Earnings Call Transcript
PROGRESSIVE CORP/OH/ (PGR)
Earnings Call Transcript - PGR Q2 2023
Douglas Constantine, Director of Investor Relations
Good morning, and thank you for joining us today for Progressive's Second Quarter Investor Event. I am Doug Constantine, Director of Investor Relations, and I'll be the moderator for today's event. The company will not make detailed comments related to its results in addition to those provided in its annual report on Form 10-K, quarterly reports on Form 10-Q and the letter to shareholders, which have been posted to the company's website. This quarter includes a presentation on a specific portion of our business followed by a question-and-answer session with members of our leadership team. The introductory comments by our CEO and the presentation were previously recorded. Upon completion of the previously recorded remarks, we will use the balance of the 90 minutes scheduled for this event for live questions and answers with leaders featured in our recorded remarks as well as other members of our management team. As always, discussions in this event may include forward-looking statements. These statements are based on management's current expectations and are subject to many risks and uncertainties that could cause actual events and results to differ materially from those discussed during today's event. Additional information concerning those risks and uncertainties is available in our annual report on Form 10-K for the year ended December 31, 2022, as supplemented by our 10-Q reports for the first and second quarters of 2023, where you will find discussions of the risk factors affecting our businesses, safe harbor statements related to forward-looking statements and other discussions of the challenges we face. These documents can be found via the Investor Relations section of our website at investors.progressive.com. To begin today, I'm pleased to introduce our CEO, Tricia Griffith, who will kick us off with some introductory comments. Tricia?
Susan Griffith, CEO
Good morning, and thank you for joining us today. I usually begin these calls by extolling the commitment of Progressive's people and expressing my pride in the results they deliver, and this quarter will be no different. In the face of extraordinary pressure on the industry, our people continue to take the actions necessary to succeed in this difficult environment. While our results through the first half of 2023 fell well short of our 96 combined ratio target, I continue to believe in our people and our strategy. I believe we have assembled a progressive team of nearly 59,000 employees that is best in class. I have no doubt that we are continuing to lay the groundwork to ensure that our best days are ahead of us. We continue to manage to this calendar year target, maintaining the discipline that has allowed us to grow in the past with better profitability than the industry. At the same time, we will be pragmatic in our approach to growth and remain cognizant of long-term value, which we continue to believe has served well by balancing growth and profitability. We spent much of the first quarter call talking about actions we would be taking to address our calendar year profitability pressure, and those actions continue. In quarter 2, we took 7 points in personal auto, which puts our year-to-date rate take at just over 11%, and assuming regulatory approval, we plan to take approximately 6 additional points during the remainder of the year as we adjust rates to match loss trend. During last quarter's call, we also said that we would reduce our media spend, resulting in our quarter 2 direct expense ratio being amongst the lowest in recent history. These actions have had the expected effect on growth with new app growth slower in the second quarter as compared to the first and PIF growth, while still robust, slowing from highs we saw in prior months. Calendar year profitability continues to be a challenge. So with the calendar year 96 goal in mind, we will continue to evaluate the rate and non-rate actions we may need to take. Catastrophe losses were a significant part of our profitability pressures. To date, 2023 has been a significant catastrophic year with some estimates suggesting that U.S. insurer losses have already surpassed $25 billion this year. The events this year had been broadly felt with 44 states affected by 43 events. At the company level, these events have added 4.5 points to our combined ratio year-to-date, which is 1.7 points higher than the impact catastrophe events had on our combined ratio for the first half of 2022. Our property business has been most affected by catastrophes, adding almost 46 points to the property loss ratio so far this year, which is about 16 points more when compared to this time in 2022. Historically, we have been among the best in the industry in reserve accuracy with reserve changes contributing little to our calendar year combined ratio. We've advanced the science of reserving, an employee team of highly experienced individuals to support our goal of being as accurate as possible with our reserves. Accurate reserves help us to price more accurately and give us the confidence to grow as fast as we have over the last decade. Having said that, the difficult environment of 2023 has presented challenges for our reserving practices. Through the end of the second quarter, prior year adverse development has contributed 4 points to our combined ratio and current accident year actuarial adjustments have contributed another 1.5 points. The majority of personal lines adverse development can be placed into 2 categories: Florida and fixing vehicle coverages. Florida's prior year adverse development accounts for just over 40% of the 4 points of prior year development. While we continue to be optimistic that March's new legislation will result in lower loss costs over time, the short-term effect has been a significant increase in attorney representation largely in medical coverages. Our data has matured each month since the bill passed, which has allowed us to continue to fine-tune reserving in the face of changes to Florida's ultimate loss costs. In fixing vehicle coverages, unforeseen severity trends deepening on previously closed claims continue to be the major driver of prior year adverse development countrywide. The contributors to the steeper trends come from a variety of sources, including longer vehicle repair times, longer rental times, higher parts prices and labor rates and changes in subrogation trends. Fixing vehicle coverages are short-tailed, which explains why over 80% of the total year-to-date prior-year development is from the 2022 accident year. In fact, excluding