The Progressive Corporation (PGR) Q3 2021 Earnings Report, Transcript and Summary

Welcome to The Progressive Corporation's Third Quarter investor event. The Company will not make detailed comments related to the quarterly results. In addition to those provided in its quarterly report on Form 10-Q and the latter to shareholders, which have been posted to the Company's website, although CEO - will make a brief statement. The Company will then use the remainder of the event to respond to questions. Acting as moderator for the event will be progressive Director of Investor Relations, Doug Constantine. At this time, I will turn the event over to Mr. Constantine.

Thank you [indiscernible] and good morning. Although our Quarterly Investor Relations event typically include the presentation on a specific portion of our business, we will instead use the 60 minutes schedule for today's event for introductory comments by our CEO and a question-and-answer session with members of our leadership team. Questions can only be asked by telephone dial-in participants. Dialing instructions may be found at investors.progressive. com/events. 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. Additional information concerning those risks and uncertainties is available on our Annual Report on Form 10-K for the year ended December 31, 2020 as supplemented by our 10-Q reports for the first, second, and third quarters of 2021, 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. Before going to our first question from the conference call line, our CEO Tricia Griffith will make some introductory comments. Tricia.

Thanks, Doug. Good morning and welcome to Progressive Third Quarter conference call. We appreciate you joining us. During our second quarter call, we discussed the challenges we were facing as our customers returned to normal driving habits, as the country open from the pandemic and as supply constraints contributed to an unprecedented increase in vehicle valuation. In the third quarter, those challenges continued with the added effect of the most expensive storm in progressive history, hurricane Ida. The result of these challenges is our first quarter with an above 100 CR in 20 years. And through Progressive fashion, we're facing these challenges head on to do what's needed to meet our publicly stated goal of a 96 combined ratio on an annual basis. As part of our efforts to ensure we meet our 96 target. We're taking rate increases across our product lines. While objections and regulators scrutiny our part of the revision process. The pressures on the insurance pricing, are real. The entire industry has been buffeted by the headwinds of higher severity, post-pandemic increased frequency, and weather-related catastrophes. Regulators take their mandate of adequate rates seriously. And as such, we've been able to work with regulators to increase rates to meet the rising costs. Year-to-date through the third quarter, we've placed in-market increases in aggregate of 5 points in Personal Auto, 3 points in Commercial Lines, and 8 points in Property. In Personal Auto during the third quarter, rate increases were effective in 20 states, which had an average increase of about 6%. So we're taking the changes in the environment seriously and reacting decisively. We have more revisions and process across our suite of products, as we work to ensure the rest of 2021 and 2022 meet our calendar year objective. Underwriting is another lever that we're using to address profitability. We continue to use this level in Commercial and Personal Lines to ensure we write exposures accurately and they meet our underwriting targets. In Personal Auto, our 8 dot 7 model, which is now in states representing about 40% of our premium, further advances the science of underwriting. And Homeowners, where profitability has been under pressure for several quarters, we are taking additional steps to hasten our progress to meet our profit objective. In the state with high CAT exposure, we've changed our underwriting rules to reduce our exposure, including targeted non-renewals. While non-renewals are not our preferred path, there are times where we need to use nontraditional methods to meet our targets. While we take steps on the profitability side of the business, we continue to see strong growth. Personal Lines written premiums grew 7%, while Commercial Lines and Homeowners both saw double-digit year-over-year written premium growth in the 3rd quarter. Personal Lines and Homeowners recorded PIF growth of 8% and 13% in the quarter respectively. Commercial auto continues to capitalize on the macroeconomic environment with its third straight quarter of double-digit PIF growth, largely due to growth in the for-hire trucking segment. Though our underwriting actions often have the unfortunate side effect of reducing growth, our product managers continue to scour the competitive landscape to find profitable growth opportunities. Finally, I'd like to take this opportunity to once again, thank Mike Seeger, our Claims President, and Jeff Cherny, our Chief Marketing Officer for their contributions to Progressive and to offer my congratulations on their planned retirement. While I'm confident that their replacements are up to the task, Mike and Jeff presence will be greatly missed. Thank you and I'm ready to take the first question.

[ Operator instructions] one follow-up. Your first question comes from the line of Mike Zaremski of Wolfe Research. Your line is now open.

Hi. Good morning. I guess as an insurance geek, I kind of missed the deep dives you guys do. But -- So first question, I guess a lot of -- I know there'll be a lot of focus on and you gave a lot of color in the past about Personal Auto, the severity side of the equation. I was hoping to maybe get some of your insights on the frequency side. Maybe any color on the rate increases and actions Progressive is taking. Does it -- Is it some of the predicated on the potential for accident frequencies to continue increasing? You think they are kind of plateauing? I know they're nearing pre -pandemic levels, I guess I feel like that's kind of, an odd -- one of the bigger uncertainties out there.

