Progressive Corp(PGR) 2022 CEO's Shareholder Letter: Unity and Resilience in Challenging Times

Dear Shareholders,

Although annual shareholder letters typically reflect the year that just ended, it’s really impossible not to think of these last three years as one continuous challenge. The fact is that Progressive employees love a good challenge and we have had to deal with a prodigious number of headwinds over these past several years. The way that we have all come together and the perseverance that we have demonstrated during these times, is just one of the many reasons why I chose Unity as the theme for this year’s annual report.

Together, we muscled through a pandemic that never seems to end, adjusted our underwriting actions to react to a year of severity trends like nothing we have experienced in at least the last 40 years, and, lastly, pivoted our focus to take the many actions necessary to achieve our objectives in what appeared to be an ever-changing landscape. Did I mention the largest hurricane in our history? In the end, I’ll put it in the same ineloquent words that I used with my team, “We did it!” It wasn’t easy and it was often painful, but we ended the year within our target margin with a 95.8 combined ratio (CR) and grew net premiums written (NPW) and policies in force by 10% and 3%, respectively. Proud doesn’t even begin to describe how I feel about the unified efforts of literally every single Progressive person.

After navigating all the chicanes in the road, we had a lot to celebrate. I often say that our people and our culture are our greatest competitive advantage and during times such as these, that is truer than ever. This year we’ve put that into focus by celebrating “2022: The Year of You” with our employees in honor of our 85th anniversary. This thread has run through several of our employee engagement efforts, and two in particular stand out.

First, I set out to host 85 employees for small group lunches to celebrate Progressive’s anniversary. The interest from our people was above and beyond what I expected. In response, I doubled the number and ultimately broke bread with about 170 employees—either virtually or in my office. With a hybrid workforce, this was a truly amazing way to spend time with more of our people and to have the opportunity to get to know them on a more personal level. For me, hearing directly from employees and getting feedback and the ground truth is one of my most important roles as a leader.

I thought that I would bring some of the sentiments to life by sharing a few quotes. As Jordan put it, “Sometimes you need an in-person event like this to re-energize you with the culture and the people of Progressive.”

I received a heartfelt thank you note from Carrie that truly made my day. She said, “Thank you so much for a lovely lunch and great conversation. I am appreciative of the opportunity to hear from everyone about what they enjoy about Progressive, our culture and how we are adapting in our new normal. Thank you for bringing us together, sharing your time and most importantly demonstrating how to lead with empathy and strength.”

The second engagement effort was on a much larger scale. We introduced a companywide program designed to make 2022 about our people and what means the most to them. Through our “Big Wish” initiative, employees described—in just a few words—a special wish they had and how it would make a difference in their lives if this wish would come true. The response was incredible. We received more than 9,000 wishes! Although it was difficult, we chose entries from each business area and surprised hundreds of employees with everything from family vacations to American Sign Language lessons and everything in between.

I, along with my executive team and other senior leaders, had the privilege to distribute many of these Big Wishes. I took part in surprising a mother-daughter duo—Pat and Adriane—both of whom are proud Progressive employees, with their Big Wish. We invited Pat to join Adriane for a tour of our art collection and surprised her with the news that Adriane had won a special trip for the two of them. All three of us were shaking with excitement after the big reveal, and their reaction was so touching that I asked their permission to share it here:

“I can’t even begin to express my gratitude! Mom and I are still in total shock. We have a tradition of getting a coffee and a cookie whenever we are together, so we sat there with our coffee and cookies just staring at each other while we tried to process what just happened and attempt to stop our limbs from shaking. This Big Gift means so much to me; without it I don’t know that I could have convinced my Mom to make the trip down to South Carolina. North Litchfield was my dad’s (really the whole family’s) happy place and he always dreamed of heading down at least one more time in his life. Although he didn’t make it there in life, he would be so happy that Mom got to experience it for the both of them. I am so lucky to work for a company that does things like this for its employees! Thank you a million times over.”

For me, their story, and hundreds more from our recipients, underscores that you never know what’s happening in someone’s life and a special gesture or act of kindness—big or small—can make a tremendous difference. Our employees routinely demonstrate kindness when helping our policyholders or claimants who are going through tough times. It’s been wonderful to share some of that empathy with our employees through this program.

While I am not one to prognosticate about the future, I am sanguine that 2023 will provide greater stability based on all of the actions we have taken over the last few years to position ourselves for growth and profitability.

THREE YEARS IN…

We have certainly had our ups and downs over the last several years but ended 2022 with solid growth and an underwriting profit of 4.2%, which exceeds our 4% target profit margin. Our Personal and Commercial Lines businesses earned a profit margin of 4.0% and 8.9%, respectively, while our Property business recorded an underwriting loss margin of 10.5%, which included 25.6 points of catastrophe losses. NPW growth was good across all segments with Personal Lines, Commercial Lines, and Property growing 9%, 17%, and 8%, respectively.

