that's a case reserve of $5000 noted by the Orange dots.
In parallel a tabular or case reserves determined for this claim from an algorithm used by the actuarial team.
The actuarial team uses predictive modeling techniques based off of certain characteristics of the claim and policy to predict what the expected cost would be for all claims that meet the criteria.
In personal auto there are over 200000 unique combinations of tabular case reserves.
It is important to note that the actuarial alder rhythm does not expect this one claim to pay exactly the tabular or case reserve.
On average all claims that meet the similar criteria should pay close to the tabular or case reserve.
This is similar to our pricing rate order of calculation formula.
In this example, the tabular case reserve is $12125.
Finally, the adjust your case reserve as compared to or is there a threshold set at $25000. In this example.
If the adjust your estimate is below the reserve threshold. The tabular case reserve is booked to the general ledger as the financial case reserve for that claim and as reflected on the balance sheet.
If the adjust your case reserve is greater than or equal to the thresholds to adjust her case reserve becomes the financial case reserve book to the General Ledger.
The logic here is that the predictive modeling approach is fairly accurate for lower dollar claims.
For more severe claims the adjuster has received more specific information pertinent to the claim and will predict better than the model for higher dollar claims.
This combination of adjuster in tabular reserves provides more consistency and accuracy on a monthly basis the.
The threshold varies by several variables, including product line coverage and limit just to name a few.
Since the adjuster case reserve is $5000 and below the threshold. The tabular case reserve of $12125 is used in the general ledger.
In addition, $1000 of IV and are set to cover claims that happened in December and at some point after December would either be late reported or reopened.
The IV in our reserve is not attached to any one claim and instead set as a factor related to earned premium to cover all potential late reported or reopened claims.
The total reserve liability on the balance sheet is $12125 for case, plus $1000 for IV and are equaling a total of $13125 to noted as the dark blue Dot and will be the reserve booked at the end of December .
In January the adjuster has kept their initial estimate of $5000.
This is below the $25000 threshold. The tabular case reserve will again be booked to the general ledger as.
As part of our roll forward process, all tabular case reserves can be adjusted monthly by an aging factor and inflation factor as the claim is one month older. The actuarial all the rhythm predicted that all claims remaining open would have a higher ultimate cost.
In addition, all tabular case reserves that are not part of an in depth actuarial review during the month gets inflated as well.
The new Tabular case reserve is $12376, which is an increase of $251.
A portion of the 251 dollar increase is aging and a portion is inflation plus.
It will show up in the earnings release as unfavorable prior accident year. All other reserve development in January it is important to note that other claims that settled in January may have settled for more or less than the December tabular or case reserves, which would also show up in the all other development category of the earnings release.
In February the adjuster has received new information and increase their estimate to $15000.
This amount is still below the threshold unless the tabular or case reserve is still used to set the case reserve liability.
In February this claim was part of the 25% to 30% of reserves reviewed at an in depth level by the actuarial team.
The actuarial team increased the tabular or case reserve for all claims that have a similar criteria. This claim to $13500, which is an increase of $1124 from January .
This increase will show up as unfavorable prior accident year actuarial adjustments in the earnings release.
In March the adjuster increase their estimate again this time to $20000.
$20000 is still below the threshold of $25000. The tabular or case reserve is still used as the case reserve book to the general Ledger the claim becomes plaintiff attorney Repped in March.
Thus, while the tabular case reserve will be inflated and aged again. It will also change due to becoming plaintiff attorney Repped. As this is one of the variables used in the actuarial auger rhythm.
A tabular or case reserve is now $20050, which is $6550 greater than the prior month.
<unk> $6550 increase is due to inflation a portion due to aging and a portion due to the claim the coming plaintiff attorney Repped.
The $6550 will show up as unfavorable prior accident year, all other development and the monthly earnings release.
In April the adjuster has increased the reserve again to $25000.
Since the adjust her case reserve is now at least equal to the reserve threshold did you.
Esters estimate is booked to the general ledger.
The case reserve for this claim.
This is an increase of $4950 into case reserve on the balance sheet moving from the Tabular reserve at the end of March to the Adjuster reserve at the end of April the.
<unk> $4950 will show up as unfavorable prior accident year, all other development and the monthly earnings release.
The adjustment made no change to their estimate in May.
Case reserves set equal to or over the threshold can only be changed by the adjuster revising their estimates.
Thus there are no additional changes for inflation aging or any other factors used in the actuarial auger rhythm.
In June our claim closed out and settled for $20000. This will show as a $5000 favorable and the prior accident here all other development section of the monthly earnings release.
Finally in July the claim was reopened and additional payment occurred for $1500.
Claim could be reopened for several reasons for example, a claimant may have initially been undecided about a vehicle repair and received a cash settlement based upon the initial estimate.
Several months later, they may have ultimately decided to repair the vehicle and additional damage may have been found.
Another example is when a claimant may initially feel that they are not injured in an accident. The claims closed subsequently reopened when the person realizes that they were injured in the accident. While the case reserve had closed out in June we were still carrying $1000 of IV in our reserves for the potential of a December .
Claim being late reported or reopening.
For this example, the IV in our reserve was released in July which means that there is an expectation that there will be no future costs from late reports or reopens from any accident that occurred in 2022 and is currently not an open case reserve as of the end of July .
The development was unfavorable <unk> $500.
This would show up in the prior accident year, all other category of the earnings release and.
In practice the IV in our reserve for prior accident years tends to get released monthly as part of another actuarial auger rhythm as the probability of late reports and reopens decreases with time.
