Business context and reporting period
The Progressive Corporation is a property-casualty insurer with Personal Lines, Commercial Lines, Property, service, and investment operations. This unaudited Form 10-Q covers the three and nine months ended September 30, 2022, compared with the corresponding 2021 periods.
Financial performance and condition
| Metric | Q3 2022 | Q3 2021 | 9M 2022 | 9M 2021 |
|---|---|---|---|---|
| Total revenues | $12,780.2 million | $11,859.2 million | $36,140.9 million | $35,209.9 million |
| Net premiums earned | $12,398.9 million | $11,364.8 million | $36,349.7 million | $32,767.3 million |
| Income before taxes | $142.5 million | $139.0 million | $(103.2) million | $3,006.1 million |
| Net income (loss) | $124.1 million | $118.5 million | $(104.9) million | $2,388.6 million |
| Diluted EPS | $0.20 | $0.19 | $(0.21) | $4.03 |
| Underwriting profit (loss) | $94.3 million | $(46.9) million | $1,281.6 million | $1,455.8 million |
| Combined ratio | 99.2% | 100.4% | 96.5% | 95.6% |
| Operating cash flow | Not separately provided | Not separately provided | $5,919.2 million | $7,309.6 million |
Q3 total revenue increased approximately 8% year over year, driven primarily by higher premiums earned and investment income. Nine-month revenue increased approximately 3%, while net premiums earned increased approximately 11%.
Q3 underwriting improved to a $94.3 million profit, but the 99.2% combined ratio remained above management’s 96% long-term goal. The nine-month combined ratio deteriorated by 0.9 points, primarily due to higher claim severity and catastrophe losses.
Net investment income increased to $327.8 million in Q3 and $850.8 million for the first nine months, compared with $202.3 million and $621.3 million, respectively, in 2021. However, total net realized losses on securities were $216.4 million in Q3 and $1.84 billion year to date, versus gains in the prior-year periods.
Comprehensive loss was $796.8 million in Q3 and $3.28 billion for the first nine months. The principal driver was a $3.17 billion after-tax decline in unrealized fixed-maturity securities gains, reflecting higher interest rates and wider credit spreads.
At September 30, 2022, total assets were $75.5 billion, shareholders’ equity was $14.8 billion, and total investments were $52.3 billion. Cash, cash equivalents, and restricted cash totaled $365.3 million. Debt was $6.39 billion carrying value, with no short-term debt outstanding; debt fair value was $5.63 billion.
Total capital was $21.2 billion at book value, and debt-to-total capital was 30.2%, above the company’s stated goal of remaining below 30%. Management said it does not currently anticipate specific corrective actions. A $250 million unsecured line of credit was available and unused.
Material changes versus the prior comparable periods
- Net premiums written increased 5% in Q3 and 8% for the first nine months. Companywide policies in force increased 1% to 26.9 million.
- Personal Lines underwriting was approximately breakeven in Q3, compared with a $21.4 million loss in the prior-year quarter, while Commercial Lines remained profitable with a 10.3% margin. Property generated a $141.0 million Q3 underwriting loss and a $289.6 million nine-month loss.
- Hurricane Ian generated approximately $760 million of Q3 catastrophe losses, including approximately $585 million of vehicle losses and $175 million of net Property losses after reinsurance. Progressive retained approximately $200 million of Property losses and allocated loss adjustment expenses and ceded approximately $1.2 billion under its catastrophe program.
- Personal auto frequency declined about 9% in Q3, but severity increased about 13%, reflecting inflation, higher vehicle values, repair costs, and medical and general damages.
- Progressive issued $1.5 billion of senior notes in March 2022, consisting of $500 million due 2027, $500 million due 2032, and $500 million due 2052.
- The company recorded a $224.8 million non-cash goodwill impairment charge in Q2 2022 related to the ARX Property reporting unit. Remaining goodwill was $227.9 million at September 30, 2022.
- The investment portfolio’s fixed-income duration was reduced to 2.7 years from 3.0 years at year-end 2021, while the portfolio’s weighted average credit quality was AA.
- Common shareholders received $175.5 million of quarterly dividends during the first nine months. The company repurchased 0.7 million common shares for approximately $78.6 million, primarily to offset equity compensation dilution.
Guidance, outlook, risks, and unusual items
Progressive did not provide formal full-year earnings guidance in the filing. Management reiterated that achieving its target underwriting profitability takes precedence over premium growth and continues to target a companywide calendar-year combined ratio of 96% or better.
Management expects operating cash flows to remain positive and does not expect to need additional capital for operations in the reasonably foreseeable future. It believes available capital, cash flows, statutory surplus of approximately $17.2 billion, and $4.2 billion held in a consolidated non-insurance subsidiary are sufficient for expected obligations and growth needs.
Personal auto rate increases totaled approximately 8% during 2021, 9% during the first half of 2022, and approximately 2% countrywide during Q3. Management stated that major rate increases are generally behind the company, except in certain states, but it will continue to evaluate inflation, vehicle prices, driving patterns, severity, weather, and state-level loss costs.
Property results remain exposed to catastrophe volatility, particularly in Florida and other coastal or hail-prone states. Florida legislation and a post-Hurricane Ian moratorium affected planned non-renewals, and the company expects to non-renew fewer policies than previously intended. The company also increased its Property catastrophe retention and reduced aggregate reinsurance coverage compared with 2021.
Key risks include inaccurate pricing or loss reserves, inflation-driven claim severity, severe weather and climate-related events, reinsurance availability and counterparty performance, investment-market volatility, rising interest rates, litigation, regulatory changes, cybersecurity and operational disruptions, liquidity and capital constraints, and potential future goodwill or intangible-asset impairments.
Management reported $52.8 million of unfavorable prior-year reserve development for the first nine months, including approximately $77 million of unfavorable Commercial Lines development, partially offset by approximately $28 million of favorable Personal Lines development.
Most important facts for an investor to verify
- Whether personal auto rate increases and lower claim frequency offset continuing inflationary severity pressure.
- The ultimate insured cost of Hurricane Ian and the amount and timing of related reinsurance recoveries.
- Whether Property underwriting losses, Florida exposure, and goodwill impairment risk improve as rate and underwriting actions are earned into the book.
- Whether the company can return to its 96% combined-ratio target without materially damaging policy retention and growth.
- The effect of further interest-rate or credit-spread changes on the $52.3 billion investment portfolio, accumulated other comprehensive income, and statutory capital.
- Progression of debt-to-total capital above the 30% policy goal and the implications of the 2022 debt issuance.
- Development of loss reserves, especially Commercial Lines injury claims and late-reported transportation network company claims.
- Potential effects of Florida legislation, catastrophe reinsurance limits, litigation, regulatory actions, and other contingencies that may not yet be probable or estimable.