Thanks, Mike. Yes, that is a big uncertainty and we watch it closely, especially because we have so much data from our usage-based insurance on Snapshot. And there's a couple of interesting trends that I'd like to share, we're going to watch this closely again. There's been so many dynamic shifts since the pandemic that we really do have to watch, and then react swiftly to the data. So if you look at vehicle miles traveled, they haven't really changed since the last call. There is still down about 6% to 8% from our 2017 and 2019 baseline. The bigger news that we've watched is frequency has picked up. And we've noticed that in each quarter, specifically in PD and collision. So let me give you a little bit of color of the things we watch for. So, during quarter 1, collision frequency was down about 10 points more than vehicle miles traveled. In quarter 2, that narrowed to 7 points, and in quarter 3, that narrowed further to 3 points. So we look at day parts. During quarter 3, that narrowing was across the whole day. During quarter 3, we saw that frequency narrow more during the morning rush hour, so think of 6 AM to 9 AM. While we see some evidence that there's congestion as well, it's a little bit surprising to us because people haven't fully returned to the office. We read the headlines in most companies because the Delta variant have pushed off a full return to the office till January. So could it be that kids are going back to school so we're taking our children at school. So there's other variables that we're watching really closely. I think what will be interesting is to see what happens first quarter 2022, when many companies have stated they're going to return to work. And of course, what would that mean? It certainly won't mean full return for every single person, since I think there's going to be a lot of flexibility built in based on the pandemics. We think that'll be an interesting data point. We also have observed frequency up sharply in the overnight hours. So think of like 1 to 6AM, both weekends and weekday is not correlated with the March reopening and that frequency is above pre - Covid levels by about 10% to 20%. Again, a smaller amount of people driving. So we're watching BMTs closely by day-part, each state, etc., and will be very interesting to see how frequency continues to close the gap on vehicle miles traveled or not. But we're going to watch that closely. So we were able to get a lot of interesting information from our telematics data and we're going to continue to watch that. Does that help Mike?

Yes, thank you for that. My last follow-up question, if I may, if from -- if you look at Progressive's overall paid to incurred boss ratios, I know this is Company-wide. And if we exclude catastrophes, they seem to be down and a lot of the -- for a lot of the commercial cash tensures, we're seeing paid loss levels be down too and some of -- I'm excited that the codes being clogged are running slower. And I guess any color on what's -- anything that's going on there that points to maybe some conservatism in Progressive 's picks?

Well, we think of our reserving, in any time frame, we want to be adequate with minimal variation, and that has been consistent for as long as I can remember. I think it's really hard to rely on historical metrics when we're looking at the data. So when you look at case IBNR or paid-to-incurred, whether you compare it to companies or even our own historical data, it's really hard without having the underlying data. So we have changers to our closure rate drop, and then rebound in frequency, increase in severity. All those ratios change when you look at that. What I would say about Progressive is that we feel very good about where we're at, again, with adequate -- with minimal variation. We're about a half point unfavorable for the year, and the majority of that can be attributed to Florida bit. So we don't believe there's conservative and we have not changed our model.

Thank you.

Thanks, Mike.

Your next question comes from the line of Michael Phillips of Morgan Stanley.

Thanks. Good morning. Tricia, I preached in the comments in your letter about how you see two forms of risk from the regulatory environment. The first was the kind of risks around mandatory of rebates or just regulatory rebates or mandates around the profitability from 2020. I guess, on that one, are you referring to the possibility of more refunds that might happen and I guess that's -- and if so, how real is that risk?

I was referring more to the asymmetry and the fact that we had this unprecedented event that hopefully none of us will have to live here in our lifetime where we had excess margins. And as an industry and certainly Progressive we swiftly gave that back to our customers and our 20% decrease over the 2 months. And then of course, when a decreased rates by another 3%, which equated to another $800 million on top of the $1 billion we gave back. So what I was referring to was now we're in a much different place. Severity trends are up 10 points, and we need rate. And we want to make sure in the end. And we believe that regulators are rational. They want to make sure that we're open and available and have competitive rates, because that's good for all of our consumers. And so, what I was referring to there is when things change swiftly, it's got to go both sides. And in many of the states that we work with, and again, the majority of the regulators we're working with are really rational and get that they want to see the data which makes sense. They want to make sure the rates are adequate for their constituents. But we definitely need rate that is real.

Okay. Stepping feels real. I guess the second risk was just in line with that prospective rate increases. If -- are there concerns there from when you talk to regulators that maybe what you're seeing on the severity side isn't long lasting and therefore, we don't want to give rate increases if that's the case?

Well, it is either because we're state regulated, and there are different ways with which rates get improved. And so different states look at it differently. So as you look at a state like California, their Department of Insurance requires us to look backwards to fill up the templates. So, while California was a little bit behind in frequency, it has picked up and is actually outpacing countrywide at this point. And so, when you fill up those templates, those rate indications are going to be distorted based on the data from last year. What we believe will happen is -- it's not reflective of the claims activity we're seeing. So as frequency and severity trends earn in, we'll be able to put that in the templates and show that we will -- we're rate and adequate and then we'll be able to increase rates in California. For now, we're going to reduce our marketing spending in California to slow our growth, and continues to be able to update that department. So we work with every department, and every department is a little bit different. You can have file and use. You can file prior approval. We work with each department to make sure we give them the data they need to feel good about putting our rates on the street.

Okay. Good colors. Thank you very much. I appreciate it.

Thanks, Mike.

Your next question comes from the line of Jimmy Bhullar of JP Morgan.

Hi. Good morning. So, first I had a question just along the line that have been asked on the Auto business. Where are you and you mentioned California already, but where are you overall through the country in terms of your prices, catching up to what's happening with frequency and severity, and your margin sort of getting to what your long-term goals have been. Is this something that you think happens in the next three to six months or could it be even longer as you go through the whole process with states like California?

