Progressive's personal auto contraction may be past its peak

Continued improvement in The Progressive Corp.'s personal auto underwriting results during the month of June, according to results released July 15, may put the company closer to selectively revving up what management previously described as its marketing "growth engine."

Progressive's personal auto business written through the direct channel produced a combined ratio in excess of the company's internal 96% target in June for the 11th time in the past 13 months. But the result of 96.7% represented declines of 0.6 percentage point on a sequential basis and 6.1 percentage points year over year, suggesting actions taken by the company to raise rates and tighten underwriting restrictions in many markets in response to the effects of inflation on average claims costs have been bearing fruit. The agency channel's monthly combined ratios appear to have stabilized at levels that exceed the targeted margin.

Company executives expressed eagerness during a May 3 conference call to return to growth mode on a targeted basis from a geographic standpoint upon being convinced that specific markets had achieved rate adequacy. The June 2022 results suggest the potential that some incremental movement to that end may have already begun.

A short-lived retreat?

The headline policies-in-force number from Progressive's June report shows an acceleration in the year-over-year rate of decline in the company's personal auto business. The 2.4% retreat was the company's third consecutive decline in a measure that had shown continued expansion over a stretch of at least 220 months going back to the end of 2003. In the agency channel, the year-over-year decline of more than 4.9% in June compared unfavorably to retreats of 3.1% in April and 4.1% in May. The direct channel experienced a year-over-year decline in policy count in June that was modest at less than 0.3% but historically significant as the only reduction of any magnitude going back to at least 2003.

Trends in sequential declines across both channels tell a different story. The 0.5% month-over-month decline in agency channel policies in force was the smallest reduction since February. The direct channel's policy count grew sequentially by 0.2%, marking its largest advance in 10 months.

Combined ratios by channel suggest the agency business may be most poised to return to selective expansion. The June result of 93.7% represented the seventh time in the last eight months that the agency business's combined ratio fell below the 96% target. Prior to that stretch, the agency channel combined ratio exceeded 96% for five straight months from June through October 2021.

S&P Global Market Intelligence's Rate Filing Histogram template, which focuses on submissions approved or otherwise disposed by state regulators, shows that Progressive began raising private auto rates in earnest in the second half of 2021. It takes a number of months beyond the filings' effective dates for the impacted business to renew at the higher rates and get earned into the book such that higher prices positively impact underwriting ratios at a time of rapidly rising loss costs.

Output from the template supports the notion raised during the May conference call that Progressive had been faster than its peers to raise rates in the current cycle and, as such, is likely to show a benefit from those actions than the industry as a whole.

For rate filings with effective dates for renewal business between July 1, 2021, and Dec. 31, 2023, the template shows the effective dates for weighted average filed changes for Progressive's private auto business, excluding stand-alone motorcycle and recreational vehicle coverages, peaked in February and March of 2022 at 11.9% and 12.3%, respectively. By the same measure, the peak for the P&C industry as a whole of 9% would occur in August 2022.

The June results provide evidence of Progressive's success in boosting rates. Personal lines net premiums written rose by 7.5% on a year-over-year basis even though total policy count declined during the previous 12 months, suggesting growth in average premiums per policy. On a trailing-12-month basis, net premiums written growth of 5.9% marked a second straight increase after the rate appeared to have bottomed at 5.2% in April 2022.

But just because Progressive succeeded in moving quickly to file for rate increases does not mean that it has been universally able to implement all of its filed rates. For example, Progressive and numerous peers have been stymied to date in their months-long attempts to receive approval from the California Department of Insurance for private auto rate increases. With their Jan. 7, 2022, filing, which remains on hold, Progressive Advanced Insurance Co. and Progressive West Insurance Co. sought to implement an overall rate increase of 6.9% effective April 1, 2022.

The ability to achieve California rate increases may be less material to Progressive than its peers, however. The company generated only 5.3% of its U.S. private auto direct premiums written from that state in 2021, less than half of the state's 13.3% share for the remainder of the P&C industry.

Taking stock

Progressive's June results showed a significant impact from weakness in the equity markets as it reported net holding period losses on securities of $760.2 million for the month and $2.11 billion for the first half of 2022. The company records changes in the net holding period gains and losses between periods for its equity securities as a component of net realized gains and losses in its consolidated statements of comprehensive income.

S&P Global Market Intelligence's insurance investment holdings data shows that the U.S. P&C subsidiaries of Progressive maintained its largest unaffiliated common stock positions at year-end 2021, limited to securities that had not been disposed by the company during the first quarter of 2022, in mega-cap tech stocks: Apple Inc., Microsoft Corp., Amazon.com Inc., Alphabet Inc. and Meta Platforms Inc. Each of those stocks declined by at least 23% during the first half of 2022, a period during which the S&P 500 dropped by 20.6%.

The $760.2 million reduction in revenue from those net holding period losses in combination with a $224.8 million goodwill writedown associated with Progressive's property insurance business sent the company to a net loss of $436.7 million for the month. Additionally, the company posted $309.7 million in net unrealized losses on fixed maturities that flowed into a total comprehensive loss for the month of $746.6 million.