Florida, accident years prior to 2022 have developed favorably. Our current year actuarial adjustments are primarily due to fixing vehicle coverages. Since fixing vehicle coverages are short-tailed, most of the claims that are affected by emerging trends have happened in the recent past. As we have moved deeper into the year, the new steeper trends in fixing vehicle coverages have increasingly affected claims that occurred in the current accident year. Florida litigation has been a relatively small part of current year actuarial adjustments since the increase in attorney representation rates largely affected claims that occurred before March of 2023. We continue to monitor loss trends across all states and coverages and will adjust if necessary to ensure we're always adequately reserved. While both reserving and pricing have been a challenge this year, I have great confidence in the teams and our strategies, which have delivered results better than the industry for a very long time. To showcase these skill sets, this morning, we have 2 senior leaders to speak to these 2 topics for our presentation. First, Gary Traicoff, our Corporate Actuary business leader and Head of our Reserving Group, will discuss reserving practices at Progressive and how we endeavor to accurately set and adjust reserves. Gary is a 28-year Progressive veteran and has led our reserving group for almost 11 of those years. After Gary, Jim Curtis, our Personal Lines Controller, will discuss cohort pricing. Cohort pricing is our term for managing to both our calendar year and lifetime 96 target when new business and renewal business have different expense and loss characteristics. Jim has been with Progressive for 28 years and in his current role for 4. Again, thank you for joining us this morning. I will now pass you to Gary.
Gary Traicoff, Corporate Actuary Business Leader
Thank you, Tricia, and good morning, everyone. I'm excited to talk to you today about loss reserving at Progressive. I will first cover some key definitions and metrics in our general process, then walk through an example on how our overall reserve levels are determined. And finally, walk through an example of the reserving life cycle of an individual claim and how it would flow through the actuarial categories of the earnings release. Let's start off with the size of our loss and loss adjustment expense or LAE reserves. The columns represent our carried reserve balance at the end of each calendar year from 2013 through 2022 and at June 30, 2023, for the rightmost column. On the left side of the graph, we can see that in 2013, Progressive had about $8.5 billion in reserves on a gross of reinsurance basis at year-end 2013. This would be the sum of the orange and blue sections within the bar with our growth as a company, reserves before reinsurance as of June 30, 2023, is now almost $33 billion and almost 4x greater than what it was in 2013, while our premium growth was a little less than 3x greater over the same time period. Much of this difference in reserves outpacing premium growth relates to our growth in longer-tailed products and commercial lines over this period. This means that we believe for all accidents that have occurred through June 30, 2023, our ultimate future liabilities will be almost $33 billion. The orange section of the bars represents how much of our reserves are ceded for reinsurance. Some examples of this include state-regulated plans, such as the Michigan Catastrophic Claims Association and the Florida Hurricane Cat Fund and private reinsurers. Our ceded reserves now make up about 16% of our gross reserves versus just over 12% in 2013. Much of this increase in the higher proportion of ceded reserves relates to newer products that have been added over time, including property and protective, which have more reinsurance needs than our historical products. The blue section of the columns represents how much of our reserves are retained after reinsurance, almost $28 billion as of June 30, 2023. Next, let's look at some metrics on how our reserves are distributed. The chart on the left shows that 67% of our net reserves are in loss case, 17% loss IBNR and the remainder under LAE. Any open claim will be assigned a case reserve that may be set by a claims adjuster or an actuarially derived estimate set by the actuarial team. We will discuss this in more detail in a future slide. IBNR, which stands for incurred but not reported, makes up about 17% of our net reserves. IBNR may have different meanings across companies. For most of Progressive's products, one can think of IBNR as the future liabilities to cover claims that have already happened and are currently not recorded as open case reserves. This would include late reports, reopens and salvage and subrogation recoveries. Anticipated salvage and subrogation recoveries can be thought of as a contra reserve and is a reduction to future liabilities. For most of our products, IBNR does not cover any anticipated development in case reserves. This is because since our case reserves are a combination of adjuster estimates and actuarially set case reserves for the majority of our products, our IBNR reserve does not cover expected case development. LAE reserves make up the remaining 16% and typically cover the anticipated expenses needed to settle claims that have already happened, such as defense counsel costs and claims adjuster salaries. The middle chart shows the distribution of our reserves by product. As expected, reserves will index more to longer-tailed products with higher limits relative to premium size. Thus, our Commercial Lines business makes up almost 1/3 of our total reserves, but a smaller proportion of premium. The graph on the right shows that in personal auto, 83% of our reserves are set to cover injury and medical costs and 17% to cover the cost of fixing vehicles. Again, this is due to the longer-tail nature and higher severity costs to injury and medical coverages versus fixing vehicle coverages and reserves are over-indexed to injury and medical relative to premium. In addition, fixing vehicle coverages have a higher proportion of contra-reserves from salvage and subrogation compared to injury and medical. One additional point. This data is as of year-end 2022 and is on a net of reinsurance basis. While the previous slide gave a high-level overview of the distribution of our reserve mix by various parts, we review the reserves at a much more granular level. We typically review reserves by some combination of product, geographic areas such as group of states, individual states and even down to a region or subset within a state. Further breakouts typically include individual line coverages