Yeah, I think it could be a little bit longer than that depending on states. We think will continue to need a little bit more rate, and we're watching the trends carefully. We've talked often in the last -- actually probably 10 years about wanting to take smaller bites of the apple. So we're watching the trends closely, especially because they changed so dramatically since March of last year. And so we're going to watch those trends, and we'll react swiftly. What I would say is that there's a lot that goes into a premium, including average written premium, and that can change. And it reflects differently depending on states. So you might have a high average written premium in a state like Florida, and if you don't have the right rates and you don't grow there, that would affect countrywide. So there's so many different inputs, including our consumers. So if you -- if you shrink in Sam's versus Robinson's, that will also affect average written premium because they have a higher average written premiums. So we're getting there, we believe will need more and then we'll continue to watch the trend again as they unfold. And I shared the opening question about how we're seeing the trends changed with our usage-based information. And then we'll react swiftly to those.

Okay. And then just on the Property -- the Homeowners business, I think margins --obviously, you saw gaps recently, but margins have been weak as far back as I could remember. I realize that you're trying to build the business, but is this a business that you think can be profitable on underwriting margins on it's its own or is it subsidizing auto or providing you other benefits that you're willing to continue to underwrite at a 100% plus combined ratio?

So, we're not happy with writing it at a 100% combined ratio. We want to make an aggregate 96% in all of our products there. We have different but none of them are over 100, I assure you that. We don't want to subsidize. We do think it's great for our customers at Robinson's that want our brand, our home and auto bundles, so we'll continue to do that. But we know what we've done has started to work, but has not fully worked. Again, if you look at what has happened this year, a lot of it was based on catastrophes. If you look at and compare it to the industry in more of the non-volatile states, we're actually very competitive. So we knew we need to do something different. So last year, we took up rates, a nearly 12 points this year, 8 points, and then we've talked about cost sharing with our customers. And more importantly, a couple of bigger things that we're doing to get us closer to our profitability is we're going to shift our portfolio of property over the next year or two. We have legacy states where ASI was really strong, and think of Texas, and Florida, Louisiana up through some of the hail alley. We've had a lot of catastrophes. We have more exposure there because more of our book of business is there. So think of the rest of the state non-volatile. I mean, the rest of the country, non-volatile state, is a little bit over 50% of our portfolio. We're going to shift that over time to be more in the 60% to 70% of our portfolio, so shifting away from the volatile catastrophic coastal states. We are going to appoint more agents in those non-volatile states, reduce our agent footprint in the volatile states and make that movement to have a more balanced portfolio. And I talked in my opening remarks about some targeted non-renewals. We will start to commence that, specifically in Florida. And we're going to work really around that focus on making sure we have more of a balanced portfolio. We both -- we are -- we still are very happy that we purchased ASI now Progressive home, we believe that's in our future, but our goal now is to get to profitability. We believe in the things that we're doing besides the rate increases, and I should mention continued segmentation. So that is a big piece of it. We're going to continue to enhance our segmentation like we have an auto product. And we believe those levers will certainly help us get to where we want to go.

Okay. Thank you.

Thanks.

Your next question comes from the line of David Motemaden of Evercore ISI.

Hi, good morning. I had a question just around PIF and conversion rates. Wondering if you could just talk a little bit about what's going on in the direct segment. I saw the conversion rates were down only 2% in the quarter, which is a little bit less than I would've expected given some of the rate actions that you're taking. Maybe could you just talk about why this is down? Did that surprise you that it was down that much and not more? And I guess, why -- is that more of reflection of some of the price changes that you're putting through just haven't hit yet? Or does that really just speak to the competitive environment and peers increasing rates like you are?

It's a great question, David. There's a bunch of different things including some timing of what was happening in quarter 3 of 2020. So when I think about conversion, I would go back to our decline in new app. So on the agency side, they are down about 14%. We think that prospect denominator was elevated in 2020. So, in 2020, there was virtually no shopping in quarter two. That move to quarter three, and then this year in addition, we pulled back on advertising. So we think conversion was stable, so we do think we still have a fairly competitive product on the direct side. On the agency side, In ups and down about 20% prospects were down slightly, but conversion was down a lot. That was really due to material tightly underwriting restrictions we put into place, rate increases, and there's like 3 big States where we have material drops in conversion. Again, the timing-wise that may be overstated, even a bit based on the fact that there is a lot of stimulus going on at this time last year. And we also had high conversion in Michigan based on some coverage reform. But you talked specifically about the direct side. I think a lot of that has to do -- the reduction has been -- has to do with advertising from the new apps. So we feel good about our conversion, that could change as more rate come in, and as we reduced more advertising. Do you guys want to add anything?

I would add briefly that the other thing that could influence countrywide conversion is the mix of quotes we're getting across geographies. So with direct advertising, you have the ability to generate quotes at a very local level. And if we have concerns on profitability in an area where we previously had higher conversion, we will shut off or reduce the ad spend in that area, and that would then show the decrease in conversion just by that mix change. When we're adjusting ads spend at the local level, you can see changes in conversion in total simply by that mix. So rate is one thing for sure but interestingly on the direct side, you can also influence conversion based on your marketing spend.

I would add just one further thing, that when our prospects fall because we spend less, then your conversion naturally goes up simply because you've got more engaged consumers when you're spending less; because they're motivated to come shop. So that will have a counteracting effect on conversion that will offset some of what rate increases would be doing.

