Progressive Corporation 2021 Q3 Form 10-Q Summary
Business context and reporting period
The Progressive Corporation, a property-casualty insurer, reported unaudited results for the three and nine months ended September 30, 2021. Its principal segments are Personal Lines, Commercial Lines, and Property. Protective Insurance Corporation was consolidated beginning June 1, 2021.
Key financial metrics
| Metric | Three months ended Sept. 30, 2021 | Nine months ended Sept. 30, 2021 | Comparable 2020 period |
|---|---|---|---|
| Total revenues | $11.9 billion | $35.2 billion | $10.9 billion / $31.2 billion |
| Net premiums earned | $11.4 billion | $32.8 billion | $10.0 billion / $29.1 billion |
| Income before taxes | $139.0 million | $3.0 billion | $1.9 billion / $5.1 billion |
| Net income | $118.5 million | $2.4 billion | $1.5 billion / $4.0 billion |
| Diluted EPS | $0.19 | $4.03 | $2.59 / $6.81 |
| Operating cash flow | Not separately provided | $7.3 billion | $5.4 billion |
| Combined ratio | 100.4% | 95.6% | 87.8% / 87.5% |
Third-quarter net income margin was approximately 1.0%; nine-month net income margin was approximately 6.8%. Underwriting operations generated a $46.9 million loss in the quarter and a $1.46 billion profit for the nine months.
- Net premiums written increased 13% year over year in the third quarter and 15% for the first nine months. Policies in force increased 9% to 26.6 million at September 30, 2021.
- Third-quarter segment underwriting margins were: Personal Lines (0.2%), Commercial Lines 10.5%, and Property (42.3%).
- Net catastrophe losses were $721.9 million in the quarter and $1.28 billion year to date, including significant Hurricane Ida losses.
- Total investments were $52.3 billion at September 30, 2021, compared with $47.5 billion at December 31, 2020. The portfolio was 91.2% fixed income and 8.8% common equities, with a weighted average credit quality of AA- and duration of 3.0 years.
- Debt carrying value was $4.90 billion, down from $5.40 billion at December 31, 2020. The $500 million 3.75% Senior Notes matured in August 2021, and there was no short-term debt outstanding.
- Cash, cash equivalents, and restricted cash totaled $285.5 million at September 30, 2021, versus $76.5 million at year-end 2020. Debt-to-total-capital was 20.9%.
- Shareholders’ equity was $18.6 billion. The company paid $2.8 billion of common dividends during the first nine months, primarily reflecting the $2.64 billion variable dividend paid in January 2021, and repurchased approximately 1.8 million common shares for $167.2 million.
Material changes versus prior comparable periods
- Revenue grew strongly, but quarterly net income fell 92% and nine-month net income fell 41%, primarily because underwriting profitability deteriorated and 2020 included unusually favorable driving patterns during COVID-19 restrictions.
- The third-quarter combined ratio increased 12.6 points to 100.4%; the nine-month ratio increased 8.1 points to 95.6%.
- Loss and loss adjustment expenses rose 38% in the quarter and 36% year to date. Personal auto frequency and severity increased as driving activity normalized; repair, medical, used-vehicle, and total-loss costs also increased.
- Investment income declined 9% in the quarter and 11% year to date because reinvestment yields were lower. Fixed-income returns were pressured by rising interest rates, while equity gains supported year-to-date investment results.
- Accumulated other comprehensive income declined to $353.3 million from $931.7 million at year-end 2020, primarily because of lower unrealized gains on fixed-maturity securities.
- Protective Insurance contributed $144.3 million of revenue and $11.1 million of net income in the third quarter, and $190.8 million of revenue and $13.4 million of net income for the post-acquisition period.
Outlook, management commentary, risks, and unusual items
- Management continues to target at least a four-point calendar-year underwriting margin and generally seeks to grow while maintaining a companywide calendar-year combined ratio at or below 96%.
- Progressive implemented personal auto rate increases in 20 states during the quarter, averaging approximately 6% in those states; aggregate personal auto rate changes were approximately 3% for the quarter and 5% year to date.
- The company reduced certain advertising expenditures and tightened underwriting criteria to address loss-cost trends. These actions reduced new Personal Lines applications by 15% in the quarter and may moderate future growth.
- Management highlighted continued uncertainty around miles driven, accident frequency and severity, used-car prices, repair and medical costs, weather, catastrophe losses, and rate adequacy.
- Property catastrophe reinsurance retention thresholds increased to $200 million per occurrence from $80 million under prior contracts. As of September 30, 2021, the company had not exceeded annual retention thresholds under its 2021 catastrophe aggregate program.
- Prior-year reserve development was unfavorable by $156.8 million for the first nine months, driven primarily by personal auto, Commercial Lines, and Property claims, including reopened Florida PIP claims and higher bodily injury severity.
- Pending litigation is primarily related to insurance claims, pricing, claims practices, employment, and other business operations. Non-claims litigation accruals were not material, but material adverse outcomes remain possible.
- Management stated that liquidity and capital resources are sufficient for operations, debt service, dividends, contractual obligations, and expected capital requirements. No material changes to contractual obligations or off-balance-sheet arrangements were reported.
Important facts for investors to verify
- Whether rate increases and underwriting actions adequately offset rising personal auto severity and frequency.
- Subsequent development of Hurricane Ida and other catastrophe claims, including the effectiveness and cost of Property reinsurance.
- Future reserve development, particularly in Florida PIP, bodily injury, Commercial Lines, and Property.
- The sustainability of premium and policy growth after reduced advertising, lower new applications, and tighter underwriting criteria.
- Investment portfolio sensitivity to further interest-rate increases, equity-market volatility, credit deterioration, and declining recurring yields.
- Protective Insurance integration, resulting claims performance, and the contribution of its fleet and workers’ compensation businesses.
- The company’s variable common-dividend policy, capital deployment decisions, and remaining share-repurchase authorization.