such as bodily injury, uninsured motor bodily injury and property damage and even by limit. To determine these breakouts, we weigh the credibility of the data, homogeneity in the data and additional value of segmenting the data at a finer level. For example, in personal auto bodily injury, almost all states are reviewed separately with the majority of states reviewed quarterly. State-level data is credible and many states have different development patterns, which warrant the data to be reviewed separately. In personal auto collision, while state-level data is credible, many states exhibit similar data patterns and several clusters of states are reviewed together. About 25% to 30% of our reserves are reviewed at this in-depth level monthly and about 85% of our reserves quarterly. About 700 reviews, which is some combination of product, state, line, et cetera, are reviewed over the course of the year. By reviewing reserves at this detailed level, we are able to adjust reserves more accurately at a granular level, which helps our pricing teams better match price to risk. We also have a robust roll-forward process that we will discuss later on, which allows up to 100% of the reserves to be adjusted monthly. The roll-forward process allows us the time to do a deep analysis on a portion of the reserves monthly while still feeling comfortable that all of our reserves are being updated monthly. Here is an example of how an in-depth review schedule will look over 3 months. In the first month of the quarter, 57 reserve reviews were completed. Each reserve review is either a loss or LAE review, which is further broken down between defense cost containment or DCC and adjusting and other expenses or A&O. Some combination of products, such as personal auto, CL or one of our core commercial auto products or TNC, which represents transportation network companies, line coverages such as bodily injury and some combination of state is reviewed. These 57 reviews would make up about 25% to 30% of our total reserves. In the following month, 60 reviews were completed. Again, there is some combination of type, product, coverage and state, but all 60 reviews are independent of reviews completed during the first month and represent another 25% to 30% of our total reserves. Finally, the third month of the quarter had 68 reviews completed, which are all different from any reviews completed during the previous 2 months and represent an additional 25% to 30% of the total reserves. Over the course of the quarter, about 85% of the reserves were reviewed. Typically, between 50 to 70 reviews are completed per month. Now let's talk about how the overall reserve level is determined. We use several different methods. One of the methods that we use is called the accident period chain ladder method in a standard industry practice. And the example above, each row represents a 6-month period when the accident occurred and each column represents how much in paid losses had been paid out for those accidents at certain time periods after the accident. For example, the top row represents all accidents that occurred from July 1, 2021 through December 31, 2021. The $100 in Column 1 means that the $100 was paid out as of December 31, 2021 for those accidents. Moving to the right of the same row. Column 2 of $120 means that for accidents that occurred during the last 6 months of 2021, as of June 2022, cumulatively that $120 had been paid out. Thus, an additional $20 was paid out during the first half of 2022. The increase of $20 could be due to payments on known claims, late reports or reopen activity. The increase of 20% from $100 to $120 is shown in the loss development factors section in the December 2021 row and column 1. Similarly, the loss development factor of 1.08 in Column 2 of the December 2021 row is calculated by taking the paid loss of $130 in Column 3, divided by the paid loss of $120 in Column 2 for the December 2021 row. Next, the actuarial analyst selected a 1.27 in the first column as the predicted Column 1 loss development factor for the accidents happening in the 6-month period ending June of 2023. We can see that in the June 2023 row, $120 had been paid out by the end of June 2023. The analyst is predicting that paid losses will increase by 27% or $33 during the second half of 2023 and cumulatively be at $153 by December 2023. Multiplying the $153 by an additional 8% predicts that an additional $12 will get paid out by the third column for a cumulative of $165. Thus, the shaded numbers in blue are predictions of what will be paid out in the future. The indicated reserve is then calculated by taking the ultimate estimated paid losses minus what has already been paid as of June 2023 since reserves are to cover future liabilities. The indicated reserve is $45 for accidents happening in the 6-month period ending June 2023 and $13 for accidents happening during the second half of 2022. In total, the indicated reserve is the sum of all accident periods or rows and adds up to $58. This example illustrates an accident period chain ladder approach using paid data. Triangle, similar to this byproduct and grouped by line coverage can be found in our annual report. Other approaches that we typically employ include using case incurred data, developing severity and frequency separately and stratifying the data by size of loss layer. In addition, data is also segmented by late report and reopen lag time from the date of loss to the date of late report and reopen and hindsight testing to prior reserve amounts are considered as well. Additional ad hoc analysis is typically completed to understand changes in the underlying data and loss development factors. Based on the indications from the multiple reviews completed during the month, the actuarial team will then decide how much of an overall reserve change is needed and adjust reserve factors accordingly. Those changes will show up in the earnings release under the actuarial adjustment section and be reported showing the breakout for the current accident year and all prior accident years. For example, in June of 2023, based off the scheduled reserve reviews, which represented between 25% to 30% of reserves, the actuarial team increased reserves $130.9 million for accident years 2022 and prior and increased reserves $160.3 million for the 2023 accident year for a total change of $291.2 million. The $130.9 million increase to prior accident years directly impacted the prior accident year development. In addition, due to other changes not related to actuarial reviews, prior accident years developed an additional $6.9 million unfavorably for a total amount of unfavorable development of $137.8 million.