Got it. That makes sense. So it sounds like we need to think about just quote volume as well in combination with just the conversion rate as well when thinking about that. That's helpful. That makes sense. And then I guess just for my follow-up, I guess I just had a question on the 5 points of rate that you've taken so far this year. My understanding is some of that is on new business, some of that's on the renewal book. I guess, when I look at the policyholder life expectancies, those were also a bit more resilient than I would've expected. I guess, maybe, could you just talk about how much of the 5 points that you've gotten this year has been -- I guess, how policyholders, existing policyholders seeing a lot of that 5 points yet? Or is that still on the come?

Yeah. I would say, and Pat, you could add anything. I think that it's still yet to come because think of -- think if we had a rate change on the streets that's starting today, and I renewed yesterday. I had the old rate, so I've got that for 6 months. So I have -- we have some inflationary measures that work into their monthly rating factors. But then, I won't get that new one until that 6th month, and then, it earns in over that 6th month. So it really depends on timing and each state. And remember, it's 5% in aggregate, so it's different in different states depending on our needs, so that rate will continue to earn it. And that's one of the reasons why we continue to have the majority of our auto policies -- our private passenger auto policies on at 6 months position so we can be nimbler when we need to get rate. Thanks, David.

Got it. Thank you.

Your next question comes from the line of Greg Peters of Raymond James.

Good morning. I know you've commented in the past on this, but given the changing moving parts within new business versus renewal, maybe you could just revisit your comments around the loss ratio, or combined ratio performance between the different cohorts. Because I suppose if new business is a little softer, theoretically you should get a corresponding lift if there is an impact in new business penalty.

Yeah. I mean, I see -- I think I get your question. You guys could add on anything. Your new business has historically had a penalty when it's put on the books and it's different in agency and direct. That's why it's so important. We talk a lot about our holy grail being renewal business because we start to understand our customers better. On the direct side, we're loading all of our marketing costs on that first 6-months policy in the direct side. So I think when we look -- when I look at that, we look at -- attest differently, new PIPs versus renewal PIPs. Our renewal PIPs are still up. That could change. I think David asked the question about PLE. We're still up 4% across both channels on trailing for PLE. So we hope that continues. That could fluctuate depending on how much rate we need. And then again, with new paths, we're down slightly maybe 10%. But again, that is very dependent on different commercial or tiers -- marking tier though we're down much more on some, so that affects that as well. So there's a lot of different factors that go into both the new and renewal. And -- did that answer your question or do you need more information?

And while it does answer the question, but I'm always -- I always welcome more information if you want to provide it.

The one thing I would add to that is that, you talked about the new business penalty. Of course, as Tricia mentioned, on direct business, there's a huge expense load difference. So as we're writing few hundred customers that flows through an advertising spend as well. So there's certainly a benefit on spending less and getting fewer new customers in the direct set, in terms of costs. In terms of loss ratio, we see a bigger differential between new and renewal on the Sam end of the spectrum than on the Robinson end of the spectrum. So to the extent we are reducing Sam's coming through the door relative to Robinson's, it would it would have a bigger benefit on the loss ratio side. So there's some of that coming through, but you also have to recognize that our book is heavily, heavily weighted to renewal customers, so it can have some benefit. But in aggregate, we need the benefit of the rate flowing through the book, the new and renewal customers. It's going to flow through renewals sooner, and there's far less elasticity in the renewal book. So you will see average premiums rising sooner and more likely on the renewal side. On the new side, customers are shopping, and it's a highly elastic market. We'll see some of that rate. We'll see a little slower, or we'll probably see a little less of it simply because there are other options in the marketplace. And we move faster than others when it comes to taking rate when we need it. So we think, and we've seen historically at least, that competitors are seeing the same trends we are. They will need the same price changes. It may take them longer. So we might see a bit imbalance on the new business front for a while. But again, our experiences, competitors see the same thing, they catch up, and by the time they do, we're in a very good position and very confident in growing more and turning advertising back up and the other growth levers we have.

Yeah, I think that's great. And as long as, Greg, you want more information? If you go back to the last time we needed rate like this, it would be right around 2012, and we did the same thing. We have a great pricing organization, they're able to get the rates on the street relatively quickly usually before our compensation. So when the market turns hard, we believe we're more competitive and that's really what we're positioning ourselves for right now.

I appreciate the color. I guess, the second question is more detail-oriented because you've mentioned that -- I'm talking about Florida PIP. You've mentioned that we heard it from others. Maybe you could just take a minute and provide us your perspective of what's going on with that. When we see charges for a specific issue, it's my perspective that it's never 1 bite at the apple fixes that. It takes us a couple of bites before it's -- you finally got it resolved. And so I'm left wondering with Florida PIP if we're not in third or fourth inning and we're going to have a couple more adverse hits from that specific issue before it resolves itself. So just some history on what's going on there and what you think about going forward.

Yeah, I mean Florida PIF is such an anomaly in terms of what can happen with plaintiffs’ bar there. So you can -- if something can go through the system, it can seem really good, and then it's challenged. And if it's lost in a one part of the state, and then appealed and lost your one in one part of the state. Different things are always happening. With what we have currently, we feel very good about our reserving for PIF and where we're going. That can change any time because plaintiff attorneys in Florida, specifically, can challenge anything, and then you have to make sure you are thinking about the future. Do you have to reopen? We try to do in anything like this happens where a case of loss by a competitor and usually when a case of lost by us or any competitor it affects the majority of the competitors. And then we determine, is it worth fighting? How long? What does that mean exactly? And we work towards getting it wrapped up and that's really what we're doing right now. We are trying to wrap these up we're trying to do some bigger global settlement of maybe a law firm that has many of our insurers with its litigation to get it wrapped up quickly and as inexpensive way as possible. I can't tell you that something won't be challenged next year. It will tell you that we've talked about it more internally because Florida PIP goes with these ebbs and flows of what happens depending on what happens with PIP perform or not. And so, we're starting to think. More with Florida PIP almost like you do a cat load in some of those other states. And because this does -- this does come more often so I can tell you is we're looking at more like that which is differently than we've done in the past.

