Earnings Call Transcript
PROGRESSIVE CORP/OH/ (PGR)
Earnings Call Transcript - PGR Q1 2025
Douglas Constantine, Director of Investor Relations
Good morning, and thank you for joining us today for Progressive's First Quarter Investor Event. I'm Doug Constantine, Director of Investor Relations and I will be a 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 a letter to shareholders, which have been posted to the company's website. Although our quarterly Investor Relation events often include a presentation on a specific portion of our business, we want to take the 60 minutes scheduled for today's call for introductory comments by our CEO and a question-and-answer session with members of our leadership team. Introductory comments by our CEO were previously recorded. Upon completion of the previously recorded remarks, we will use the balance of the 60 minutes scheduled for this event for live questions-and-answers with members of our leadership 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 31st, 2024, as supplemented by our Form 10-Q for the first quarter of 2025, 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?
Tricia Griffith, CEO
Good morning and thank you for joining us today. Since the pandemic started in March of 2020, we've hosted 20 Investor Relations calls. And the common theme of those calls has been how our business is weathering uncertain and unique macroeconomic environment. The last five years has shown challenge after challenge. And through it all, Progressive has not merely survived, but thrived. Following a fantastic 2024, we just delivered one of our best quarters ever with near-record margins coupled with record growth. As more challenges arise, including in the form of the macroeconomic effects of tariffs, I feel very confident in Progressive's ability to face the issues head on. The momentum we had in 2024 carried us into 2025. And during the first quarter, we added new policies below our target acquisition cost and continued moving full speed ahead on growth with a focus on realizing our vision of becoming consumers', agents', and business owners' number one destination for insurance and other financial needs. Even though our competitors have reported improved profitability over the last couple of quarters, the shopping environment in personal auto has remained very favorable to Progressive. You may recall that the first quarter 2023 set the record for the most new personal auto applications of any other first quarter in our history. Well, I'm proud to say that the first quarter 2025 personal auto new applications surpassed the previous record by over 20%. Our results achieved because of both more quotes, and higher conversion of those quotes to a sale. More year-over-year quotes mean our customer acquisition machine is running efficiently and strong conversion in both channels suggest a very good price competitiveness. Growth is not just happening in personal auto. In property, we increased homeowners policies enforced in the less volatile states and reduced policies enforced in the more volatile state. We're also continuing to significantly grow our renters business. In commercial lines, although the trucking space continues to be challenging, core commercial auto new applications are up 8% year-over-year and our business auto and contractor BMT has experienced significant growth in new applications. In addition to growth, our personal auto and property products as well as commercial lines have year-to-date combined ratios below 90, a significant achievement considering the industry's challenges in property and commercial auto. Despite the significant turmoil in financial markets in recent weeks as investors react to tariffs and other news, I'm pleased to report that our balance sheet has remained strong. At quarter end, common equities were only 4% of our total portfolio. And thus far, it has been largely insulated from stock market volatility. Additionally, we have been generating capital at a brisk pace, both from strong underwriting profitability and investment returns. For the quarter, our investment portfolio generated investment income that was 32% greater than the first quarter last year and averaged over $270 million a month year-to-date. We are still in the early days of the tariffs and the effects may not be known until sometime in the future. The interconnectedness of global trade makes it even more difficult to predict where and how quickly the impact of tariffs will work their way through supply chain and ultimately, our loss cost. Determining our rate levels is a prospective exercise where we try to predict future loss trends and other costs to be able to set appropriate rates to achieve our underwriting profitability goal. Since late 2024, our talented team of pricers, modelers, analysts, and actuaries have been modeling various scenarios to allow us to assess the impact of potential tariffs on our business to help us to be prepared to react as quickly as possible. In our fourth quarter 2021 IR call, we talked about our ability to gather data quickly, process it effectively, and react to it decisively. I believe we're better at this than anyone else in the industry. And proof of this is that over the last 20 years, periods of macroeconomic turmoil have often directly coincided with Progressive's most successful periods. More recently, the inflationary environment of 2021 through 2023 proved that we were able to manage through rapid unpredictable increases in loss costs and manage our calendar year combined ratio. I think that we have the tools, systems, and most importantly, the people to react quickly and effectively during times of market disruption. While I can't know what the future holds, I believe the odds are strongly in favor of Progressive to once again manage through whatever lies ahead, better than anyone else in the industry. Thank you again for joining us today, and I will now take your questions.
Douglas Constantine, Director of Investor Relations
This concludes the previously recorded portion of today's event. We now have members of our management team available live to answer questions. We will now take our first question.
Operator, Operator
The first question is from the line of Bob Huang with Morgan Stanley. You may proceed.