Jim Curtis, Personal Lines Controller
Thanks, Gary. Now let's transition from estimating ultimate losses in LAE to another key element of our pricing, which is our expected lifetime value. We price each policy written to a lifetime target consistent with our enterprise goal of a 96 combined ratio. We refer to this as cohort pricing where a cohort is defined by policies written at new business and followed through their expected lifetime value, including all renewal terms. Lifetime performance is measured as the sum of all expenses realized and the premium earned across all new and renewal terms for a policy. When I say all expenses, by that, I mean loss, LAE, acquisition expenses and operational expenses. As you can see by the stylized chart, loss and expense costs vary between new and renewal policy terms. With this in mind, we price across the policy life to achieve a lifetime 96 combined ratio. Said another way, the sum of lifetime loss and expenses divided by lifetime earned premium nets us at 96 combined. This pricing approach positions us to offer a competitive rate of new business and stable rates across renewals. Now that we have a conceptual view of cohort pricing, let's dig into the mechanics. The following is a tabular representation of the lifetime view we covered in the last graph. We think about pricing in 3 separate categories: loss and LAE, acquisition expense and operational expense. Loss and LAE represent our indemnity experience. We break out our expense ratio into acquisition and operational expenses. And in all cases, renewal business operates at a total lower cost structure than the first term or our new business. While we price to the lifetime profitability of our policies at a 96 or better, we also manage this approach with consideration to our calendar year goal of meeting a 96 or better combined ratio. Next will explore each individual category or line item and finish with our management of cohort pricing within our calendar year 96 goal.
Douglas Constantine, Director of Investor Relations
This concludes the previously recorded portion of today's event. Michelle, I will hand the call back over to you for the closing scripts.
Operator, Operator
The next question comes from Elyse Greenspan with Wells Fargo.
Elyse Greenspan, Analyst
My first question, you guys highlighted that you need 6 points of additional price, right, in Personal Auto over the balance of the year. Can you just help us get a sense, what are you assuming for severity and even frequency, just overall from a loss trend perspective when you think about additional rate need from here?
Susan Griffith, CEO
Thanks, Elyse. We really don't share our trend selects normally. But obviously, we've been seeing the trends in shorter-tail business increase as just the repairs to vehicles have slowed down. And when we look at that in overall kind of both frequency and severity, we think we're at 6 right now. Just like I said in the last call, that could range. But at this juncture, we think we need another 6, so about 17-ish for the full year.
Elyse Greenspan, Analyst
And you believe that will get you to the 96?
Susan Griffith, CEO
It will certainly get close. Again, all the caveats I said last time with weather. We feel much better about our reserving because of those losses being short-tailed, and we started seeing those at the end of last year. So I believe Gary really got out in front of that. It will certainly get us closer. But again, all the caveats and the uncertainty that we've felt for the last 3 years kind of are underlying that assumption.
Elyse Greenspan, Analyst
And then my follow-up, you guys saw a significant amount of adverse development for accident year 2022. So I'm just trying to square the fact that there was a good amount of adverse development for accident year '22 with the improvement that you're seeing in the accident year ex-cat loss ratio so far this year.
Susan Griffith, CEO
Yes. What I would say to that is as those 2022 rates earned in that I put on one of the slides that I had, we believe we're putting on the books both new and renewal business that is closer to or below our targets, our accident year targets, I should say, in both channels on a year-to-date basis. So we feel good about where we're at in the business we're putting on the book in 2023.
Operator, Operator
Our next question comes from Mike Zaremski with BMO.
Michael Zaremski, Analyst
My first question is about loss cost expenses. Tricia mentioned that these come from various sources, and in your letter, you indicated that some of these sources might be mean reverting or showing signs of deceleration. Looking at the bigger picture, I understand this is a complex issue with many different factors involved. Over the past decade, I've observed a general trend of rising bodily injury expense inflation rates, though you may have a different perspective. The industry seems to be handling this well in terms of pricing appropriately over time. Currently, the data appears to show that the trends are more associated with non-bodily injury costs. Do you think there is a persistence to this that both you and the industry recognize? Ultimately, could this mean that Progressive may not be able to engage as frequently if there is uncertainty regarding the trends in the upcoming year?