An in depth review of IV in our reserves are completed in tandem with case reserves.
Remember any changes made to factors by the actuarial team as a result of those reviews.
So up under the prior accident year actuarial category.
For the year, the starting reserve was $13125 and the claim was eventually paid for $21500. The year to date development is unfavorable by this difference which is $8375.
I as the Chief Actuary have complete decision, making authority on our reserves.
While the actuarial team has complete independence and determining the reserves to be booked there are many checks and balances in place internally, we have a close partnership with our claims pricing and product management business partners meetings are held throughout the months at both a localized a national level discussing trends.
Changes in the mix of business claims process changes rate activity and methodologies.
<unk> I meet with the audit Committee members of the board of directors to discuss results and trends for the quarter.
Furthermore, our external auditors perform an annual audit of the company as required by the SEC.
The actuarial team meets with the audit firm to discuss our actuarial process current trends and results for the respective quarters and year I.
I hope that you have found this presentation helpful for more information on progressive loss reserving practices, we posed to report under the Investor site of Progressive Dot com.
This report is updated every two years.
For your time today, and I will next turn it over to Jim to discuss cohort pricing.
Thanks, Gary now has transitioned from estimating ultimate losses in LAE to another key element of our pricing, which is our expected lifetime value.
We price each policy written to a lifetime target consistent with our enterprise go all of a 96 combined ratio.
We refer to this as cohort pricing, where a cohort is defined by policies written at new business and followed through their expected lifetime value, including all renewal terms.
Performance is measured as the sum of all expenses realized in the premium earned across all new and renewal terms for our policy.
When I say all expenses by that I mean loss.
Acquisition expenses and operational expenses.
As you can see by the stylized chart loss and expense costs vary between new and renewal policy terms.
With this in mind, we price across the policy life to achieve a lifetime 96 combined ratio.
Either way the sum of lifetime loss and expenses divided by lifetime earned premium nets us a 96 combined.
This pricing approach positions us to offer a competitive rate at new business and stable rates across renewals.
Now that we have a conceptual view of cohort pricing, let's dig into the mechanics.
The following is a tabular representation of a lifetime view, we covered in the last graph.
We think about pricing in three separate categories loss in LAE acquisition expense and operational expense.
Loss in LAE represent our indemnity experience.
We break out our expense ratio into acquisition and operational expenses and in all cases renewal business operates at a total lower cost structure than the first term or our new business.
While we price to the lifetime profitability of our policies at a 96 or better. We also manage this approach with consideration to our calendar year goal of meeting a 96 or better combined ratio.
Next we'll explore each individual category our line item and finish with our management of cohort pricing within our calendar year 96 goal.
Let's start with loss expense.
Loss ratio improves from new business to renewal and is primarily a function of mix of business and policy life expectancy.
And we price to that expected lifetime loss ratio performance based on the characteristics at new business, which ensures the business written is priced to a lifetime target.
Starting the upper left in this illustrative example, you can see that our first term business runs at a loss in LAE ratio of 85 with a renewable book of business at a 77.
With an expected policy life, a fixed policy terms the lifetime loss in LAE ratio was 78.
When combined with our other expense categories. The lifetime CPR is at 96, thereby combining new and renewal performance and achieving our lifetime target.
However, within the new to renewal loss ratio performance, there our segmentation opportunities its not all policy characteristics at new business have the same expected lifetime loss ratio performance.
Building on this with an illustrative example, consider car color starting in the upper right.
When looking at the expected renewal improvement from new business in loss ratio on Red cars, we see a larger change than we expect to see in green cards.
Implication for pricing are twofold first we observed that red cars last on average five policy terms and green cars last on average seven policy terms.
The second consideration is that the loss behavior also varies.
We price to this differential unexpected policy life expectancy, and the different improvement and indemnity performance between the two segments in this illustrative case car color.
Applying this to a real life opportunity, we frequently discuss key consumer segments as Sam's Diane's rights and Robinson and our continued opportunity for growth in the Robinson segment as a refresher robinsons are consumers, who bundle their home and auto knees and typically have a longer policy life expectancy.
We can recognize this policy extension and build it into our pricing, which ultimately leads to lower rates with more lifetime renewal premium at a lower cost structure.
Finally, while I focused on the indemnity piece of cohort pricing. You'll also note that the policy life expectancy can affect the other expense categories will move into the distribution channel and acquisition cost next.
Before we dig deeper into acquisition expenses, we need to first review the fundamental differences between the direct channel in the independent agency channel.
While we price both channels to a lifetime 96, the economics differ in both how we account for the acquisition cost and Relatedly the timing of those costs.
Starting on the left direct has an upfront acquisition expense by virtue of our marketing spend we spend consumer marketing dollars media and non media alike.
Count for the entire acquisition expense in the new business term.
We can see that in the illustrative example, with a 60% acquisition expense ratio on the first term and zero percent on subsequent renewal terms again this reinforces the lifetime value of extending policy life expectancy.
With the independent agency channel policies are acquired at the cost of commission paid to the Asia.
The commission expense is paid to the agent and ultimately reflects a percentage of premium earned by policy term.
Unlike direct we see a much smaller acquisition expense in the first term, which reflects the commission paid on that term and we see additional expense and renewal policies also reflecting a percentage of premium earned.
In both cases and the satellites example, lifetime acquisition expense was 10% and we achieve a 96 combined ratio, but we have a much larger first term expense and direct and a higher renewal expense and agency.
Let's look at each distribution channel and a little more detail.