Got it. Thanks for the answer.

Thank you.

Your next question comes from the line of Paul Newsome of Piper Sandler.

Good morning. Thanks for your help. I have a couple of questions on the home business in particular. And first 1, how impactful is the home non-renewal on growth of the new product? I think it's been a long time since you've actually done non-renewals, but bundled product. You've -- obviously, auto piece is really important to you guys. Is that something we should see in the numbers or is it pretty small?

Well if -- we have a number of what we believe will be non-renewals. And then we take it down to each customer to say, are there customers that have maybe something has changed with their home, that they've updated their roofs that we can continue to have on the books? We look to see if some of our unaffiliated partners could help if they wanted to take the customers. And it's going to take a while because there's actually a time frame with which we need to work with the Florida Department to make sure that we give a lot of notice. So you're not going to see those first non-renewals happening till May of next year. But we think it will be significant because this cohort of customers are really, really, really unprofitable. And so we need to get there in addition to moving our footprint more towards non-volatile states. So there's a lot of work to be done before we know the exact number. We obviously have a number of where we think we start with and then we're going to try to work with our customers. We also -- we'll give the customers an opportunity to stay with Progressive if they opt into the new roof payment schedule, which is where there will be some -- a coverage options to share the cost of the replacement with us. So a lot going on there. And no we don't do non-renewals very often it's -- and usually, you try to get the rate for it, but these customers are very unprofitable. We couldn't get enough rate to have them ever be close to profitable, and that's why we need to do that. It's never something we want to do, but as we looked at our whole portfolio and our strategy going forward, we realize this is an important piece to start as -- to start to set as ship straight.

And while we -- we don't know exactly how many customers we'll have to, now, renew, and as Tricia said, we're trying to work with customers for options to stay with us. You should think of a very low single-digit percentage of our policies enforced countrywide. But this is not a huge shift, but it's a shift, as Tricia was saying, geographically. So while we want to reduce our footprint in the volatile space, we want to grow in the less volatile space. So in aggregate, our objective is still to grow. It's simply to grow in different areas.

Great. And I actually want to follow up on just that comment on the move into the non-coastal states, the result of states. I would've thought that mainly I just -- that you would have had a lot of these agents already signed up in the -- you have a pretty growing broad national Carrier Agency Distribution to begin with. Was there something in the process that kept you in earlier years from expanding earlier from an agent perspective or -- because I would've thought that today you pretty much have all those agents you'd want Outside of the coastal areas signed up?

It's our original and final purchase. ASI was more of a scarcity model. And so we had platinum agents that or appointed to sell auto and home. So we have a lot of opportunity to appoint more platinum agents in the non-volatile states. So that's what we're working on right now.

Great. Appreciate it. Thank you.

Thanks.

Your next question comes from the line of Ryan Tunis of Autonomous.

Hey. Thanks. Good morning. I just want -- I think, about ASI. It's been clearly, a successful deal from a growth standpoint, but the value proposition to agents has always seemingly been that. You guys would write good insurance in [Indiscernible] states like Florida and Texas.

I guess what I'm trying to think about is -- we've seen good growth of the Robinson's. But most of the ASI book is in those two states. How are we going to continue to grow the Robinson's and kind of given there's geographic move and how our agents reacting to it in Florida and Texas?

Well, right now on our non-volatile states it's actually -- we have about 54%. So we have been expanding over the last several years to have less density in those states. We are purposely doing this to make sure that we can take care of the majority of that consumers. There's some like we said with the non-renewals than we can. And I think Insurance gets out. I think agents get bad because they also see the data. So for us to make sure we can protect those states, we need to make sure that we only have so much density in those states. So, for us, Florida and Texas are a big part, but still the non-volatile states are our majority of 54%. We're going to get those to 60% to 70% over the last couple -- the next couple of years. And when we look at that compared to the industry, we outperformed based on that state mix. Again, we got to change that state mix to make sure that flows through with everything.

And then, I guess another foll -- sorry go ahead.

Yeah, I was going to say something.

I was going to say you referenced the majority of the book being in those two states sets. That's a little heavier than reality. And since we became owners of ARX/ASI, we have been diversifying the book. Now, it hasn't always been to the less volatile states, unfortunately, so we have grown in some other volatile states, think Hail Alley, but we have done a lot to diversify the book. We've just come to the more recent realization that we need to diversify more and faster. And I guess one other thing is -- I'm wondering if maybe you guys are overreacting just a little bit to the elevated costs Even this quarter, you guys have done a great job with reinsurance. Accounts are still not a significant part of your loss costs roll into the most insurers. I'm just wondering why this is really that big of a deal, especially because you have the reinsurance. I always thought that home was more -- not a loss leader per se, but the purpose of selling home was to sell well's business and that's been successful. So why abandon that, or why kind of move away from that simply because you have an extra couple of points of costs

Our purposes to have -- to having a home, specifically in the agency channel, was to grow more Robinson, but it was never going to be a loss leader. It was to make money on the home and make money on the auto bundle, have great claims service. So, that hasn't changed. So, I might say we're overreacting if we did this a year ago or 2 years ago, we continue to see quarter-over-quarter, where we're struggling to make money and cats is a big part of it. Reinsurance is great, but it doesn't come without a pretty heavy cause. So we want to make sure that we use our shareholders capital the right way. And we believe this is the best way to do it.