Bob Huang, Analyst
Hi, good morning everybody. My first question is on auto rates. So, obviously, auto profitability has been pretty incredible well ahead of your target at 96%. Now taking tariff uncertainties into consideration, do you plan to take rate decreases in order to accelerate growth? Or do you think that it's better just to keep rates static to maintain the current earnings profile? Curious on your thoughts on this.
Tricia Griffith, CEO
Good morning Bob. Well, as you know, we look state-by-state, product-by-product when we look at rates. And in fact, the last quarter, we took about a dozen state rates up and a dozen state rates down, but mainly flat. So, we're going to do all we can to continue the growth engine, and so we monitor that at a very granular level. Obviously, we're sitting on some nice margin with an 86% combined ratio in the first quarter. And with the unknowns around tariffs, we obviously have to think about that for future. But we are business as usual, trying to make sure we grow as fast as we can, and that means in some states, taking rates up a little bit and some rates taking them down a little bit. I think the good thing is that we are back to where we wanted to be in terms of what we call small bites at the apple. We know that our insureds like stable rates, we're going to do our best to keep it that way, but to also continue with our growth engine.
Bob Huang, Analyst
Thank you for that. My second question is about advertising. You significantly increased your ad spending for the quarter. Regarding the three major advertising channels—TV, digital, and radio—where do you expect the most growth in ad spending to come from moving forward? Is there a specific channel that you believe might be overly saturated, making additional spending there less worthwhile? I'm interested in your perspective on advertising spending and the competitive landscape.
Tricia Griffith, CEO
Yes, we always evaluate our advertising strategy. We conduct several business reviews each year, with one major review focused on our spending strategies. Digital advertising has seen significant growth in recent years, which aligns with consumer behavior. Although you mentioned radio, it has its effectiveness as well. We examine all options, and I often discuss direct mail during our reviews. If it proves effective and efficient, we will utilize it. Ultimately, we are committed to spending no more than what is necessary to acquire new business.
Bob Huang, Analyst
Got it. I'll be looking for that. Progressive is mainly in my mailbox.
Tricia Griffith, CEO
You got it.
Operator, Operator
The next question is from the line of Rob Cox with Goldman Sachs. You may proceed.
Rob Cox, Analyst
Thank you. My first question is about the new business penalty. Can you discuss the impact of this penalty today in personal auto and whether its magnitude has changed over time? I'm curious because it seems difficult to distinguish its effects in the current combined ratios, or perhaps it's being obscured by other factors.
Tricia Griffith, CEO
Yes, I believe that when we reopened for business, or rather tightened our operations, we noticed an increase in the preferred market. I'll let Pat elaborate on this if he wishes. However, I think we're always going to face a new business penalty on the direct side because of our approach to expensing our business and advertising upfront. As a result, the initial term will appear significantly different from the subsequent terms. I feel we are in a unique position here, and much of that is related to our size. Pat, do you have anything to add?
Patrick Callahan, CFO
Yes. The only thing I'd add is first quarter is typically a strong growth quarter for us. And baked into our acquisition costs is the lifetime expense to bring a policy on board. So, we are continuing to price to our lifetime cost. And yes, when you grow quickly, there's a slightly higher combined ratio due to the expensing of ad expense. But on a quarter-over-quarter basis, it's not materially different, I don't think, than sort of what we've seen in the past when we've grown new applications 30% in a quarter.
Rob Cox, Analyst
Okay, got it. Appreciate the color. And the second one I had for you was on policy life expectancy. You mentioned the strong growth in the quarter. And that was despite policy life expectancy being a little bit lighter versus last time you reported it. Is that just more reflective of the increased shopping environment, and that's more of an industry dynamic? Or is that being driven by something else?
Tricia Griffith, CEO
Yes, that's definitely a factor, Rob. PLE is quite complex, and several elements can influence it. We observed a couple of inputs as we analyzed the situation. Initially, when we needed to get rated and tightened our underwriting approach, it had a positive impact on PLE. Now, having reopened for business, our mix has returned to what we would typically expect, involving bands that are inconsistently insured. I want to emphasize that we are familiar with Sams and know how to profit from them, so we aim to acquire as many Sams as possible as long as they align with our target profit margins. This shift in mix is a contributing factor. Regarding the shopping environment, there is significant pressure on renewals, leading people to compare options, which is reasonable. It's essential for individuals to find the appropriate rates, and with competitive pricing, our insureds may consider shopping around. If they do shop and we engage with them through policy reviews, our customer preservation team can discuss potential changes that might be beneficial, such as plan adjustments or deductibles, and if it makes economic sense for both parties, we can rewrite those policies, initiating a new timeline. While there is a lot of discussion about policy life expectancy, which we recognize as significant, we've observed considerable improvement in our internal measure of household life expectancy, which is encouraging. Ultimately, I want to highlight our growth; we've added 5.5 million PIFs compared to last year, reflecting an 18% growth rate, which makes me feel optimistic. We will keep focusing on policy life expectancy and are committed to providing exceptional customer service, both through our CRM and claims processes, while maintaining competitive pricing. This is our top priority. However, you are correct that much of the current situation stems from the shopping environment we are experiencing.