We'll start by spending more time on how policy life expectancy is a key component to our direct acquisition economics.
Consider two policies with different needs.
In policy number one we see a total of six policy terms with a targeted acquisition expense of 60% on that first term.
With an average policy premium of about $750, we can assume our rate level considered as about a $450 acquisition expense, which is about 10% across the entire life of the policy.
Other words 750 times six policy terms is 4504 hundred $50 policy acquisition expense is 10% over that lifetime premium.
Let's move to policy number two.
All else constant, but the policy life expectancy, you can see the first term assumptions produces the same 450 permissible or 60% of 750 <unk>.
However, with the addition of two policy terms the acquisition expense of $4 50 years now 8% of total policy lifetime premium.
Said another way we invested the same $450 in policy acquisition as we did in policy number one.
But we see the benefit the PLE extension gives us as a lower acquisition expense as a percentage of lifetime premium.
We can segment, our pricing to capture differences in policy life expectancy.
The end market conditions, we can either increase the allowable.
To drive additional demand or we can lower our rate level to increase our new business conversion in both cases, we will still achieve a lifetime 96.
I realized example would be our continued segmentation efforts, reflecting our consumer marketing segments and correspondingly our investment to inquire Robinson again, those who bundle home and auto which carry a longer policy life expectancy compared to those who don't bundle home and auto with progressive.
Moving on to the agency channel.
This distribution business model it takes a different form as I mentioned, we pay commission to agents.
In the example above the policy achieves a lifetime 96, but you can see that the acquisition expense ratio is the same between the first policy term and the remaining five renewal terms.
This is possible because we pay commission by policy term and ultimately on earned premium.
In practice it is possible to very commission by new and renewal. However, even in this scenario the combined ratio implications will likely be much flatter than what we see in our direct economics.
Because we pay our percent of commissions earned acquisition costs in dollars will vary based on policy premium.
But as a percentage of premium will always match. This is a key element in cohort pricing as the dollars may vary, but the expense as a percentage of premium will be the same we still see cohort performance that has an overall higher cost structure in new business, but it is proportionately more in an indemnity and operational expense relative to our direct business.
Model finally, we finished with operational expenses and we see a modest new renewal differential.
The operational costs for servicing new business policies is greater than the operational costs for renewal terms.
The remaining other category includes things like bad debt or unpaid balances on earned premium.
We extend coverage on our cancel policies do not receive payment this happens with greater frequency on new business. We see these expense differential was consistently and can also priced them into our product.
Under your earnings have an implicit new and renewal mix driving results and we manage that mix to ensure target combined ratios are achieved for the calendar year in question.
While managing our new renewable mix, we consider both the mix of our cohorts and the rate revisions, earning in.
Remember that rate from revisions take time to earn in as policies have to renew into the new rate level.
Typically this happens in our new business faster than renewal as our rates hit the marketplace before a renewable book.
This will affect the combined ratio performance of our new business and renewal cohorts.
Setting rate changes aside periods of accelerated new business application growth can apply upward pressure on our combined ratio as we now know new business has a higher expected combined ratio and in the case of direct has additional pressure based on our accounting of consumer marketing expense.
Using this stylized example, you can see that in a period of high growth New business makes up a larger portion of our total earned premium and while we may be within our lifetime targets, we see our calendar combined ratio appears to 96.
To manage this we can slow growth and thereby reduce the mix of new business earned premium which resulted in a combined ratio of less than our 96th goal.
And in both cases, we are.
In our cohort targets.
This is a great example of how we develop our media budget, we consider both our lifetime economics, and our margin position considering each simultaneously with calendar year performance, taking priority and we then adjust our budget accordingly.
Upward pressure from new business can be dampened by the lengthening of policy life expectancy is our renewal book becomes a larger portion of the overall book of business.
With the expected combined ratio improvement, we can use that to manage new and renewal earned premium mix.
As you can see as it relates to our expected cohort performance, we price across the lifetime of a policy and balance our near term and long term growth with our 96 calendar year goal.
Thank you for your time.
This concludes the previously recorded portion of todays event. We now have members of our management team available lives to answer questions, including presenters carry trade cough and Jim Curtis who can answer questions about the presentation.
The Q&A session will be audio only and questions can only be submitted over the phone by pressing star one one on your keypad.
In order to get to as many questions as possible. Please limit yourself to one question and one follow up we will now take our first question.
Please standby for the first question.
The first question comes from Elyse Greenspan with Wells Fargo. Your line is open.
Hi, Thanks.
Good morning, My first question.
As highlighted that you need.
Six points of additional price right in personal auto over the balance of the year.
Can you just help us get a sense what are you assuming.
For severity and frequency just overall from a loss trend perspective, when you think about additional rate need from here.
Thanks, Elyse, Yeah, we really don't share our trends to lax normally but obviously, we've been seeing the trends and shorter tail business increased as I just the repairs to vehicles have slowed down and when we look at that and overall kind of both frequency and severity. We think we're at right now.
And just like I said in the last.
Call that could range, but at this juncture, we think we can get another six so about 17 ish for the full year.
And that will get you you believe that'll get you to the 96.
It'll certainly get close again, all the caveats I said last time with the weather.
We feel much better about our reserving because of those losses being short tailed when you start seeing those at the end of last year or so I believe Gary really got out in front of that.
We'll certainly get us closer, but again, all the caveats and the uncertainty that we've felt for the last three years kind of our our underlying that assumption.