In Personal Lines, we started 2022 with promise considering the sharp turn in loss trends experienced during the latter part of 2021. Our discipline around profitable growth prompted our product management team to act quickly. We increased our countrywide rate level about 8% for auto in 2021 and managed our media budget conservatively.

As a result of these actions, we started 2022 in a more favorable position but continued our personal auto rate actions during the first half of the year with additional rate increases of about 9% during that period. As our profitability appeared to be trending in the right direction, in the third quarter 2022, we experienced the largest hurricane in our history as Hurricane Ian made landfall several times in both the Gulf and Atlantic coasts. For the year, we incurred an estimated $560 million of losses in Personal Lines and nearly $15 million in Commercial Lines.

Acting quickly and keeping our financial objectives in mind, we made trade-offs during the second half of the year and prioritized profit over growth with a focus on expense management, primarily our media budget, and continued rate level management. As a result of these efforts, our Personal Lines business finished the year at a 96.0 CR.

Managing to our companywide stated profit goal did not come without sacrifice, particularly in growth during the first half of the calendar year. However, because we acted quickly in 2021 and the first half of 2022 with rate increases, our second half of 2022 rate changes moved closer to our ‘small bites at the apple’ approach and were about 4% and at a pace closer to the inflationary pressure we experienced. Based on publicly available rate filings, during the second half of the year, we witnessed the market catching up with rate increases of their own that were comparable to the rate actions we took much earlier. As our competitiveness improved, our Personal Lines business ended 2022 with growth in both premiums and policies in force.

Our Commercial Lines business was the highlight for 2022 after several years of similar success. We work as a very cohesive and unified team, so we celebrate each business units’ success and lift each other up when there are opportunities. This year was no different. In addition to supporting our existing Commercial Lines business market targets, we continued to integrate Protective Insurance Corporation’s people and products into the organization and am pleased that the timeline and plan are meeting our expectations.

We ended 2022 with 17% NPW growth at a 91.1 CR. I remember vividly when we reached $1 billion in Commercial Lines NPW and now the business unit wrote $9.4 billion of net premiums during 2022. The tremendous growth we have achieved in a very short amount of time is a bellwether of our stellar leadership in this business unit, as well as our ability to leverage what was happening in the economy during that time.

Our Property business experienced premium growth in 2022; however, profitability fell well short of our expectations with a combined ratio of 110.5. We ended 2022 with $2.4 billion of NPW, an 8% increase over 2021, and recognized modest growth in policies in force of 3%.

Our Property underwriting loss reflected nearly 26 points of catastrophe losses, primarily from Hurricane Ian, which alone accounted for almost 30% of our total Property catastrophe losses, an April hail/wind event in Arkansas and Texas, and a late December winter storm. As a result of our per-event catastrophe reinsurance, our losses and allocated loss adjustment expenses from Hurricane Ian were capped at $200 million, or 8.8 points. Improving profitability continues to be our top priority for our Property business. Due to our concentration of policies in catastrophe-exposed states, severe weather events generally have greater impact on our results compared to other national carriers. To reduce this volatility, we focused our efforts on growing in states with traditionally less catastrophe exposure and limiting growth in the coastal and hail-prone states. We began implementing underwriting changes during the second half of 2021 to accomplish these goals, continued to take steps during 2022, and will continue to take steps during 2023 to reduce our concentration exposure. In addition, we increased rates an average of about 19% across Property’s product portfolio in 2022, with larger increases in Florida and in hail-prone states, such as Colorado and Oklahoma. We will continue to adjust rates to work towards our profitability goals in our Property business.

In 2022, our investment portfolio saw a fully taxable equivalent total return of -7.8%. We believed we entered the year with a conservative posture, but it was difficult to escape the volatility seen across both the fixed-income and equity markets. While we stayed in the bottom half of our self-imposed target duration range, the persistence of high inflation and the Federal Reserve’s actions contributed to losses across the interest rate curve.

Our fixed-income portfolio returned -6.6% on the year, as higher rates and wider credit spreads offset the higher investment income that we were able to generate as the year progressed. The sharp movements in interest rates depressed equity returns as well, with our equity portfolio producing a -19.4% total return. As the year progressed, we stayed cautious, due to increased geopolitical risk and the significant tightening in monetary policy, and conservative, with the interest rate, credit, and equity risks that we chose to take, in our investment portfolio. We believe that there is the potential for continued market volatility in the first half of 2023 and believe that our current posture will have us in position to find strong investments if valuations continue to improve.