Rob Cox, Analyst
That’s very helpful. Thank you.
Operator, Operator
The next question is from the line of Mike Zaremski with BMO. You may proceed.
Mike Zaremski, Analyst
Hey good morning. My questions are on auto loss costs. In the letter, you point out that part of the frequency decreases are due to mix towards the more preferred customer base. I'm curious you don't call out severity being higher due to that mix shift as well. Do more preferred customers not have higher kind of, I thought, just more expensive cars and higher limits with more severity? Or am I not thinking about that correctly?
Tricia Griffith, CEO
No, I think you're seeing about that right in terms of severity and more coverage. I don't know necessarily expensive cars, but you have more coverage. What I would say, let's go back to frequency. What I would say with frequency is as we sort of decompose that, there's a little bit of noise and of course, it's quarterly data. But when we look at frequency, we would look at a couple of different things like those that would affect it. And that would be both what you talked about from a preferred mix, which would decrease frequency, but also a couple of things that increase frequency from our perspective, some growth, weather and our calendar year, we went to a Gregorian calendar, which equated to about 1 point of frequency. So, that would be more in line with our trailing 12 frequency decline of about 3.5% to 4%. So, we do see that a little bit differently. Interesting, and this would be something to watch, our OBD data from our usage-based insurance, the dongle in the car showed for the first time since 2019. So, take away 2020 because a lot of people were driving. So in 2019, that vehicle miles traveled decreased, especially in strips that were over 100 miles. So, I think that's an interesting data point for one quarter economically to look at. From severity, I feel like we're right in line with competitors on severity. If you look at our collision, it looks higher based on some sub and salvage recoveries that were very high in Q1 of 2024. So if you take that out, it's about 2% gross recovery. So, I would say the collision is in line with our PD on the severity piece.
Mike Zaremski, Analyst
That’s helpful information. I have a follow-up regarding severity. You may have addressed this already, but when considering the long-term severity trend, I see it as low to mid-singles. Does Progressive have a perspective on whether the new normal glide path will remain consistent over time, or do you anticipate it might be slightly higher due to factors like lawsuit inflation or changes in mix? I'm interested in any long-term insights you might have on severity.
Tricia Griffith, CEO
We talk about it a lot. And obviously, we react to the data as it comes. And there's been so much volatility over the last five years that we've really had to react to it, especially with inflation. I would have never predicted that would have happened. But again, we reacted to that. Tariffs will be another sort of unknown, but we'll react to that and react to that quickly should we need to. I think the one place where we've seen severity increase across the industry is more on the bodily injury side with just inflation, more attorney reps, higher medical bills, sort of the social inflation that we talk about a lot. And so we try to build that into our models as we think about the future as well.
Mike Zaremski, Analyst
Thank you.
Tricia Griffith, CEO
Thank you.
Operator, Operator
The next question comes from the line of Alex Scott with Barclays. You may proceed.
Alex Scott, Analyst
Hi, good morning. I wanted to see if you could dig a little bit more into the potential impact from tariffs. Just to kind of frame for us how much that may or may not ultimately increase loss cost trend? And if you could particularly touch on how you're viewing auto parts and just repair costs in general?