And then my follow up you guys saw a significant amount of adverse development for accident year 2022. So I'm just trying to square. The fact that there was a good amount of adverse development for accident year 2002, with the improvement that youre seeing in the accident year ex cat loss ratio so far this year.
Yeah, what I would say to that is you know as those 2022 rates earned and I put out in one of the slides that I had we believe we're putting on the books, both the new and renewal business that is closer to or below our targets. Our accident your targets I shouldn't say in both channels on a year to date basis.
So we feel good about where we're at in the business from putting on the book in 2023.
Thank you.
Thanks Elyse.
Please standby for the next question.
Please standby for the next question.
Our next question comes from Mike <unk> with BMO. Your line is open.
Yeah.
Hey, great good morning.
My first question is on.
Loss cost expenses.
You talked about Tricia.
Coming from a variety of sources and you also talked in the letter about some of those sources looking like there.
Maybe mean reverting.
Decelerating a bit but I guess just stepping back.
I know there is I know this is a key.
Complicated issue, because there's lots of different sources, but.
We saw I feel like over the last decade, or so a bit of a secular trend in terms of higher <unk>.
The injury.
Expense inflation levels, maybe you disagree with that but.
And the industry it seems like they've been doing a decent job of.
Appreciating that.
Over time and pricing for it it seems like it's coming more we can see the data is coming more from the.
But then the non <unk> side.
And so do you feel like there is a stickiness to this debt.
That you and the industry are are appreciating and ultimately does this kind of cause progressive to not be able to maybe play as much offense.
If the if there is uncertainty on the.
PD trend over the coming year or so.
Yeah, I think we have our arms around does that mean for B I.
We try to keep ahead of that trend when we see it we react to it and were in line with the industry. This has been a very unusual time as you know if you've looked over the last couple of years and you've seen the manheim used car index and how thats float, even though you're seeing it ticked down a little bit it's still is a.
A very big difference in what you saw in 2018 in 2019.
So you know when we look at that especially as we looked at the second half of last year, we really started to see that trend specifically in property damage, but also in collision increase and it's really you know we're watching it flow through in our claims organization.
Do you have let's take the property damage example.
Somebody is taking care of another one of our carriers.
Our competitor is taking care of their uninsured, but theyre going to Subrogate us so that accident happens today and there is no shop capacity for that particular heads. So they do an estimate as best they can with the sheet metal selling the car, let's say, it's drivable for this example, and they continue to drive the shop can get it in 45 days from now maybe 60 days.
From now and it comes in the sheet metal off of it Oh Lo and Behold, there's more damage those supplements are more frequent and they're more expensive so you're having capacities longer cycle times longer rental times I think I said in my letter that rental time, we're seeing it go down a little bit and Thats. One data point. So we'll continue to watch that.
But you've got that and then you've got labor rates.
And parts increase so and in terms of your question the stickiness will.
Likely be based on wages for workers in the body shops. There was recently a wall Street Journal article that talked about automotive repair workers there.
Their salaries increased 24% in quarter four of 2022 compare to 2018, so 20% over the last year and that was from the Bureau of Labor statistics and making cars.
Be in the same position the indemnification of vehicles is also sore and since 2018 about 36%. So I do think.
We might see some trends like in used car prices as the supply chain issues came through in new et cetera that might continue to go down, but I think some of the other things that will be part of a new normal.
Okay. That's helpful. My final questions.
On the expense ratio, it's been a date the expense ratio has come down a lot you called out we can see some of the math behind it looks like add expenses.
The biggest lever, which.
Which is a great lever to have but kind of curious directionally as we're looking at the AD expense ratio over over.
Decades, plus as does this.
Or are we kind of at the trough or is there more room for either at <unk> or the expense ratio to come down in the coming quarters.
Well as we attempt to get so our calendar year, 96, where theres always levers we can pull.
Clearly I'd rather be in a different position, where we're spending more money on media and continuing to grow as long as of course that would be at our target profit margins. We have a lot of discipline within the company as well in terms of expenses in times such as these so we you know obviously, we will continue to look at that for this next six.
Months to see if we can get closer to that 96.
Thank you.
Thanks, Mike.
Please standby for the next question.
The next question comes from Jimmy <unk> with J P. Morgan Securities. Your line is open.
Hey, good morning. So you went through a lot of details on your whole process on reserving, but maybe just stepping back can you talk about your confidence in where your reserves sit now and given.
Given that you've had I think six to eight months of adverse development.
Are you a much more comfortable than reserves overall or is there still a lot of uncertainty and it's hard to say that you've caught up in terms of loss trends.
I'll, let Gary weigh in on that I would say from where I sit I'm much more comfortable but again, Gary is independent and does his reserve reviews.
My involvement I hear about that in just a little bit before you do say Gerry why don't you weigh in a little bit sure. Thanks, Tricia Great question Jamie.
So overall, yes, I feel really good about our overall reserve position and where we're at right now.
To your point, we have had quite a bit of unfavorable development each.
Each of the last six months.
As Tricia pointed out if you exclude Florida all of the development would really be coming from accident year 2022 were actually favorable.
On accident year 2001 and prior.
And within accident year 'twenty to over 85% is from accidents that happened in the last six months of the year.
A lot of that relates to the fixing cars and the reopened severity that Tricia was talking about that's fairly short tailed we've seen that come through the data and we have reacted very quickly to it and so that gives me a lot of confidence because of the short tail nature of or most of the issue was.
We're in a good position right now.
Same time, right I can't obviously guarantee and the data could change going forward, but I feel really good of our current position.
Thanks, Ken alone.
Along the same lines on Florida, I think it was <unk>.
