Business Context and Reporting Period
The Progressive Corporation is a property-and-casualty insurer operating through Personal Lines, Commercial Lines, Property, service businesses, and an investment portfolio. This unaudited Form 10-Q covers the three and nine months ended September 30, 2020, compared with the corresponding 2019 periods.
- Companywide policies in force increased 11% year over year to 24.4 million.
- Progressive acquired the remaining interest in ARX Holding Corp. on April 1, 2020, making ARX wholly owned, for $243.0 million.
Financial Performance and Position
| Metric | Q3 2020 | Q3 2019 | 9M 2020 | 9M 2019 |
|---|---|---|---|---|
| Net premiums earned | $9,973.5 million | $9,012.2 million | $29,052.8 million | $26,296.7 million |
| Total revenues | $10,947.2 million | $9,530.5 million | $31,242.3 million | $28,281.2 million |
| Net income attributable to Progressive | $1,530.8 million | $841.7 million | $4,020.3 million | $2,899.5 million |
| Diluted EPS | $2.59 | $1.42 | $6.81 | $4.90 |
| Operating cash flow | Not separately provided | Not separately provided | $5,358.3 million | $5,133.4 million |
| Underwriting profit | $1,217.1 million | $732.5 million | $3,642.3 million | $2,533.0 million |
| Underwriting margin | 12.2% | 8.1% | 12.5% | 9.6% |
| Combined ratio | 87.8% | 91.9% | 87.5% | 90.4% |
- Net income increased 82% in the quarter and 39% year to date. Comprehensive income attributable to Progressive was $1,506.4 million in the quarter and $4,626.5 million year to date.
- Net realized gains on securities were $532.6 million in the quarter and $869.8 million year to date, compared with $65.4 million and $659.8 million, respectively, in 2019. These gains materially benefited reported earnings.
- Net investment income declined to $225.8 million in the quarter and $701.0 million year to date, from $257.1 million and $758.9 million, respectively, primarily because reinvestment yields were lower.
- The investment portfolio was $45.8 billion at September 30, 2020, up from $39.3 billion at December 31, 2019. Fixed-income securities represented 92.5% of the portfolio, and the portfolio’s weighted-average credit quality was AA-.
- Total assets were $62.9 billion and shareholders’ equity was $18.1 billion at September 30, 2020, compared with $54.9 billion and $13.7 billion, respectively, at year-end 2019.
- Debt carrying value was $5.4 billion, with fair value of $6.7 billion. Debt-to-total capital was 23.0%, below the company’s 30% policy threshold. Progressive issued $1.0 billion of senior notes in March 2020.
- Cash, cash equivalents, and restricted cash were $91.1 million at quarter end, while management identified the investment portfolio and operating cash flows as additional liquidity sources. No borrowings were outstanding under the $250 million discretionary line of credit.
Material Changes Versus the Prior Comparable Period
- Net premiums written increased 14% in the quarter to $11.0 billion and 11% year to date. Commercial Lines grew 34% in the quarter, Personal Lines 12%, and Property 13%.
- Lower personal-auto accident frequency, associated with COVID-19-related reductions in driving, improved underwriting results. Personal-auto incurred frequency declined approximately 19% in the quarter and 25% year to date, while severity increased approximately 8% and 9%, respectively.
- Progressive issued approximately $1.1 billion of personal-auto policyholder credits during the second and third quarters. Policyholder credit expense was $29.0 million in the quarter and $1,062.4 million year to date.
- Personal Lines’ combined ratio improved to 86.6% from 91.0%, and Commercial Lines’ improved to 87.2% from 93.7%. Property deteriorated to 111.8% from 102.3%, primarily because of catastrophe losses.
- Net catastrophe losses increased to $281.6 million in the quarter and $767.8 million year to date, compared with $158.8 million and $442.4 million in 2019. Property catastrophe losses included hurricanes, wildfires, and severe storms.
- Prior-year reserve development was unfavorable by $116.1 million year to date, primarily reflecting Commercial Lines injury severity and large claims, as well as personal-auto claim development. This was less adverse than the $215.2 million unfavorable development in 2019.
- The effective tax rate was 20.4% for the quarter and 20.7% year to date, compared with 16.5% and 24.0% in the prior-year periods.
Outlook, Commentary, Risks, and Unusual Items
- Management stated that driving patterns remained below historical levels and that the timing and direction of future accident-frequency changes could not be predicted with confidence. Rate reductions continued as the company adjusted premiums to underlying risk.
- Management believes liquidity, capital resources, and operating cash flows are sufficient for near-term needs, scheduled debt payments, dividends, contractual obligations, and expected capital requirements. No formal earnings or revenue guidance is provided in the filing.
- Property results remain exposed to catastrophe frequency and severity. The company exceeded the $375 million annual retention under its 2020 catastrophe aggregate excess-of-loss program and recorded a $135.3 million reinsurance recoverable; it also recorded a $10 million recoverable related to Hurricane Laura.
- Investment results are sensitive to interest rates, credit spreads, equity markets, and credit performance. The company reported no allowance for credit losses on fixed-maturity securities and expected securities to pay principal and interest, but described the market environment as highly uncertain.
- COVID-19 affected driving, claims frequency, policyholder payment patterns, billing leniency, policy cancellations, advertising, and certain commercial businesses. Management noted that retention metrics were temporarily elevated by suspended cancellations and may remain affected through the second quarter of 2021.
- Other key risks include reserve adequacy, pricing competition, severe weather, reinsurance recoverability, litigation, regulatory requirements, cybersecurity, investment performance, access to liquidity, and the ability of insurance subsidiaries to pay dividends to the holding company.
- Pending litigation is consistent with previously disclosed matters. Accruals for non-claims litigation were not material, but outcomes are uncertain and a substantial judgment or settlement could materially affect results.
Most Important Facts for Investors to Verify
- Whether post-pandemic driving frequency and severity normalize, and the resulting effect on personal-auto margins and policyholder credits.
- The adequacy of loss reserves, particularly for Commercial Lines injury claims, reopened PIP claims, bodily injury severity, and 2018 and prior accident years.
- The sustainability of underwriting profitability after catastrophe losses, advertising increases, rate reductions, and the expiration or reduction of COVID-19-related benefits.
- The extent to which reported earnings depend on realized and unrealized investment gains versus recurring underwriting and investment income.
- Catastrophe exposure, reinsurance recoverables, retention thresholds, and the performance of the 2020 aggregate excess-of-loss and catastrophe reinsurance programs.
- Liquidity relative to the low reported cash balance, upcoming maturities including $500 million of senior notes due in August 2021, and ongoing dividend and capital-return commitments.
- The effect of ARX integration and the company’s strategy to expand bundled home-and-auto relationships.