Tricia Griffith, CEO
Yes, absolutely. This will probably be a longer answer to the question, but I wanted to give you an insight of kind of how we're looking at the complexity of tariffs at such a granular level. And so stick with me. So, I talked in February about tariffs are inflationary, and they're one-sided to loss costs. And we care deeply about trying to understand the impact on our book of business. Oddly, last Monday, I spent an hour with our national auto pricing manager, we went over the inputs and the outputs to the tariffs and had a great conversation. The work is extremely well done and then Tuesday, the White House, that it would soften some of the tariffs. So, it changed things in terms of stacking the steel and aluminum with the imported vehicles as well as some rebates on foreign parts that are assembled in the U.S. So, that immediately changed some of the dynamics with what we were working on. So, we take a bunch of raw data. So think of probability of occurrence, which is very high at this juncture, start date, market lag, time to full effect in the tariff rate. And then we take some components. So, clearly, USMCA compliance is a big one, price umbrella, part sourcing, per coverage cost e-com. So, that is just a handful of some of them of the inputs that we put into our model. Then we ran our entire fleet through the USMCA compliance to understand each vehicle and what we think the cost could come to. So, let me walk you through a couple of examples. I won't give you the exact car, but Car A basically assembled outside the U.S., 1% U.S. Canada content. The rest is German and from Poland and a couple of other countries. So it's not USMCA compliant. So quick math on that is that 99% of that value should be tariffed. So we know that for that car. Vehicle B, a little bit different, assembled in the United States, 50% U.S.-Canadian content, 25% Mexican content. So it is USMCA compliant. So as of last Monday, it would have been 25% eligible to be tariffed. As of Tuesday, that first 15% was eligible for the rebate. So, the effective tariff rate is 10%. So that's how surgical we're getting with our models. And it's a moving target, but we have to be nimble. And I think that the big thing here is that the key is we've got to recognize as soon as possible when we see the data and take action accordingly. I do have to take a moment to shout out a couple of people. We have many, many people working on this, but couple of people from our pricing team that have done an incredible job, Brad and Bruce and other names from our Economics team, they've been working feverishly as things evolve. And so we will be ready for whatever comes our way, but we have put a lot of thought and a lot of modeling into this and a lot of scenario planning. So, I believe we are as prepared as anyone.
Alex Scott, Analyst
That’s really helpful. Thank you. Next one I had is on disruption in certain states around homeowners markets and how it may benefit or detract from PIP growth? And I was hoping maybe you could talk about Florida and just sort of the healing process in homeowners and the impact of that happening on PIP there and sort of the opposite in California where it looks like things may get more difficult?
Tricia Griffith, CEO
Yes. So, I gave you a little bit of the sort of five-point plan for the blueprint for the future. We feel really good about where we're at, especially on the combined ratio side, we were sub-90 in Q1 in property, growing a lot in renters. And obviously, we're taking the time to grow because we want to do this in the right way. And John and his team have done a fabulous job with that. Florida, we're still in the midst of non-renewing the 115,000 policies that we talked about a few years ago. It's been a little bit more time-consuming just because of moratoriums. But we will send out our last notifications by this May. So, we're feeling we're in a much better position in Florida. We have very little market share in California, and so that will be a place where we'll tiptoe in. But I would say that where we stand today with more bundling with cost sharing, with exiting our DP3 program with our agent incentives, we feel like we are in a much different position and we're going to be able to open up the growth machine in areas where we think it's beneficial and where we get those bundled.
Alex Scott, Analyst
Got it. Thank you.
Operator, Operator
The next question is from the line of Elyse Greenspan with Wells Fargo. You may proceed.
Elyse Greenspan, Analyst
Thanks. Good morning. My first question is hypothetical regarding tariffs. If a state is operating with a combined ratio in the mid to high 80s and we assume that tariffs have a mid-single-digit effect on severity, all else being equal, how would you respond in that state? Would you be able to obtain rate approval considering the level of profitability is quite high?
Tricia Griffith, CEO
It's a great question, Elyse. Here, I think one of the things that I did mention is we also have reached out to a couple of insurers departments because I think because our models are so granular and so refined. We want to make sure that they understand and can contemplate that for each state. Here's what I would say is we make a lot of decisions based on combined ratio, but is that state growing? Is it not growing? How could you know? So to me, if there's a state in the mid-80s and there's not growth, I would say that we could pressure test that to grow a little bit. But obviously, we have tariffs in the back of our mind, and we know that is something we'll have to react to. And we'll have to react to it differently in different states depending on where that combined ratio falls.
Elyse Greenspan, Analyst
Thanks. And then my second question, I was just interested if you could just provide kind of just some color on just the monthly cadence of your retention as you guys have been putting on new business and the industry has obviously been getting more competitive with the shopping to grow as well. Any color just as you think about monthly retention levels that you can provide?
Tricia Griffith, CEO
I previously mentioned that we look at trailing three and trailing twelve metrics. While I'm not pleased to see a decline in retention, I anticipate this will happen due to some of our initiatives. Opening up to our Sams and conducting policy reviews could negatively impact the actual PLE number, but it shouldn't adversely affect our PIF growth, which is a balance we need to consider. We have some household-level data that continues to improve, and I want to see the trailing three metrics move in the right direction. We'll keep doing everything we can to support this. Currently, the shopping environment is quite competitive, which benefits customers and fosters a healthy competitive atmosphere.
Elyse Greenspan, Analyst
Thank you.
Operator, Operator
The next question is from the line of Michael Phillips with Oppenheimer. You may proceed.
Michael Phillips, Analyst
Thanks. Good morning. I guess at the risk of the tariff topic being too much, one more on the phone. I guess, Tricia, I might kind of hear how you think about the balancing of maintaining stability in rates for customers versus reacting fast to tariffs. And when I hear you say earlier today and throughout this conversation continue in the growth engine and grow as fast as we can, it makes it seem like maybe you're more inclined to keep the rates stable and let there be a margin impact versus reacting and taking rate increases?