We're just -- we're not only reacting to the results. We've been digging harder into the modeling and looking at our exposure for what they could best look like even after reinsurance. So while we are heavily reinsured and we're pretty [indiscernible] relative to our total insured value, especially those cut states, there are still potential scenarios. And that's what we're trying to manage. The tail risk is still there. We haven't seen it. But we want to be proactive in managing that, so that we don't see that down the road.

And one thing that I would add on top, John, and I think you mentioned it, but it's not about shrinking our book in the volatile states. It's about accelerating growth in the less volatile states while we have a period of time where we're investing in product segmentation, and as Tricia mentioned, product features that risk share with our customers. So don't think of it as abandoning the property business in any way, shape, or form. It's a temporary acceleration of growth in less volatile states until we get to a more comfortable balance between volatile and less volatile.

Got it. And then just one quick technical one. Of the disclosed auto rate increases that you give us, how much of that is coming from the monthly rating factors?

A small part of that.

Thank you.

Your next question comes from the line of Tracy Benguigui of Barclays.

Good morning. Could you help me understand how it works in practice, the process you go through request at rate increase in a filing in new state because it doesn't seem to be that simple, as filing new. We've been seeing back-and-forth objections and iteration. So maybe just to walk through an example in Texas, it's our understanding that the public hearing on your previous set of filing has been postponed due to ongoing settlement discussions. In the meantime, it looks like you've submitted two new rate filings for your independent agent and direct business. So I guess where I'm getting at is how long should a filing be in a state of limbo way past the requested effective dates?

Great question. So we use Texas as a file-and-use state. So we put the files out there. We were able to put them on the street. They don't need to approve the filings. However, they can disapprove. They have not disapproved our filings and rather filed objections for that. Objections don't mean rejections of our rates. What that means is they want more information. So we've been working with the TDI on making sure supplement, all the information we can have to support our rate level. In fact, since April, we have done a 3-rate increases, one that's just a couple weeks ago. So, hitting into the fourth quarter, that totaled around 13%. So, we don't have our rate hearing. In fact, they issued a notice for our July filing, but we're sending because we're trying to work back-and-forth on making sure we do the right thing. Again, we had a good long-term relationship with the TDI and we believe they're rational and they want the data to make sure they do the right thing. And if you look at the filings, there are -- we're in good Company with many of our competitors where they're asking for more information. We want to be competitive, and open and available for the people of Texas. So every state is that it could have a little nuance to it, but that, hopefully, gives you a little bit of light of Texas. Objection is just the back-and-forth of data.

Is there an expiration of those back-and-forth discussions?

No. Typically, it will reset a clock. So some states will have a dimmer provision where there's not an objection filed, than it will be deemed approved after a certain date. But the ongoing especially in preserving great relationships with our regulators, if there's open questions we want to be transparent and provide them the data they need to do their jobs.

Okay. And also, it looks like you're not the only one, and the insurers are making filing rate increases, but it's not uniform like the largest auto rider is lagging on those efforts. So, how can that uneven in like impact the progress of rate increased discussions with your regulators? And how do you think about increased shopping behavior?

Well the competitive environment that we operate in has some pretty different business models. So whether you have a mutual structure or a stock Company as two good examples, and as a result, there's different motivating factors, different profit objectives, different targets. So while we can't comment on specific area or action, we operate our business to deliver, as Tricia said, the $0.04, and grow as fast as we can. And that may mean that our growth is a little lumpier, but our profitability is generally pretty consistent.

Yeah. I guess, if I look at the last time the market tried to push rate increases, let's call 2015. It's just seemed like a while for the mutual to catch up. And many mutuals now are taking notice and maybe asking questions, but different Company by Company. But I think that may just present opportunities for shopping in general. I'm not trying to pick on one insurer. So how do you think about that in general?

We fully expect as rates go up that will create shopping and we enjoy. We believe a larger share of the shoppers than we do of that overall market. So generally, that's been good for us when there is a hardening market that create shopping. We benefit because we're broadly distributed and try to be available where, when and how consumers want to shop for and buy insurance.

Yeah, but we're not going to change our model because this is in the model with some of the mutual for many years and the money they make is more on the investment side. We're still going to, with many of our competitors, we want to make a profit on the underwriting side. We want to grow as fast as we can, but we're not going to knowingly put a bunch of unprofitable business on our book. And that's why we're pulling back on advertising and during the rate increases. But again, like I said in a prior question, we believe this really positions us well for what we believe might happen as the market turns, and we'll be positioned where the shopping happens. We're going to get a lot of that business. And when that happens, we don't exactly know, but that's why we are positioning ourselves where we're at now based on the data that we see.

Okay. Thank you.

Thanks, Tracy.

Your next question comes from the line of Josh Shanker of Bank of America.