Susan Griffith, CEO
Yes, I think we have a good understanding of the situation. For business interruption, we are consistently trying to stay ahead of the trends. When we identify changes, we respond accordingly and align with industry standards. These past couple of years have been quite unusual, especially when observing the Manheim used car index and its fluctuations. Although we notice a slight decline, the current conditions still differ significantly from what we experienced in 2018 and 2019. In analyzing the second half of last year, we clearly observed increasing trends, particularly in property damage and collision claims. We are closely monitoring how these trends affect our claims organization. For instance, in a property damage case, one of our competitors takes care of their insured but then subrogates the claim to us. If an accident occurs today and there’s no shop capacity to address it right away, they provide an estimate based on visible damage, assuming the vehicle is drivable. The repair shop might not be able to take it in for 45 to 60 days, and once they examine the vehicle, they often discover additional damage. This results in more frequent and more expensive supplements. Consequently, we’re experiencing longer cycle times and extended rental periods. I mentioned in my letter that rental times are showing a slight decrease, which is one data point we will keep an eye on. Moreover, we are facing rising labor rates and parts costs. The stickiness of these trends will likely depend on wages for body shop workers. A recent Wall Street Journal article noted that automotive repair worker salaries increased 24% in the fourth quarter of 2022 compared to 2018, with a 20% rise in the past year according to the Bureau of Labor Statistics. The indemnification values of vehicles have also increased by about 36% since 2018. While we may see some trends similar to used car prices as supply chain issues become more evident, other aspects will likely become part of our new normal.
Michael Zaremski, Analyst
Okay. That's helpful. My final question is about the expense ratio. It has decreased significantly, and you've mentioned it. We can see the reasoning behind it, and it appears that ad expenses have been the main factor, which is beneficial. However, I am curious about the future. Looking at the ad expense ratio over the past decade, are we nearing the lowest point, or is there still potential for further reductions in ad expenses or the overall expense ratio in the upcoming quarters?
Susan Griffith, CEO
As we work towards our goal for calendar year 96, there are always options available to us. Ideally, I would prefer to be in a situation where we're investing more in media while still striving to maintain our target profit margins. The company has a strong commitment to managing expenses, especially during challenging times. We will continue to evaluate our position over the next six months to determine if we can move closer to that goal.
Operator, Operator
The next question comes from Jimmy Bhullar with JPMorgan Securities.
Jimmy Bhullar, Analyst
So you went through a lot of details on your whole process on reserving. But maybe just stepping back, can you talk about your confidence in where your reserves sit now? And given that you've had, I think, 6 straight months of adverse development, are you much more comfortable in reserves overall? Or is there still a lot of uncertainty, and it's hard to say that you've got up in terms of loss trends?
Susan Griffith, CEO
I'll let Gary weigh in on that. I would say from where I sit, I'm much more comfortable. But again, Gary is independent and does his reserve reviews without my involvement. I hear about that just a little bit before you do. So Gary, why don't you weigh in a little bit.
Gary Traicoff, Corporate Actuary Business Leader
Sure. Thanks, Tricia. Great question, Jimmy. Overall, I feel very confident about our reserve position at this moment. To your point, we've experienced quite a bit of unfavorable development over the past six months. As Tricia mentioned, if we leave out Florida, most of the development relates to accident year 2022, where we are favorable on accident year 2021 and earlier. Within accident year 2022, over 85% of the issues arise from incidents that occurred in the last six months of the year, which are largely related to car repairs and the reopening severity that Tricia discussed. This is relatively short-tailed, and we have observed this in the data and responded swiftly. This gives me a lot of confidence due to the short tail nature of the issues. While I cannot guarantee anything, as data can change, I feel very positive about our current situation.
Susan Griffith, CEO
Thanks, Gary.
Jimmy Bhullar, Analyst
And along the same lines on Florida, I think it was somewhat expected that the number of lawsuits would go up given total form, but it's lasted longer in your results. So just wondering how the number of lawsuits that are coming in have trended through the last 3, 4 months or so? And was there an element of Florida in June in terms of adverse development and how that's changed versus maybe April and May?
Gary Traicoff, Corporate Actuary Business Leader
Yes. So that's a good question. So with respect to Florida overall, obviously, the big hit occurred March, April, May. And we've started to see it level out in what's been coming through. Most of June really related to the actuarial adjustments that we took from the reserve reviews primarily related to property damage, third-party fixing cars. So Florida had a very little impact from what we had from the June development.