Tricia Griffith, CEO
It's a great question because many factors come into play. When I consider rate stability, I think about making small adjustments. We have reduced rates in about a dozen states and increased them in another dozen, but overall, the points have remained relatively flat. It varies by state, and we assess our ability to grow. Each of our product managers is focused on growing as quickly as possible at or below 96%. Tariffs will always be a significant concern, as I want to avoid raising rates like we had to do a few years ago due to inflation impacts from used car prices and parts. It's a balancing act that we work on daily to find the best way to grow and capture market share amidst competitive rates. We aim to maintain our margins while continuing to grow. Overall, balancing stability, tariffs, growth, and the combined ratio is a complex equation that we consistently address at the state and product levels.
Michael Phillips, Analyst
Okay. Thank you. Second question. In the agency channel, you've talked about maybe for a little bit, kind of a shift in 12 months to six-month policies. And I wonder, is that just a result of the increased shopping and different customer base, maybe Sams versus the Robinsons? Or is that something intentional you're trying to push through?
Tricia Griffith, CEO
We do that for our preferred platinum agents who have our property book because most people have a property policy that lasts 12 months. It's primarily for the convenience of the agents we collaborate with, so they can easily bundle auto and home insurance.
Operator, Operator
The next question is from the line of Jimmy Bhullar with JPMorgan. You may proceed.
Jimmy Bhullar, Analyst
Good morning. Tricia, your comments in your prepared remarks and answers to questions seem quite optimistic about PIF growth. However, considering that many of your competitors have been raising prices significantly more than you and limiting their marketing, while now all the public companies are back to focusing on growth, why shouldn't we expect to see a slowdown in PIF growth? Even if it stays strong, it might not be as robust as it has been.
Tricia Griffith, CEO
Well, I think what you will see is a much more difficult comparison because if you look at the last three quarters of 2024, we grew a massive amount. That said, we are in a really good position. And like we talked about with our acquisition machine, we're going to continue that. You saw what we spent in the first quarter. We're going to continue to spend as long as it's efficient in our cost for sales under our target acquisition cost. We have a machine that works really well in both channels. And so we're going to push the envelope as much as we can to grow. So I am bullish, and I'm very optimistic. And if I had to put a buck down on a horse, it'd be Progressive.
Jimmy Bhullar, Analyst
There's a strong emphasis on auto insurance, both personal and commercial. Can you discuss your long-term goals in the homeowners sector and in commercial lines beyond auto, along with the trends in those areas and where you identify the greatest growth opportunities?
Tricia Griffith, CEO
Yes, I believe we are in a much stronger position when it comes to homeowners, as discussed in our blueprint. We recognize that customers tend to stay longer when they bundle their auto and home insurance, and we plan to continue focusing on that. Approximately half of our homeowners business operates on our own progressive paper, while the other half involves working with unaffiliated partners, which provides us with a good balance. Our bundling percentage for auto and renters is very high, exceeding 75%, and we aim to attract future customers who will likely choose Progressive Home. We are also expanding our network through what we call our Progressive Advantage agencies. Our long-term goal is to achieve profitability in property insurance, ensure stability, and deepen our segmentation understanding, similar to our approach in private passenger auto. I feel that we are making significant progress in this area. Regarding commercial auto, I appreciate the diversity of our Commercial Lines organization and the various market targets we have. We see numerous growth opportunities as economic conditions shift, for example, in higher trucking and specialty areas, which allows us to expand in the business auto contractor segment. We have a strong transportation network business and now offer our business owner’s policy in 46 states, providing multiple growth avenues in Commercial Lines, which is an exciting aspect of the Progressive portfolio. A few years ago, my team and I outlined our growth strategy, emphasizing the need to expand our private passenger auto market share while also growing our commercial auto division, even though we've held the number one position for some time. We were also focused on figuring out the homeowners segment. Moving forward, we identified additional businesses to evolve, primarily within commercial lines. For instance, we expanded our fleet business from insuring 10 or fewer power units to up to 40, and we acquired Protective to enhance our offerings. We created the BoP and launched BusinessQuote Explorer, akin to our HomeQuote Explorer, to ensure small business owners feel well-covered. The potential for growth in Commercial Lines is substantial, and Karen and her team are effectively identifying the right strategies to facilitate that growth. If you look at the combined ratios, the commercial auto sector is over 111%, while ours is in the sub-90 range. This means customers will need to maintain a high standard, and it may take longer to see results since these are 12-month policies, but we are confident they will find competitive rates, excellent coverage, and outstanding service within our commercial lines organization.