Yeah. Thank you for taking my question. Can we talk a little about in the transition when the business is underpriced and your competitors are raising price. Customers still are likely, they come to you maybe at a margin that's not entirely attract ive. We can have a business that's going to come in the doors the next 3 to 6 to 9 months. Even without advertising, I think people will come to Progressive because of your funnel. How -- what's the stickiness of that business at the current price? How do you think about the margins on that business and what is the long-term value of the customers who are coming in the hair pin transition? Yeah, besides advertising, we really do try to have some tighter underwriting restrictions to not have as much of that business come on the books. Clearly, they are going to come on the books because timing is everything, and so we would get some of that business. Some of it will be underpriced, and I'll get it in renewal. And some of it, if it's overpriced and they shop, they will leave, and that will be okay, especially with what we believe is our industry-leading segmentation, especially if we have data from our snapshot. So it's hard to stay in an environment like this because there's so many variables happening. But clearly we'll get some business on the books based on our brand, and people want to come, and the pricing doesn't hit all at once in the industry.

Yeah. No, I think that's exactly it. Over the lifetime of these customers, we do expect to hit our targets, and we do price to a lifetime model. Additionally, there's value in selling other products to these customers and establishing a relationship with them now. Even if they may not be priced completely to target, it's not a bad thing for the long-term health and growth of the business.

And without emphasizing it too much, the Sams, I guess, are going to be looking for the best prices. It feels like you guys are about 6 months ahead of the industry in adjusting your price Can the Sams find a provider with a smaller funnel than Progressive who hasn't raised their price yet, or are you still going to pick up a fairly good share of Sams regardless even while you're raising prices because your customer acquisition capabilities are so strong?

Yeah, I think Sams will be able to find a price out there. In fact, I talked a little bit about new business tests being down and they're down mostly in Sams because they're one, inconsistently insured and they frequently shop because it is really about price. So yeah, I think they'll find it and then when the --the Sams is very much about price. So as those companies raise their rates, they'll come back to us. At that point, we'll be competitively priced to make a lifetime 96 on those Sams.

Ma'am, thank you very much.

Thanks.

Your next question comes from the line of Meyer Shields of KBW.

Thanks. Tricia, I can't disagree with your viewpoint of the regulators as being rational, but sometimes it takes a lot longer than we would hope for that to manifest itself. So I was hoping you could clarify the difference between the indicated rate increases that we would infer from frequency and severity trends in the 5% that you've gotten so far. How much of that is regulatory friction and how much of that is Progressive slowing the increases to maintain retention?

Yeah, we're not trying to slow the increases for retention. If we slow increases, it's because, like I talked about in California, the mechanism is more backward-looking than what we're seeing in the claims. So we will try to get the amount of rate we think we needed that time against small bites of the apple. And as we've seen more data, we'll either won't raise rates, or like last year, or reduced rates, or raise them a little bit more. But the regulator timing is really an individual conversation we're having across the country. I gave a couple of examples in Texas and California. California going to take a little bit longer, so we are going to try to reduce our growth there. But I think it's really where we priced our indications and we look at that prospectively.

Yeah. The one thing I would add is there's just acceleration in our rate takes. So the 5% of the year-to-date number and as Tricia mentioned in Q3, in half the country, we increased rates about 6% cut 3 in that period. So there's 6 months of the year before we saw the real frequency recovery that we were still lowering rates, frankly. And that's factored in there.

Okay. And that's pricing compared to, I guess, end of year 2020?

Correct.

Okay. Second question. Can you talk about what the catastrophe loss exposure in homeowners means for small commercial property?

Yeah. The -- so our small commercial property book is very, very small at this juncture. While we are trying to grow our business owner's policy program. And I think we're now in 29 states --

31 now.

31 now. Thank you.

29, we've been [Indiscernible] at the cue, it's 31 by the time we have this meeting.

Yeah. Our property exposure at this juncture, Commercial Lines is very minimal. We aspire to have far bigger share of that business. And at that point, you're right, it will be something we need to manage proactively. At this juncture, it's really not material.

Okay, perfect. Thanks so much.

Your next question comes from the line of Elyse Greenspan of Wells Fargo.

Hi, thanks. Good morning. My question is going back to the Personal Auto rating discussion on just said you talked around 6 points of rate in the third quarter. That still does put you below where frequency, for severity are on a combined basis. Tricia, I think earlier in the call, you said that it would probably take more than 3 to 6 months for all these weight to pull through the system. So, when you make that comment, are you thinking that you will at some point get the approvals and get rates in excessive trends or are you also assuming maybe that severity, which is a bit elevated and impacted by the supply chain issues over that time period severity trends might improve, or maybe it's a combination of both.

Well, I would say I'll let Pat add what he has. And we will look at prospective need for rate increase, and that's why we're following the trend so closely. And again, they -- there -- it's so volatile based on what's been happening and it could change back and forth. So we'll continue to get that. And we will likely, at this point, if trends continue, we'll see that we'll need even more rate in the fourth quarter and probably into Q1.

Yeah. We price to our expected cost. And as far out as we can see, the effective date of our revision or the average date of that revision. we're setting our prices based on where we expect trend to be. If trend continues to accelerate, we'll continue to take rate. If trend ameliorates, we'll slow our rate take and not file for additional increases.

That's why it's important to be really nimble. And that's why I often talk about our pricing group and what we're able to get to really quickly and decisively. And if you couldn't do that, you might have to take way more rate because it's going to be a big issue to do that. But we're able to be so nimble that we can do that. Watch trends and if we need a little bit more or not, we can act accordingly.