Somewhat expected that the number of lawsuits would go up given tort reform, but it's lasted longer in your results.
So just wondering how the number of lawsuits that are coming in that have trended.
Through the last three or four months or so and then was there an element of Florida.
June in terms of Edwards to open and how that's changed versus maybe.
April and May.
Yeah.
So that's a good question so.
With respect to Florida overall, obviously, the big hit occurred.
March April may and we started to see it level out and what's been coming through most of June really related to the actuarial adjustments that we took from the reserve reviews, primarily related to property damage third third party fixing cars, So Florida has.
Had a very little impact from what we had from the June development.
Yeah, and all I would say in addition to that as you know as soon as that the house Bill 87 went through and then we had the subsequent.
Losses that I talked about it we went in and we're pretty aggressive and conservative because we were trying to figure out what was estimable and probable and that will develop over time as those also get settled so that's not something that will we will know right away because those take a little bit longer to settle.
Thanks.
Please standby for the next question.
Okay.
Yes.
The next question comes from David Magee maintenance with Evercore. Your line is open.
Hey, good morning.
I just had a follow up on the reserves. Gary you had mentioned that you can adjust up to 100% of your reserve balance monthly I'm just wondering if that happened in June .
Or was it a normal review where you maybe you did 60 to 70 reviews.
But not a complete review when we.
We have to wait for potential further movement upwards or downwards as we move forward over the next few months.
Yeah. Good question. So in June it was the typical 25% to 30% of reserves that were looked at the comment related to the 100% kind of goes to the part on the the reviews that we do not look at it in the months, they still will be inflated or unless there, particularly.
If theyre below the threshold they will be inflated.
And they also will be aged they also can change.
For example, if they become plaintiff attorney Repped et cetera. So the the potential every month to have 100% of the reserves adjusted somewhat whether it's by an adjuster or whether it's by inflation or aging exists.
In terms of our normal process, we typically stay pretty consistent with that 25% to 30% I would say the only a couple of times, where he might deviate.
In December in particular, because I'm the opining actuary for the statutory reserves. If we are seeing additional information we may add a review or two to make sure that the statutory companies are in the correct position as of year end and then obviously for something like Florida. When the house Bill passes we would go into immediately.
<unk> with new information from that and do an adjustment.
Got it so I guess so.
The June review it.
It sounds so I guess you just confirm that was just 25% to 30% and maybe some other adjustments around the edges, but it wasn't one of those full comprehensive reviews.
Yes, that's correct.
Great. Thanks.
And then just my second question.
Yeah.
So I believe there was a stylized example, just given about the mix of business and how you're.
Having less new business more renewal business can have an impact.
I guess, how quickly can can that have an impact on the combined ratio.
Particularly considering the growth that you guys had in the first quarter.
Is that something where where that mix can change significantly through the end of this year.
I'll, let Jim talk about that a little bit of obviously, there's a lot more that goes into it than just the acquisition expense a lot has to do with losses and there can be uncertainty around.
Fees etcetera, but Jim do you want to talk a little bit about that sure also a good question.
A couple of ways to think about that there's several dimensions to consider when thinking about mix so to your point about.
Any type of lag function when we write business sits in written premium, but it doesn't necessarily hit our earned premium mix until it starts to age or get into the policy term.
So we would see on a six month basis, roughly three to four months later, where you start to see earned premium mix shift that would work in both ways.
The growth on new business apps and periods of slowing of new business apps.
Yeah.
Yes, I would add to that just for clarification, we expense advertising in the period incurred so I don't have a direct basis, especially.
And you're seeing that come through the expense ratio very quick.
And I would build on that debt.
Expense does hit immediately the earned premium mix with where we would start to see some measure of reaction in our indemnity performance.
Thank you.
Thanks, Please standby for the next question.
Okay.
The next question comes from Alex Scott with Goldman Sachs. Your line is open.
Hi.
First one I had is on the.
In the commentary you guys gave on the lifetime.
Combined ratios and it just strikes me is.
A lot of that is very geared towards what the lifetime ends up being and appreciate that you guys probably have the best data and best Kipp.
<unk> analyzed it too but are we at a period of time, where just given how unprecedented is with inflation and all the pricing.
How much.
Room is there around the estimates that you guys are putting into their lifetime, but I mean are you being conservative around.
Potentially significantly higher churn as we kind of get through this period, where everything is being taken out to market on a much more consistent basis.
How much is that being incorporated into your decision as to whether to start growing quickly or not.
Well I think we always try to be realistic with the data not too Conservative church conservative are generous and.
And we take each data point and as we get more confidence of course, we're able to do that and we saw an increase in PLE on both the 12 months and three months I'd like to see a couple more data points. So theres a lot of shopping in the industry and obviously you know you're looking at the same data we are from the industry and Theres a lot of movement from rates. So I would.
Say theirs.
Hundreds of variables that we look at when we think about that and we'll continue to do so again in this uncertain environment, Jim do you want to add anything.
Sure.
We also considered different time periods and just typical when looking at data set longer time period more credibility and more confidence we have.
We will look at recent time period is just a leading indicator adjust slowly.
My team said sort of are permissible and acquisition as an example, and we just go through that exact process.
Yeah.
Yes.
Just quickly add is that we're not writing a four year policy at once right, we constantly adjust rates to ensure we're hitting our lifetime target so to the extent that we have those targets.
You all have every policy and we have an advantage with a mix of six months policies that we can adjust as we see another card or another data point and loss costs et cetera.