Patrick Callahan, CFO
I could add to that answer by saying that you inquired about our interest in homeowners insurance. We view it as part of our personal lines strategy. Approximately half of the personalized marketplace includes home and auto, and our entry into homeowners insurance was aimed at continuing our growth in auto. Currently, we hold a low single-digit market share in the Robinsons segment, which represents about half of the overall marketplace. Our focus in homeowners insurance is on personalized households, providing us significant potential for growth in this area. Additionally, as Tricia mentioned, the Businessowners Policy marketplace is several times larger than our commercial auto marketplace, where we are a dominant leader. The opportunity in the BoP market presents a substantial growth potential that extends well beyond our commercial auto segment. We believe these initiatives will create long-term growth opportunities for us.
Jimmy Bhullar, Analyst
Thank you.
Operator, Operator
The next question is from the line of David Motemaden with Evercore. You may proceed.
David Motemaden, Analyst
Thank you. Good morning. I have a question regarding the improvement in renewal applications growth occurring simultaneously with a decline in policy life expectancy over the last three and twelve months. Is this related to the mix impact that you mentioned earlier, Tricia? It seems that while the policy life expectancies are decreasing, the retention remains relatively strong with approximately 20% growth in renewal applications.
Tricia Griffith, CEO
Yes, I think that's part of it, and I think just the stability of the rates kind of leveling out. I think like I did say before we had the pressure on renewals just because of shopping, but the renewals from not having to take big increases, I think, has been helpful as well. Do you want to add anything, Pat?
Patrick Callahan, CFO
Yes. One thing I'd add is the renewals are driven by what happened six months ago, and we opened up pretty aggressively six months ago or nine months ago. So, renewal app growth rate will be driven by new apps that show up in that period. And PLE is a forward-looking projection. So, we look at that to predict how long policies on the books today will retain. So, that moves differently than the units that you see within our renewal applications.
David Motemaden, Analyst
Got it. Okay. That’s helpful. And then maybe just a question on the competitive environment. So, Tricia, I think you mentioned that competitors are in a good spot as well, increasing advertising spend. I guess my question is are we close to a point where the market gets more competitive like we saw back in 2018 when I think that was the last time you guys and some of your peers started putting through price cuts? Or is there enough uncertainty out there where you think that, that won't be the case? I'm just sort of interested in terms of how you're thinking about the competitive environment right now?
Tricia Griffith, CEO
Yes, there is still a significant amount of shopping happening, which is why we aim to leverage our advertising capabilities and maintain our acquisition momentum. The competition has intensified. We adjusted our rates ahead of most competitors, and now many of them are in a favorable position. We plan to continue increasing our advertising efforts while also reducing our expenses, which is crucial for keeping our prices competitive and driving growth. Over the past 17 years, we have consistently reduced our non-acquisition expense ratio in LAE by 0.5 points each year. As we consider future growth, we are currently working on our next three-year strategy, with a strong focus on managing our expenses effectively, as this will support our growth alongside the technological investments we've made to improve efficiency. It's certainly competitive, and as I mentioned, that's where the real challenge begins. We are committed to driving this growth forward.
David Motemaden, Analyst
Thank you.
Tricia Griffith, CEO
Thanks.
Operator, Operator
The next question is from the line of Josh Shanker with Bank of America. You may proceed.
Josh Shanker, Analyst
Yes, thank you for taking my question. I noticed your comment that you spent more on advertising in 1Q 2025 than you did in 4Q 2024. Always there's a nice surge in 1Q seasonally, it seems for a procurement of customers. But we only see the net numbers and retention is getting worse. Is the efficacy of the spend the same as it was in 2024 or are you seeing diminishing returns even if they're above your targets right now for what you need to acquire new customers?
Tricia Griffith, CEO
Yes. Typically, the first quarter of any year is a high shopping season. So, we want to make sure we leverage that. We don't share our target acquisition cost or our cost per sale, but it continues to be efficient. Clearly, with competitors coming in, it will get a little bit tougher, but we still feel like we're an efficient machine.
Josh Shanker, Analyst
Do you expect to spend about as much in the remainder of the year on media and advertising as you did in the last 12 months of 2024?
Tricia Griffith, CEO
We will spend as long as we believe we can grow and do it at an efficient cost. And as you've seen over the years, that's a lever that we can ebb and flow depending on where we're at from a profitability perspective. But as you can see, sitting at 86% combined ratio for the first quarter, we're sitting in a really great position to be able to continue to spend to acquire more customers.