And that's the key for individual consumers, right? That they get a small increase at renewal which doesn't prompt them to shop as opposed to somebody that waits. And if they wait 6 months or 12 months. And at that point in 88 points or rate are something higher, it creates shopping in your book that's just not healthy, frankly, for the health of the overall book.

And then my second question, sorry, in terms of capital management, you guys shifted to quarterly dividend and going back a few years ago. And then we do -- you have been still been playing a special dividend at the end of most years. This year, obviously, growth is a little lighter given the rate, the rate you're taking. And also, we've seen profitability be impacted by loss trends in auto and cats in home is a prospect for a special dividend still on the table, or how should we think about capital return for this year?

Yes. So we're meeting with the Board in December and they will ultimately make the decision on the variable dividend and what we would intend to give throughout the year. We look at all the inputs like you suggest to determine what makes sense. And that's one of the reasons why we changed the dividend policy several years ago because it can from a timing perspective be different from what we're seeing internally, from the gain share program that we aligned it with several years ago. So we're working with the board, and ultimately, it will be their decision in December on how much they believe the variable dividend will be up for this year.

Okay. Thanks for the color.

Thanks, Elyse.

Your next question comes from the line of Brian Meredith of UBS.

Thanks, Trish. Back in the personal auto. Just quickly here. So what is your expectations of kind of claim severity here going forward? Do you expect this inflationary environment to persist here for a while? So when you're thinking about filing rates, your kind of assuming these kind of elevated severity levels?

Well, we're watching closely because there's so much in play. So obviously if you look at the severity on collision, it's up 14%. And you've been watching what has happened. And as an example was the Manheim Used Car Index. I mean, even the first few weeks of October, it was up 8% over September. And then if you look at October 20 to October 21, it was up 37%. And then pre -pandemic to now, up over 50%. Some of those huge increases we've never seen, so we'll have to watch and see what happens with the supply of chips. Does that open up the supply demand of new cars and used parts? We do have -- we're off a little bit with frequency on salvage returns. So we're going to watch that closely. What we haven't seen yet in body shops are labor rates increasing. They've been relatively flat. We'll watch that, especially when you think about talent in that area. And we have seen the labor -- I mean, parts prices up right around 5%. Some of that's inflation, and some of that is just inherently expensive parts and more expensive vehicles. So those are the things we're watching, and we have trend meetings all the time, really closely to see if this sort of inflation is transitory or baked into our system.

Okay. It has to be determined I guess.

Yes.

And then I guess my next question, maybe just to simplify this a little bit. If I look back historically, it's generally taken you all about 6 to 9 months to get enough rate for margins to return to, call it, more normalized levels. Look at '12, it happened that way, '16 happened that way. Is there anything different this time around that we should expect that you'll be able to get enough rate to the system to become rate adequate in the next 6 to 9 months?

Yeah, I think '16 was a little bit different because most of the rate we needed was on the commercial side and those are 12-month policies. I think what we've been talking about a lot in this call was regulatory, just some of the objections. It might take a little longer with those dates as we provide more data. But we expect to, as we have in the past, be in that position in that 6-month timeframe, hopefully sooner.

Great. Thank you.

Thank you.

Your next question comes from the line of Tracy Benguigui of Barclays.

Thank you. Thank you for taking another question. Very helpful context to hear that you want to take multiple bites of the apple and be agile as you're thinking about future rate increases, but I'm just wondering, as you're thinking about it, is that 6% that you took in the third quarter? Is that in your view, more of maintaining where you are on loss trend or that be getting more into your long-term combined ratio target similar on improvement of margin?

It's on improvement of margins and where we're at with the data we have now that we do look at those prospectively but if we believe we need more and I think the question that Brian just asked makes a lot of sense if we're watching some of the inflationary trends and will launch those closely as we believe we will need those and we'll get more.

I want to offer -- one point of clarification and a little more color. One is that we've heard twice people say we took 6 points of rate in the third quarter. We actually took 3 in our Personal Auto. We took 6 points in about half the country, which gets you to 3 -- 5 year-to-date. And we're going to continue to take rates. So whenever you're taking rate, you are either or both, catching up from what you didn't see when you first priced or you’re pricing for the future. So in a perfect world you're just always pricing for the future, and your previous pricing was perfect. That's normally not the case. You're either a little higher or a little low on your previous pricing. So some of that adjustment is catching up in this environment. It's catching up, frankly. But it is also looking forward as to what we believe frequency and severity trends will be for the coming life of that rate revision be at 6, 12 months. So I just wanted to clarify on what we've taken year-to-date and we say it is -- to some degree catching up, but to a large degree, ensuring we have a very adequate rates on the street going into 2022, so that we're very confident to turn on more advertising and other growth levers.

Yeah, I would add that -- so do I. I gave the percentages of what happened with used cars and, obviously, the things that would happen with supply chain. I think the industry overall, missed that because who would have ever thought used parts will go up to that extent. So that -- those are just some of the things we're catching up, and Gary, that 6% was in 20 states? Yes.

Yes. Thank you. I recognize 20 states. Appreciate it. Thank you.

Thank you.

We've exhausted our scheduled time, and so that concludes our event. Deshundra (ph), I will hand the call back over to you for closing scripts.

That concludes the Progressive Corporation's third-quarter investor event. Information about a replay of the event will be available on the Investor Relations section of Progressive's website for the next year. You may now disconnect.