Susan Griffith, CEO
Yes. And all I would say in addition to that is as soon as the House Bill 837 went through, and then we had the subsequent lawsuits that I talked about, we went in and were pretty aggressive and conservative because we were trying to figure out what was estimable and probable. And that will develop over time as those also get settled. So that's not something that we'll know right away because those take a little bit longer to settle.
Operator, Operator
The next question comes from David Motemaden with Evercore.
David Motemaden, Analyst
I just had a follow-up on the reserves. Gary, you had mentioned that you can adjust up to 100% of your reserve balance monthly. I'm just wondering if that happened in June. Or was it a normal review where you maybe did 60 to 70 reviews, but not a complete review? And we have to wait for potential further movement upwards or downwards as we move forward over the next few months?
Gary Traicoff, Corporate Actuary Business Leader
Yes, that's a good question. In June, we typically reviewed about 25% to 30% of reserves. The remark about adjusting up to 100% pertains to reviews we don't conduct every month. Those reserves can be inflated, especially if they fall below a certain threshold, and they may also become outdated. Changes can occur, for instance, if they shift to become plaintiff attorney representatives. Each month presents the possibility of adjusting up to 100% of the reserves due to factors like adjustments from an adjuster, inflation, or aging. Generally, we maintain our usual review range of 25% to 30%. The main exceptions are in December, as I serve as the opining actuary for the statutory reserves; if new information comes to light, we may include additional reviews to ensure the statutory companies are accurately positioned at year-end. Additionally, in situations like Florida when new legislation is enacted, we would promptly adjust based on that new information.
David Motemaden, Analyst
I understand. In the June review, it seems you confirmed it was only 25% to 30% with perhaps some minor adjustments, but it wasn't a comprehensive review.
Gary Traicoff, Corporate Actuary Business Leader
Yes, that's correct.
David Motemaden, Analyst
Great. And then just my second question, so I believe there was a stylized example just given about the mix of business and how having less new business, more renewal business can have an impact. I guess how quickly can that have an impact on the combined ratio, particularly considering the growth that you guys had in the first quarter? Is that something where that mix can change significantly through the end of this year?
Susan Griffith, CEO
I'll let Jim talk about that a little bit. Obviously, there's a lot more that goes into it than just the acquisition expense. A lot has to do with losses, and there could be uncertainty around catastrophes, et cetera. But Jim, do you want to talk a little bit about that?
Jim Curtis, Personal Lines Controller
Sure. Also a good question. A couple of ways to think about that. There's several dimensions to consider when thinking about mix. So to your point about any type of lag function when we write business, it's in written premium, but doesn't necessarily hit our earned premium mix until it starts to age or get into the policy term. So we would see on a 6-month basis, roughly 3 to 4 months later, where you start to see your earned premium mix shift. That would work in both ways, periods of growth on new business apps and periods of slowing our new business apps.
Unidentified Company Representative, Unidentified
I would like to clarify that we recorded advertising expenses in the period they were incurred. This is reflected in our expense ratio quite quickly.
Jim Curtis, Personal Lines Controller
Yes, I would build on that point that the expense affects us immediately. We would really start to see some reaction in our indemnity performance related to the earned premium mix.
Operator, Operator
The next question comes from Alex Scott with Goldman Sachs.
Taylor Scott, Analyst
First one I had is on the commentary that you guys gave on the lifetime combined ratios. And it just strikes me is a lot of that is very geared toward what the lifetime ends up being. And appreciate that you guys probably have the best data and best capability to analyze it, too. But are we at a period of time where just given how unprecedented it is, with inflation and all the pricing, I mean how much room is there around the estimates that you guys are putting into the lifetime? I mean, are you being conservative around potentially significantly higher churn as we kind of get through this period where everything is being taken out to market on a much more consistent basis? And how much is that being incorporated into your decision as to whether to start growing quickly or not?
Susan Griffith, CEO
I believe we always evaluate each data point. As we gain more confidence, we can act accordingly. We've observed an increase in PLE over both the 12-month and 3-month periods. I would like to see a few more data points since there is considerable activity in the industry. You're analyzing the same data we are, and there are significant fluctuations in rates. I would say there are countless factors we consider in this context, and we will continue to do so in this unpredictable environment. Jim, would you like to add anything?
Jim Curtis, Personal Lines Controller
Sure. We also consider different time periods and just typical when looking at data set, longer time period, more credibility and more confidence we have. We'll look at recent time periods as just a leading indicator adjust slowly. My team set sort of our permissible acquisition as an example, and we just go through that exact process.
Unidentified Company Representative, Unidentified
I would just quickly add is that we're not writing a 4-year policy at once, right? We constantly adjust rates to ensure we're hitting our lifetime targets. So to the extent that we have those targets, every renewal of every policy, and we have an advantage with a mix of 6 months policies that we can adjust as we see another card or see another data point in loss costs, et cetera.