Josh Shanker, Analyst
And if I can sneak one more in. We do talk about how retention has changed, and we don't really know what absolute retention is. I feel like 2025 feels a lot like 2019, in many ways, how does the retention right now compared to past periods when the industry had adequate pricing and there was a great deal of competitiveness in the market and willingness to accept new business from competitors? Are we at the same level we were at that time? Or are you better now than you were five years ago?
Tricia Griffith, CEO
Some changes have occurred in our business mix, leading to a more preferred composition. When assessing retention, we analyze it in detail based on our business mix. I would estimate that our retention is likely about even at this point.
Josh Shanker, Analyst
Okay. Thanks very much for the answers.
Tricia Griffith, CEO
Thanks Josh.
Operator, Operator
The next question is from the line of Meyer Shields with KBW. You may proceed.
Meyer Shields, Analyst
Great. Thank you so much and good morning. Tricia, you talked about spending more on advertising. And clearly, it's paying off. When you have more competitors looking to grow, does the cost per unit of advertising go up? Or is it just a matter of more advertising overall?
Tricia Griffith, CEO
There's an increase in competition in digital auctions, so we need to position ourselves effectively to attract new customers without overspending. Yes, having more competitors does put some pressure on bidding, but we have strong data to help us strategize our bids and allocate resources efficiently to acquire new customers.
Meyer Shields, Analyst
Okay, that’s helpful. Second question, I think I'm just missing a step like you've talked about this still being a lot of shopping. Clearly, competitive rate increases are slowing down. Why do you think there is? I don't know if it's as much shopping as last year? Or in the absence of significant rate increases, what's promoting more shopping behavior?
Tricia Griffith, CEO
I believe that shopping has become more convenient. With rising prices on various items, people are seeking ways to save money, whether it's through grocery store items like eggs or insurance. Since it's easy to compare prices and switch providers if a better deal is available, customers are focused on managing their budgets effectively.
Meyer Shields, Analyst
Great. Thank you so much.
Tricia Griffith, CEO
Thank you.
Operator, Operator
The next question is from the line of Andrew Andersen with Jefferies. You may proceed.
Andrew Andersen, Analyst
Hey, good morning. Looking within the Property segment, I think you've made a note that like 30% of that business is going direct now. Can you maybe just talk about the customer appetite to go through that direct channel? I'm not sure if that was driven by a change in business mix, but it seems that that's up about 5 points year-over-year.
Tricia Griffith, CEO
We made that decision a long time ago. So, we purchased American Strategic insurance now Progressive Home, really get access to those bundled Robinsons in the independent agent channel. And that has worked really well, and we have our platinum agents and other agents that are able to sell those bundles. And that's worked well. But we knew even at that time, way back when that we wanted our customers to have a choice. So, if our appetite wasn't open in a certain geography, could we get our customers to still have the auto with us and another person's home. So, we have had what we call our Progressive Advantage Agency through HomeQuote Explorer, to have our product plus the product of unaffiliated partners. So, we feel great about growth there because, again, we get a commission on those policies and those customers retain longer. So we have about half of our Robinsons are with Progressive and half are with our partner carriers, and we feel really good about that. And we have great partners is a win for them and a win for us. So, we'll continue that growth on both our paper and within our Progressive Advantage Agency. We continue to add new partners to make sure that we give our customers the ability to bundle the auto home.
John Murphy, CFO
Just a clarity on that 30% direct. So that is of the property business, the progressive rights, as Tricia was mentioning, we have unaffiliated third-party carriers that we work with through our direct channel and that is a very significant business and growing rapidly as well. So, when we talk about the policies in force of Robinsons, we skew direct, that is where we started bundling with those third-party carriers and increasingly, we have offered the progressive product there as well. But by far and away, the majority of what we're selling direct is actually the third-party business. So, the 30% is what is underwritten by Progressive go indirect.
Patrick Callahan, CFO
If I could jump in just quickly on that with the industry trend. So, your observation about direct-to-consumer home and I think the question is there growth in direct-to-consumer home. Our answer is absolutely. And to John's point, that's where we're investing. So, today, roughly 30% of auto insurance is sold direct to consumer and less than 15% of property insurance is sold direct to consumer. So that gap exists in part due to distribution channel but also complexity of the product, meaning homes don't have wins. They're harder to quote in an easy direct-to-consumer experience, and we're investing to change that and to close that gap. And we think as consumers find an easy-to-use direct-to-consumer home option that affords the depth of coverage and breadth of carriers, we think we will capture an outsized portion of that growth going forward. So, we're investing there, and we do expect it to continue to drive growth.
Andrew Andersen, Analyst
Thank you for that. As we move into the second half of the year and into 2026, in an increasingly competitive auto market, does that affect where capital should be allocated, whether in the agency channel or directly? I believe direct has been growing faster than agency for a couple of years now.