Have you seen that with how nimble we've done with our pricing over the year as we've seen things we've made changes where we are as anxious.
It's likely our shareholders to grow but again, we have very specific core value of profit on a calendar year 90.
<unk> 96, and so that that's a that's a priority.
Got it that's helpful follow up.
I had is on the.
The loss adjustment side of things I mean, some of the anecdotal.
Chatter Ive heard out there is that.
Just given where the labor markets are and so forth that the claims adjusting process might be chat.
Challenged by that and being able to get the right amount of hires in talent in there to be able to.
Execute that process.
<unk> done normally in.
Have you experienced any of that is that at all a challenge that you face in trying to get the reserves.
In the right spot consistently or or is that something thats.
Less of an issue at this point.
I think it's a little bit less of an issue I think anytime you have the growth we've had and with the labor environment that has been around for a couple of years. That's a challenge I will say at this juncture, we are fully staffed and our claims organization. So we feel really great about that and turnover is continuing to go down that is sad.
Our tenure is still low and so with that Com is just a learning curve from that and our claims president is having the the newer people.
They are in the office with Supervisors, because that's really where you learn a lot and you get up to speed very quickly and we have a lot of processes in order to do that but I would say if you asked me that a year ago. It would be a different answer than today I felt confident in our claims organization. The action that we're taking and tenure continues to grow I think we'll be in a <unk>.
Position for accuracy.
Got it thank you.
Please standby for the next question.
The next question comes from Josh Shanker with Bank of America Your line of sight.
Okay.
Yes, I guess my question for Jim.
At the new cohort.
Acquisition cost ratio can you talk a little bit of how the current period.
Shopping in the last meeting to reach new customers with advertising to get them on boarding effects.
The way you look at that new cohort margin.
Sure.
We measure that by are permissible compared to actual actual defined as our media spend or consumer marketing spend an incoming volume of apps.
With what we believe to be us.
Sort of heightened dislocation in the marketplace a lot of shopping with we hold our conversion level of pedal drive our cost per sale down and so in the current period, we'd be pretty efficient.
And then it's a matter of managing our media budget to our calendar year position.
And I realize how valuable the 96 calendar year as the company.
Is there a risk.
Right now there is an opportunity to acquire new customers.
<unk> costs.
Cost far below the long term average and by focusing on the 96.
There's a lot of growth being forgone that ultra will be more expensive to achieve in the future.
Gosh, that's a great question and one we obviously ask ourselves and in fact I was recently Onboarding, a new director on our board and I, let her know there in my mind as I lead. The organization. There are two things that are sacrosanct here, our five core values at our 96 calendar year combined ratio.
Asia, So I'm going to this is going to be a longer answer, but I think it's I think it's one that a lot of the a lot of your analysts.
The analysts of our dog and so I think it's worth the time for me.
Me to walk through a little bit how we think about this on the.
The profit side, the growth side and the capital side. So let me first begin by reiterating our core values and of course, one is process. We went public in $19 71 and ever since that date, it's been publicly talked about probably prior to that I just don't have the evidence in writing but.
All of our other core values a profit it's not a value of convenience, where we look to waver from it depending on the business, It's really how we guide our business.
It's an all in number we don't manage to an underlying even though that's obviously something we look at but it can't be exclusive of catastrophes or adverse development ore reserve development of any kind because that's part of being in the business of insurance.
How it reads, it's a profit core values states, we have a responsibility to ourselves our customers agents and investors to be a profitable and enduring company by offering products and services consumers value its.
It's part of what makes and has made progressive so successful we inject the discipline of putting profits before growth and we've built a business that has delivered better than industry results consistently for a very long time.
That consistency in which we've been able to deliver on our profit target is a significant part of the share price multiples we enjoy today.
Like now when profits are under pressure, we take action quickly and aggressively and by taking action quickly and aggressively we not only meet our targets, but will also put business it reaches or exceeds our goals and the flex business that does that.
You might remember because you've been around for a while over seven years eight years ago. When I took over this role I took the opportunity to publicly commit system objectives that we've written about for years and I just wanted to take a moment to reiterate one of those.
Outlined in our annual report and our policies section, but I think it's worth repeating.
For us a 96 combined ratio is not a solve for a variable in our business model equation, but rather a constant that provides direction to each product and marketing decision and a cultural tipping point that ensures zero ambiguity as to how to act in certain situations.
At a level, we believe create a fair balance between attractive profitability in consumer competitiveness, it's deeply ingrained in central to our culture I can't I can't really stress that enough. It's part of the fabric of our culture and really embedded in everything we do along with the other four core values.
It's true our published the accident year ratios are lower than the calendar year ratios and closer to our targets. However, that's a moment in time and I really have said several times in prior calls the uncertainty is the new normal since the onset of the pandemic and that remains true today, so for us growing fast and uncertain future.
For profit is a dress is a recipe for sustained profit paying many insurance companies makes us messed up and we don't intend to repeat those mistakes.
But let me go to growth because I think that's the story that we're not hearing enough as well I wanted to remind everyone of the significant growth. We've had in the first half of 2023 and six months. We've added 2.2 million policies in force and we've increased written premiums by over 5 billion and that's the equivalent of adding a top 10 personal.
Auto carrier, so I would say growth this year could be defined as spectacular.
Ambient shopping and you brought that up does remain elevated our agency channel is actually the best barometer for industry shopping level, because it's less affected by media expenditures.
Channel quotes are up about 16% in the quarter.