Susan Griffith, CEO
Have you seen that with how nimble we've been with our pricing over the year? As we've seen things we've made changes. We are as anxious as likely our shareholders to grow. But again, we have a very specific core value of profit on a calendar year 96, and so that's a priority.
Operator, Operator
The next question comes from Greg Peters with Raymond James.
Charles Peters, Analyst
I'm going to start building upon the comments you just had about the growth results and Jim's cohort pricing. I'm wondering if you can provide us a perspective of how the limits profile of your consolidated order book have changed. I would imagine if you're focused more on Robinsons, the profile is moving up. But maybe you could give us an updated perspective on how that looks and where you think it might be heading.
Susan Griffith, CEO
Yes, I think you're spot on. We are trying to have more and more of the Dianes, Wrights and Robinsons. We love Sams as long as we can make our target profit margin, but we continue to increase our bundle. And as we think about both auto and property, those bundles are more important. So we've increased our Robinsons over time. And then, of course, we've talked about this in the past, and it's probably worth an update at some point in the next couple of quarters. The soon-to-be Robinsons. So it could be a Diane that's buying a house, et cetera. So we'll continue to try to be a place for every cohort, but we have increased our Robinsons profile in the last several years. And of course, during times like this, Sams are going to shop more because they're very incented by price.
Charles Peters, Analyst
I’m curious about the cohort pricing and its assumption regarding retention. With all the recent price changes not only at Progressive but also among many companies in the auto sector, I’d like to know how these retention characteristics are performing at the Robinson level. Are they aligning with your expectations, or are they causing disruptions in your pricing assumptions?
Susan Griffith, CEO
We don't specifically discuss retention for each consumer profile or marketing tier, but we do monitor it over time. Historically, Robinsons have performed better. We have found that having more products leads to greater customer loyalty. Sams, particularly with other characteristics considered, tend to have similar retention durations and have not changed significantly over the years. While we do not disclose specific figures, I would say that Robinsons remain more loyal.
Unidentified Company Representative, Unidentified
Great. We are constantly evaluating the assumptions that go into our acquisition model. As Jim mentioned, we use PLE to understand the permissible costs for acquiring customers, and we analyze this at a very detailed level. You are correct that there have been significant changes in policy life expectancy, which has recently increased, and we are assessing this closely and factoring it into the pricing over the customers' lifetime. Additionally, we have various opportunities to adjust the pricing for those customers if needed.
Operator, Operator
The next question comes from Tracy Benguigui with Barclays.
Tracy Benguigui, Analyst
Just a quick follow-up on your 96% combined ratio target. I appreciate all the commentary so far. But I'm just wondering, do you feel like there are secular changes going on in auto that you may need to do better than 96%? Like it feels like the tail is lengthening, which is happening for property damage despite it being a short tail line, which could add to volatility.
Susan Griffith, CEO
Well, good question, Tracy. You remember our 96 is an aggregate. So we look at it differently for new business, renewal business. We've taken to the assumptions of our PLE products, state, although it all goes up to 96, which I don't think will change. One thing, we do look at a really granular level; and two, I think we want to watch this playthrough because some of these changes came about pretty quickly in the delays. And a lot of it is really the shop capacity. And as that starts to open up with the exception of what I talked about with labor rates and probably prices, I think we could be priced adequately and continue to keep our 96 calendar year and lifetime goal. That would be my approach.
Tracy Benguigui, Analyst
Okay. Your year-to-date current accident year actuarial adjustments of $424 million was primarily driven by fixing vehicle coverages. So how do I reconcile that update with your property damage severity loss trend going down when you come up with your loss picks? Like you reported yesterday, property damage severity is 11%. But if I compare that to 1Q, it was 15% and then 20% in the full year '22.
Susan Griffith, CEO
We experienced several rate increases, which was one factor. When considering our properties and the impact of recent catastrophic events, it’s clear that 80% of the year-to-date total of $1.1 billion was related to auto. Specifically, 50% came from cars, and about 35% was attributed to Florida, with notable contributions from glass, personal injury protection, and bodily injury. The remaining amounts were related to IBNR and bodily injury nationwide, but the property sector did not show favorable development. Gary, would you like to add anything?
Gary Traicoff, Corporate Actuary Business Leader
So I think Tricia's spot on there. The one thing I would add, Tracy, to your point, the property damage severity that you're showing, that's for all claims, if we stratified and only looked at the reopen severity, which is really where the reserve actual adjustments have come from. The reopen severity is well above and has been increasing over those quarters relative to the 13%, 14% you're seeing.
Operator, Operator
The next question comes from Ryan Tunis with Autonomous Research.
Ryan Tunis, Analyst
So Tricia, I guess just going back to the comments you were making about how in the past, you've had tons of remediation that have led to tons of outsized growth. And you referenced that you see opportunity for that in the future. Just curious from where you sit today, is there any reason to think your appetite will grow, will be different going into 2024 than it was going into 2023?