In times of volatility, we also believe it is appropriate to have a conservative approach as it pertains to our capital. In the first quarter 2022, as we saw the effects of inflation on both the operating and investing sides of our business, we felt it was prudent to raise capital in the debt markets. We issued $1.5 billion of corporate bonds with an average interest rate just above 3%. In the fourth quarter, management and the Board of Directors agreed that, given potential growth opportunities, the right decision was to not pay a variable dividend this year. Nevertheless, we maintained our $0.10 per common share quarterly dividend and repurchased enough shares to offset dilution from employee equity grants. We believe that the actions that we took during 2022 will provide a strong foundation for underwriting growth in 2023 and beyond.

Overall, even with the many significant headwinds that we have faced these last three years, we remain positive, confident, and eager to get even closer to achieving our Vision.

OUR FOUR CORNERSTONES

You are all familiar with our four cornerstones—who we are, why we are here, where we are headed, and how we will get there—as the construct Progressive uses to think about having a competitive advantage. We start with our five Core Values that clearly outlines who we are. Next is our Purpose, which is a statement we recently modified to more clearly convey why Progressive exists and the role we play in society and is described in more detail below. The third cornerstone is our Vision, which we also slightly revised to reflect all our customers and their future needs. Lastly, and the more tactical of all the cornerstones, is Strategy, which is supported by our four strategic pillars that have been our resolute approach to making sure we invest in the most critical elements of People and Culture, Broad Needs of our Customers, our Leading Brand, and having Competitive Prices.

CORE VALUES > These values, which remain unchanged and continue to serve as the foundation for our culture, are Integrity, Golden Rule, Objectives, Excellence, and Profit.

PURPOSE > Since opening our doors in 1937, Progressive has challenged the status quo to accelerate progress and equity. Our history of consumer-focused innovation and foundational Core Values continually drives us to put people’s needs first. Building on this legacy, we are modifying our Purpose to better unify and guide our organization.

At Progressive, “We exist to help people move forward and live fully.”

“Move forward” means more than simply providing products and services that assist people in recovering from a loss; it’s how we help people—regardless of their background—and make measurable progress toward a more promising future. “Live fully” comes from the peace of mind we give people to pursue what matters most without fear of setbacks. In doing so, they can then confidently live the fullest expression of their lives.

In a world where it can feel challenging to get ahead, we’re proud to be a trusted partner that champions progress for consumers, our customers, and the Progressive community. We’re united in our purpose to help people move forward toward their fullest lives, as reflected in the incredible stories shared throughout this letter. Our collective commitment guides our decisions to make tangible progress possible for more people.

VISION > The slight modification to our Vision statement to add “business owners” and “other financial needs” provides a more holistic view of all the customers we are privileged to serve and their future needs.

Our Vision is to “Become consumers’, agents’, and business owners’ #1 destination for insurance and other financial needs.”

STRATEGY > Our strategic pillars serve as the foundation of how we will achieve our Vision and are discussed in more detail below.

People and Culture

We strongly feel that to be consumers’, agents’, and business owners’ #1 destination for insurance and other financial needs, we need to understand and anticipate the needs of our customers. For us, Diversity, Equity, and Inclusion are business imperatives required to sustain our incredible growth. It’s our growth that generates additional career opportunities for all of us.

Our four Diversity, Equity, and Inclusion objectives remain as follows:

– Reflect the customers we serve

– Leadership reflects the people they lead

– Maintain a fair and inclusive work environment

– Contribute to our communities

I will briefly describe our efforts of each objective below.

After almost five years of significant growth and hiring, the gender and racial demographics of our workforce are closely aligned with the U.S. adult population. There’s obviously more to diversity than just gender and race, like diversity of thought and demographics, such as disability, religion, and veteran status, but gender and race are the two demographic factors that we currently measure for all Progressive people.

From this, we can focus on the recruiting and development efforts that have proven to be most successful over the past few years. We recognize it will take an ongoing effort to ensure we continue to attract and retain a richly diverse workforce. We believe that engagement strengthens when our people rise into leadership roles and inspire others to lead. Our talent management and acquisition processes strive to remove any barriers we may face in our efforts to increasing the representation of women and people of color into management roles. A deliberate effort to increase the diversity of our candidate pool has proven effective in meeting this objective. We plan to maintain our discipline in developing deep, diverse candidate pools through new and existing recruiting networks and internal talent development investments.

We’re committed to creating an environment where our people feel welcomed, valued, and respected. One key measure of success is participation in our Employee Resource Groups (ERGs). In fact, during 2022, our ERG membership grew even faster than the rate of growth of our employee population. We believe our ERGs, and our outsized participation rates compared to benchmarks (DiversityInc’s Top 50), are a significant contributing factor to several people metrics at Progressive. Our ERG members are more engaged and more likely to stay at Progressive and achieve a promotion.

We’re also proud of our pay equity. Our pay equity analysis shows that for Progressive employees with similar performance, experience, and job responsibilities, women earn one dollar for every dollar earned by men, and people of color earn one dollar for every dollar earned by their white co-workers.

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Read the whole letter here.