Tricia Griffith, CEO
Yes, I believe our media spending has a significant impact on our direct business. We aim for growth across all areas, although the timing may vary due to market competition. When you visit an agent's office, there are many more options available, which benefits consumers. We will continue to drive growth as the largest independent agent company, which has been essential to our history. In the second half of the year, we will push to expand both in the agency channel and by offering incentives for growth. Additionally, we want to enhance our bundled business in our less volatile states, and direct sales will be heavily influenced not only by pricing but also by our advertising capabilities.
Operator, Operator
The next question is from the line of Gregory Peters with Raymond James. You may proceed.
Gregory Peters, Analyst
Good morning. So, one of the areas that's been tremendously impactful for you guys the last couple of years is just the investment income growth. And we really didn't spend any time in the Q&A section talking about it. So, maybe you can give us some perspective on where you are with new money yields and book yields and how you're thinking about asset allocation as we look forward, considering your comments about the choppy market conditions?
Tricia Griffith, CEO
Yes, I'm going to let Jon Bauer, who runs our Progressive Capital Management answer that. But the short answer is we definitely had new money come in that we can invest in greater yielding securities, and that's been part of it. I talked a little bit about it in my letter in my opening comments. But Jon, do you want to give Gregory a little bit more color on that?
Jon Bauer, Chief Investment Officer
Sure, thank you for the question. It's important to understand Progressive's model and our goals from both a management and Board perspective, which is to enhance our return on equity over time. We begin by focusing on growing our operating business as quickly as possible while maintaining our operating leverage. Additionally, we have an efficient capital structure, with our financial leverage typically in the 20% to 30% range, although it's a bit lower right now due to our strong comprehensive income growth. Assuming we have the necessary capital, we are well-positioned in terms of our capital structure. We also consider the type of investment risk we want to take to ensure long-term performance. In the past year, valuations were not particularly appealing, which is reflected in our conservative allocations at the start of this year, characterized by a significant amount of cash and treasuries, and a low amount of equities, as Tricia mentioned earlier. However, we slightly increased our interest rate risk, which is evident in our duration rising from three years to 3.4 years. Currently, we feel we have a strong capital position with a portfolio that can capitalize on opportunities as they arise, though we are very patient at this time. Importantly, our operating business has experienced strong growth alongside rising market yields due to higher risk-free rates and widening credit spreads, allowing us to generate increased investment income. Our book yields have risen, but unlike many competitors, we do not set a target for book yield; our aim is to achieve the best total return over time. Maintaining this long-term perspective allows us to be conservative with risk allocations and wait for favorable opportunities, especially as we look towards 2024. Does that answer your question?
Gregory Peters, Analyst
Yes, it does. There's obviously more detail in there that’s not appropriate for this conference call. I want to revisit the last question. Tricia, in your comments, you mentioned the dongle and Snapshot being prominently featured. I assume this is a technology-related issue. How many people are still using the dongle? I feel that many of your competitors have transitioned from the dongle to apps on phones, which track movement data as well, if not better. I'm surprised that the dongle is still being used. Could you provide insight into how much the dongle and the Snapshot product are being utilized? I know you're rolling out your new 8.9 model, so some additional details would be helpful.
Tricia Griffith, CEO
The majority of our new business comes from our mobile devices, although we still have some customers using dongles. Dongles are beneficial because they gather data directly from the cars, which allows us to adjust and improve our models in a different way than mobile devices do. However, most of our new business is generated through mobile. Pat, do you have the exact figures?
Patrick Callahan, CFO
Yes, I don't have the exact percentage or mix on it. But you're right, when given the choice, consumers opt for the mobile app, and that does give us additional information beyond the hardware device and lowers the cost and that we're not shipping out devices and paying for a cell chip in all those monitored vehicles.
Gregory Peters, Analyst
Are you just seeing an uptake in the use of the mobile device versus your historical experience? Or is it just staying consistent, the level staying consistent?
Patrick Callahan, CFO
Well, we are seeing a higher take rate, particularly in the direct channel, where we optimize the experience and where consumers are interested in saving money and getting rewarded for safer driving. So, we think UBI as our most powerful and predictive variable continues to be a differentiator for us in market and we continue to invest, leverage our scale and leverage the technology to drive adoption and help that price more accurately.
Gregory Peters, Analyst
Got it. Thanks for the answers.
Tricia Griffith, CEO
Thank you.
Douglas Constantine, Director of Investor Relations
Those in the queue appear to be those who have already asked questions. So that concludes our event. Michela, I'll hand the call back over to you for the closing scripts.
Operator, Operator
Thank you. That concludes the Progressive Corporation's first quarter investor event. Information about a replay of the event will be available on the Investor Relations' section of Progressive's website for the next year. You may now disconnect.