Susan Griffith, CEO
As long as we look at the data and feel good about where we're at with our combined ratio on overall calendar year and accident year, we will grow as fast as we can. So that has been our objective for a long time, 96, grow as fast as we can. We want to do that. We're a growth company. We feel great about it. But again, profits over growth. But as soon as we feel confident with the little stability and less uncertainty, we are very prepared to grow.
Ryan Tunis, Analyst
Just to clarify, if a bad hurricane were to affect your execution, that wouldn't deter you from pursuing growth in January, right? You would be focused on your expected returns.
Susan Griffith, CEO
Yes. Yes. We don't know how the next 6 months will go. We're going to do the best we can. But again, like you said, if something happens, that is above and beyond that would be different. But yes, we will continue to grow. And in 2024 would be a new year as long as we felt that we had the policies on the book that we believe are at or below our new and renewal targets.
Ryan Tunis, Analyst
Got it. And then lastly, we've discussed the impact from previous issues. Is there any way to quantify the loss ratio impact from the first half of 2023 on the current accident year?
Susan Griffith, CEO
From Florida, you mean?
Ryan Tunis, Analyst
Correct.
Unidentified Company Representative, Unidentified
The impact for the current accident year was essentially zero because these lawsuits concern claims that took place before HB837 was enacted in March. While there are some, the majority involve claims from previous years. We are closely monitoring what we anticipate to be some positive changes from HB837 as well. We are analyzing the data carefully, and it will take some time to determine if we are indeed observing those effects. However, we are optimistic that there will be a benefit, and we are eager to adjust our pricing once we have clearer insights.
Operator, Operator
The next question comes from Yaron Kinar with Jefferies.
Yaron Kinar, Analyst
I have a question regarding the target of 96. If I understand correctly, you're aiming to stay close to 96 for this year. One way to reach that goal is by reducing new business growth, which should help improve the combined ratio. My question is whether it's possible to achieve this solely by lowering new business growth while still maintaining a combined ratio of 96 for cohorts, or do you need to aim for better than 96 for existing cohorts in order to reach the target of 96 for the year?
Susan Griffith, CEO
Well, we clearly need to get a rate. So that's one part of the formula. We also have really had a lot of restrictions from an underwriting perspective on new business. And so those are some other things that go into it. We have a line of sight, but again, we'll caveat that by all the comments regarding uncertainty that I've said before.
Yaron Kinar, Analyst
Okay. But ultimately, do you believe that beyond the kind of flexing down or up the new business growth, do you need to take any additional actions to lower the combined ratio for the existing business below 96 in order to get to a full year 96 or close to it?
Unidentified Company Representative, Unidentified
So clearly, the new renewal mix is working in our favor right now. The other bigger tailwind is the rate that's earning in. So we've taken a lot of rates. We still have about 6 points in Personal Auto for that rate to earn in. Additionally, we're taking 6 more points for the rest of the year. So the denominator effect is a tailwind for us the rest of the year.
Yaron Kinar, Analyst
Got it. And then my other question, maybe for Gary, since Gary is on the call. We saw an uptick in bodily injury severity this quarter. And I am curious as to how that ultimately plays out or how you think about it, how you approach that with regards to prior year reserves? Ultimately, I would think that bodily injury has a longer tail, so more risk there for things going adversely. So how do you approach that?
Susan Griffith, CEO
I'll start, and then Gary can weigh in. About half of the BI was actuarial reserves, but it's pretty much in line with the industry. So we're not too concerned about it. A lot of them are soft tissue, attorney rep but not litigated. So they do take longer. But I feel like we're in a good position and understand where they're headed. And I think in a better position than we were even a year ago. Gary, do you want to add anything?
Gary Traicoff, Corporate Actuary Business Leader
Yes. I think Tricia is spot on there. The only couple of things I'd add from the reserve side is we tend to look at the data off of an accident period basis, right, as opposed to reported calendar information. The accident period data is more smooth, right, on a calendar basis, you can get some movements up or down, sometimes with changes in mix or closures, et cetera. So on an accident period basis, we're a little bit lower than what that shows. The other thing what Tricia alluded to is there's some large loss mix, et cetera. If you think back to that presentation, that's one of the reasons we employ that reserve threshold. So when our claims adjusters identify those large losses, once it's above that threshold, they put that up immediately. So it's recognized in the reserves. And again, there could be a little bit of timing difference between the accident period and the calendar period, which you would see.
Douglas Constantine, Director of Investor Relations
We've exhausted our scheduled time, and so that concludes our event. Michelle, I will hand the call back over to you for the closing scripts.
Operator, Operator
That concludes the Progressive Corporation's Second Quarter Investor Event. Information about a replay of this event will be available on the Investor Relations section of Progressive's website for the next year. You may now disconnect.