If we had perfect knowledge about the future and knew that we for sure had adequate rates undoubtedly there is opportunity for significant growth today, but that said growth opportunities today do not preclude the possibility of growth opportunities tomorrow.
You've probably watched in the past and we've taken our rates and other underwriting actions to focus on achieving our profitability goal, we have proven to be better positioned for strong growth in the following periods.
2022 was among the worst years for industry personal auto profitability and so far in 2023 has been worse.
We can't know the future current market conditions changed yes, there'll be opportunities to increase market share in the future and then just let me wrap up by saying you know growth can't happen without growing surplus our capital position today is strong and we believe we have plenty of capital to support the premium growth. We expect we have a structured growth business. It is.
Largely self funding internally through underwriting profits and investment returns.
Bring us back full circle, our profit core value is the key to sustained growth I know that was a long answer, but I think it's really important to be super clear and unambiguous about how we think about the business I hope that answered your question hopefully others.
Thank you very much for the extended explanation.
Thanks, Josh.
Please standby for the next question.
The next question comes from Greg Peters with Raymond James Your line is open.
Good morning, everyone. Thank you for taking my question.
I'm going to start.
Building upon your comments you just had about the growth results and Jim's cohort pricing.
I'm wondering if you can provide us a perspective of how the limits profile of your consolidated auto book have changed.
I would imagine if youre focus more on Robinsons profile is moving up but.
Maybe you could give us an updated perspective on how that looks and where you think it might be heading.
Yeah, I think you're I think you're spot on we are trying to have more and more other diane's rights in Robinson is a lot of sounds as long as we can make our target profit margin, but we continue to increase our bundle and as we think about both auto and property. We will add those bundles are are more important and so we will increase.
Our Robinsons overtime and then of course, we've talked about this in the past and it's probably worth an update at some point in the next couple of quarters.
The soon to be Robinson, so it could be a diane is buying a house et cetera. So we'll continue to try to be a place for every cohort, but we have increased our robinson its profile.
In the last several years.
And of course during times like this sounds are gonna shop, more because they're very incentive by price.
Alright.
Yes.
Hi.
I guess, what I'm wondering is.
And the cohort pricing, there's some assumption around retention.
And given that there is all these price changes happening not only at progressive.
With a lot of other companies in the auto sector I'm wondering how.
With elevated shopping how those retention characteristics are holding out.
Ed at the Robinson level at the right level is it is it matching what your expectations are is that causing some hiccups along with your pricing assumptions.
Well I think we do.
We don't talk about retention when he went to each of the profiles of our consumers the marketing tiers.
But we do look over time, and historically Robinson have fared better.
And we find that the more products you have a stickier gonna be and.
Especially if.
If there are other characteristics ago can last.
About the same month.
It hasnt varied too much over the years, but.
Although we don't share it I would say Robinson has continued to be stickier.
Great.
We are.
Constantly looking at the assumptions that go into our acquisition model and as John was mentioning we used.
To understand the permissible costs for acquiring customers and we do that at a very granular level. So you're right. There have been significant changes in policy life expectancy, obviously lately. It has been going back up and we're looking at that at a very granular level and pricing that in over the lifetime of.
Those customers and to Pat's point, we have many shots at pricing.
Pricing those customers if necessary.
Got it thanks for the answers.
Please standby for the next question.
The next question comes from Tracy Bangui with Barclays. Your line is now open.
Thank you just a quick follow up on your 96% combined ratio target I. Appreciate all the commentary so far but I'm. Just wondering do you feel like there are secular changes going on in auto that you may need to do better than 96 like it feels like the Taylor's Lincoln.
Which is happening for property damage. Despite it being a short tail line, which could add some volatility.
Well good question trace you remember our 96 is an aggregate. So we look at it differently for new business renewal business, we've taken to the assumptions of our PLE products stay so although it all goes up to 96, which I don't think will change one thing we do we do look at the it really granular law.
And two I think we want to watch this play through because some of these changes came about pretty quickly and the delays and a lot of it is really the the shop capacity and as that starts to open up with the exception of what I talked about with labor rates and probably prices I think we could be priced adequately and continue.
You too.
Keep our 96 calendar year and lifetime goal that would be that would be my approach.
Okay.
Your year to date current accident year actuarial adjustments at $424 million was primarily driven by fixing vehicle coverages.
So how do I reconcile that update with your property damage severity loss trend going down when you come up with your loss picks like you reported yesterday property damage severity as 11%, but if I compare that to <unk> was 15% and then 20% in full year 'twenty two.
Well, we had a lot of rate increases come in so that was one of them and a lot of our property if you take if.
If you look at the property and the cat load on top of it or the cat I shouldn't say the cats, who had you can take that into account, but it.
It is the 80% of that I think he did a quarterly number but 80% of that.
$1 1 billion on a year to date.
It was auto 50% with cars about 35 ish percent was.
Florida glass Pip B I and the rest was I be in RMB I across the country, but property did not develop favorably Gary do you want to add anything.
I think Patricia spot on there the one thing I would add Tracy.
Your point the property damage severity that you're showing that's for all claims.
We stratified and only looked at the reopens severity, which is really where the.
Our reserve actual adjustments have come from the reopened severity as well above and has been increasing over those quarters relative to the the 13, 14% you're saying.
Okay, Yeah, sorry, I meant in your current loss pick.
Your actuarial adjustment not mid 'twenty two.
Hi, Jasmine.
Are you considering a higher loss pick.
For property damage or not given.
It feels like that loss trend is trending down.
We are so I think to your point, even though the overall is trending down some the reopened severity. We believe on the current accident year has been trending up and so a lot of those.
