PROGRESSIVE CORP quarterly report, Q1 FY2022

Progressive Corporation — Q1 2022 Form 10-Q Summary

Reporting period: Three months ended March 31, 2022. Progressive is a property-casualty insurer with Personal Lines, Commercial Lines, Property, service, and investment operations. The interim financial statements are unaudited, and management cautions that quarterly results are not necessarily indicative of full-year results.

Key financial metrics

Metric	Q1 2022	Q1 2021	Change
Total revenues	$11,841.5 million	$11,445.2 million	+3%
Net premiums earned	$11,802.9 million	$10,420.2 million	+13%
Income before taxes	$390.2 million	$1,867.9 million	-79%
Net income	$313.9 million	$1,480.0 million	-79%
Diluted earnings per share	$0.52	$2.51	-79%
Operating underwriting profit	$648.8 million	$1,119.9 million	-42%
Underwriting margin	5.5%	10.7%	-5.2 points
Combined ratio	94.5%	89.3%	+5.2 points
Net cash from operations	$2,502.3 million	$2,614.5 million	-4%

Net income available to common shareholders was $307.2 million, or $0.53 basic and $0.52 diluted earnings per share. The approximate net margin was 2.7%, compared with approximately 12.9% in the prior-year quarter.

Underwriting and business trends

Net premiums written increased 12% to $13.2 billion. Policies in force increased 3% to 26.4 million.
Personal Lines premiums earned increased 7% to $9.1 billion, but the segment margin declined to 4.8% from 11.3%. Agency and Direct margins were 6.7% and 3.1%, respectively.
Commercial Lines premiums earned increased 50% to $2.1 billion, while the margin declined to 9.5% from 16.1%. Growth reflected transportation network company business, the Protective Insurance acquisition, and broader commercial demand.
Property premiums earned increased 18% to $558.1 million. The segment returned to a profit, with a 1.5% margin versus a 15.0% loss margin in Q1 2021.
Loss and loss adjustment expenses increased 25% to $8.9 billion. Personal auto incurred severity increased approximately 16%, while frequency increased approximately 2%. Used-vehicle prices, repair costs, inflation, and changing driving patterns were significant factors.
Catastrophe losses declined to $146.6 million from $211.5 million, reducing the combined-ratio impact to 1.2 points from 2.0 points.
Prior-year unfavorable reserve development increased to $190.8 million from $124.4 million. Personal auto contributed approximately $106 million, Commercial Lines approximately $99 million, and Property had approximately $16 million of favorable development.

Investment results, capital, and liquidity

Total investment income was $242.2 million, up from $220.2 million; net investment income was $236.5 million. The recurring investment book yield declined to 2.0% from 2.1%.
The investment portfolio was $53.2 billion at March 31, 2022, compared with $51.5 billion at year-end 2021. The portfolio’s FTE total return was negative 3.8%, versus positive 0.3% in Q1 2021, reflecting rising interest rates and equity-market declines.
Net realized losses on securities were $445.3 million, compared with net realized gains of $585.3 million. Equity securities generated $349.6 million of holding-period losses, compared with $452.4 million of gains in the prior year.
Fixed-maturity securities generated $1.4 billion of after-tax unrealized losses in other comprehensive income. Accumulated other comprehensive loss was $1.4 billion at March 31, 2022, compared with accumulated other comprehensive income of $40.7 million at year-end 2021.
Operating cash flow remained strong at $2.5 billion. Cash, cash equivalents, and restricted cash totaled $287.3 million at quarter-end.
Total debt was $6.4 billion and shareholders’ equity was $17.1 billion. Debt-to-total-capital was 27.2%, up from 21.2% at year-end 2021 but below the company’s stated 30% policy threshold.
Progressive issued $1.5 billion of senior notes in March 2022, consisting of $500 million each due in 2027, 2032, and 2052. Net proceeds were approximately $1.486 billion. No short-term debt or line-of-credit borrowings were outstanding.

Material changes versus the prior comparable period

Premium growth continued, but profitability fell sharply as post-pandemic driving activity normalized and claim severity increased.
Investment results reversed from substantial gains to substantial losses because of rising interest rates and weaker equity markets.
Comprehensive income declined to a loss of $1.1 billion from income of $940.6 million, primarily because of fixed-maturity unrealized losses.
Commercial Lines expanded substantially, aided by Protective Insurance and transportation-related business, while Personal Lines growth slowed because of rate and underwriting actions.
Personal auto new applications declined 26%; total Personal Lines new applications declined 24%. Trailing 12-month personal auto policy life expectancy declined 5%.
Advertising spending decreased 8%, contributing 1.1 points of improvement to the underwriting expense ratio.
The policies-in-force portfolio grew despite lower personal auto applications: Personal Lines increased 2%, Commercial Lines 16%, and Property 9%.

Guidance, outlook, risks, and unusual items

Management’s target remains a 4% underwriting profit margin and a calendar-year combined ratio at or below 96%. Q1’s 5.5% margin exceeded the target but was materially below the prior-year level.
Progressive implemented personal auto rate increases in 36 states during the quarter, representing approximately 75% of trailing 12-month written premium. Aggregate countrywide rate increases were approximately 7%; management estimated nearly 7 points of prior rate increases remained to be earned during the rest of 2022.
Management expects profitability to take precedence over growth and will continue evaluating rate adequacy, used-car prices, miles driven, severity, weather, inflation, and other loss-cost indicators.
Property growth will be concentrated in states with lower catastrophe exposure. Progressive planned to begin non-renewing approximately 60,000 Florida policies in Q2 2022, with completion expected over approximately one year.
The 2022 Property aggregate excess-of-loss reinsurance program increased retention from $475 million to $575 million and reduced aggregate potential coverage by $50 million to $175 million.
Management expects operating cash flows to remain positive and does not expect to need additional capital for operations in the reasonably foreseeable future, but notes potential effects from market, regulatory, catastrophe, reinsurance, and other unforeseen conditions.
Material risks include inaccurate pricing or loss reserves, inflation and claim severity, catastrophes and climate-related events, reinsurance availability and counterparty performance, investment-market volatility, competition, regulation, litigation, cybersecurity, technology disruptions, and COVID-19-related effects.
Pending litigation is generally related to insurance claims handling and business practices. Accruals for non-claims litigation were not material, but the company states that an adverse judgment or settlement could materially affect financial condition, cash flows, or results.
The quarter included a $2.2 million impairment loss on a federal new markets tax credit fund and full amortization of a $256.2 million policies-in-force intangible asset.

Investor verification checklist

Verify whether rate increases and underwriting restrictions improve personal auto severity and restore the combined ratio toward the 96% target without materially damaging retention.
Monitor reserve development, particularly the unfavorable development in personal auto and Commercial Lines.
Assess the durability of Commercial Lines growth, including contributions from Protective Insurance and transportation network company business.
Track interest rates, equity markets, unrealized investment losses, and the effect of portfolio valuation changes on shareholders’ equity and comprehensive income.
Review catastrophe frequency, Florida policy non-renewals, reinsurance retention levels, and potential exposure to severe weather.
Confirm debt-service capacity and capital flexibility following the $1.5 billion senior-note issuance.
Review subsequent filings for changes in litigation accruals, reinsurance recoveries, claim trends, and the company’s variable dividend and share-repurchase practices.