Actuarially adjustments both on prior and current year are reflecting the elevated reopens severity, even though to your point. The overall has come down that is a different trend. If you just look at only the reopened severity, which is really what's driving a lot of the reserves.
Got it thank you.
Please standby for the next question.
The next question comes from Ryan Tunis with Autonomous Research Your line is open.
Hey, Thanks, good morning.
So Tricia I guess, just going back to the comments you were making about how in the past you've had tons of remediation that have led to.
Tie ins of the outsize growth and you referenced that you see opera.
Jamie for that in the future just curious where you sit today is there any reason to think your appetite.
Appetite will grow will be any different going into 2024 than it was going into 2023.
As long as we look at the data and we feel good about where we're at with our combined ratio on a <unk>.
Overall calendar year and accident year, we wont grow as fast as we can so that has been our objective for a long time 96 grow as fast as we can we want to do that we're a growth company, we feel great about it but again profits over growth, but as soon as we feel confident with a little stability and less uncertainty.
We are very prepared to grow.
Okay.
Just to be clear like.
Let's just say in or about you guys executed, but there is a bad hurricane and you ended up coming in at a 96 five.
That wouldn't lead you to punish yourselves.
Grow in January right you'd be looking at what you think the perspectives returns are.
Yeah Yeah.
We don't know how the next six months ago, we're going to do the best we can but again like you said, if something happens that is above and beyond that would be different but yes.
We will continue to grow and in.
2024 would be a new year as long as we felt that we had.
Policies on the books that we believe are at or below our new and renewal targets.
Got it and then just lastly, we've talked about the impact.
Of the 400 towards stuff on prior year.
Is there any way to quantify.
The loss ratio impact that that had in the first half of 2023 on a current accident year.
From 40, you mean.
Correct.
Current accident year, the impact was virtually nil.
Because those are lawsuits that are opening claims that occurred pre.
H B.
837 can't be nil, because <unk> 37 was in March so it's.
Predominantly those were prior year claims we're also looking closely at.
We expect to be some benefit in the environment from HBA 37, as well we're looking at the data closely it will take a while to assess if indeed, we are seeing that but we personally we believe that there is going to be benefit and.
We look forward to pricing again, once we see it.
Makes sense. Thanks.
Please stand by for the next question.
The next question comes from <unk>.
<unk>.
The mirror.
With Jefferies. Your line is open.
Thanks, Good morning, a lot of questions on the 96 or <unk>.
On here.
Yes.
So if I understand correctly youre still within line of sight to be.
Close to 96 for this calendar year, one of the ways that you can achieve that is by lowering new business growth, which ultimately should improve the combined ratio I guess my question is and maybe it's the other side of Jonathan's question earlier.
Ultimately can you achieve that simply by lowering the.
New business growth, while achieving kind of a 96.
Combined ratio for cohorts or do you now need or are you aiming to achieve a better than 96.
For existing cohorts in order to get to the 96 will be is closer to the 96 for the year well, we clearly need to get right. So that's one part of the Formula. We also have really had a lot of restrictions from an underwriting perspective on new business and so those are some other thing.
Does that go into it we have a line of sight, but again.
At that by all the comments regarding uncertainty that I've said before.
Okay.
Ultimately do you believe that beyond the <unk>.
Flexing down or up for the new business growth.
Do you need to take any additional actions to lower the.
The combined ratio for the existing business below 96 in order to get to a full year 96 or close to it.
So clearly the new renewal mix is working in our favor right now the other bigger.
Tailwind is the rate this earning it so we've taken a lot of rate, we still have about six points and personal auto for that rate to earn in.
We're taking six more points for the rest of the year. So the denominator effect as a tailwind for us the rest of the year.
Got it thank you.
My other question maybe for Gary since Gary is on the call.
We saw an uptick in <unk>.
Bodily injury severity this quarter.
I am curious as to how that ultimately plays out or how you think about it how you approach that with regards to prior year.
Reserves.
Ultimately I would think that.
Bodily injury has a longer tail, so more risk therefore things going adversely so how do you approach that.
I'll start and then Gary can weigh in you know about half of the B I.
Was actuarial reserves, so it's pretty much in line with the industry. So we're not too concerned about it a lot of them are soft tissue attorney wrapped but not litigated so they do take longer.
But I feel like we're in a good position and understand.
I understand you know where they're headed in and I think in a better position than we were even a year ago. Gary do you want to add anything yes, I think Patricia spot on there only a couple of things I would add from a reserve side as we tend to look at the data off of an accident period basis right as opposed to the reported calendar information the accident peer.
Data is more smooth on a calendar basis, you can get some more.
Movements up or down sometimes with.
Changes in mix or closures et cetera, so on.
On an accident year basis, we're a little bit lower than what that shows.
The other thing Tricia alluded to is theres, some large loss mix et cetera. If you think back to that presentation. That's one of the reasons, we employ that reserve thresholds. So in our claims adjusters identify those large losses once it's above that threshold. They put that up immediately so it's recognized in the reserves and again it could be a little bit of a timing difference.
Between the accident period in the calendar period, which you would see.
Thanks, so much.
Thank you.
Exhausted, our scheduled time and so that concludes our event Michelle I will hand, the call back over to you for the closing scripts.
That concludes the Progressive Corporation's second quarter Investor event information about a replay of this event will be available on the Investor Relations section of Progressive website for the next year you may now disconnect.
Yeah.
Okay.
[music].
Yeah.
Okay.
[music].
Okay.
[music].