Personal Lines
Our operating philosophy is to grow as fast as possible, subject to the constraints of our 96 combined ratio goal and our ability to provide excellent customer service. Despite this consistent approach to operating the business, market conditions and weather volatility can result in varied outcomes from year-to-year and 2016 was a prime example. In 2016, we grew Personal Lines net premiums written 12% at just above a 95 combined ratio, illustrating our disciplined approach to maximizing growth while ensuring we continue to meet profit and customer service expectations. Additionally, during the year we continued to make significant investments towards future profitable growth by advancing our product segmentation and risk selection, strengthening our Agency distribution channel, and deepening our relationships with customers through expanded product and service offerings.
Profit margins within our Personal Lines business were about 2 points lower for 2016, as compared to 2015, driven by higher loss ratios that were partially offset by lower expense ratios. The elevated loss ratio resulted from a combination of higher catastrophe losses (about $368 million or 2 points), increased underlying loss frequency and severity trends, and the calendar year effect of rapid Direct auto new business growth. Our lower expenses were primarily due to reductions in media spend during the second half of the year.
In June, we introduced our next generation auto product and, during the second half of the year, expanded it to 12 additional states that in total make up more than 32% of U.S. households. This product version expands our use of prior claims information, adds billing and vehicle history segmentation, and expands our tiering mechanisms to afford more competitive rates at new business while providing more stable rates for our longer-tenured customers. Market response has been solid, with improved conversion for more preferred consumer segments, particularly in the Direct channel.
We continue to invest to bring our Snapshot® program to more customers, enjoying more than 20% growth in new participants and achieving a milestone of more than 2 million policies in force that have used Snapshot. More than a third of our new Direct customers sign up for Snapshot, and our Agency take rate has doubled in states where the participation discount is available. As of year-end, this version of the Snapshot product is available in 39 states accounting for 85% of our UBI auto premiums. During the year, we also successfully launched the Snapshot mobile app, which will supplement Snapshot’s current hardware-based monitoring with a software version that improves user experience while also reducing monitoring costs through the elimination of our hardware and data transmission costs. Our Snapshot mobile app is available in four states as of year-end 2016 and will be deployed as permitted to all remaining states during 2017.
On a year-over-year basis, our Agency auto business grew net premiums written 10% and policies in force 7%, the strongest growth we’ve seen from the Agency channel in more than a decade. This growth was driven by a combination of an 18% increase in new applications for the year and a 7% increase in policyholder retention. During the year, we added more than 1,500 new agencies and streamlined our onboarding process to accelerate new business production. Quote growth on our proprietary agent systems was faster than on comparative raters, indicating agents are increasingly coming to us first to meet their clients’ needs. Also, when agents quoted us via comparative raters, our conversion was up more than 20% during the year, confirming our strong competitive position. During the year, we grew new applications and total policies in force across all consumer segments, although growth in our more preferred Wrights and Robinsons segments significantly outpaced that of our Sams and Dianes. Acknowledging a much smaller base, Robinsons new applications in Agency grew five times faster than Sams during the year, due in part to the expansion of our property offerings and dedicated sales team focusing on auto/home bundled growth, which we’ll cover in more detail in the Property operating summary.
Our Direct auto business continued its strong track record in 2016 as we grew both new applications and policies in force 9% and net premiums written by 15%, while remaining below our 96 calendar year combined ratio. Growth in the channel was driven by a combination of more efficient acquisition of new customers during the first half of the year and 4% better customer retention. During the latter part of the year, we adjusted advertising spending to ensure profit margin delivery, which resulted in slower growth during that timeframe. Despite the decrease in advertising, we grew new policies in force across our Dianes, Wrights, and Robinsons segments while we saw low, single digit declines in new applications from our Sam segment during the year. We grew policies in force across all consumer segments, despite a year-over-year decline in Sams new business, and experienced our strongest growth coming from our Robinsons segment. As our mix of Direct customers shifts towards more complex, multi-product customers, it’s essential that we continue to expand the Destination Era products we offer or make available. To this end, during the year we made it easier for consumers to secure life insurance protection underwritten by other carriers, launched auto finance and refinance products from a prominent, national finance company, and made significant progress towards introducing a third-party mobile device protection offering in early 2017.
Our special lines products (motorcycle, boat, recreational vehicle, and manufactured home) experienced both weather-related challenges and elevated severity during the year, which resulted in compromised profit margin contribution relative to prior years. Weather-related losses almost doubled for these products during 2016, adding 3 points to its full year combined ratio. Despite lower margins this year, the overall business met our target profit margins and continued to deliver profitable boat and motorcycle growth. Unlike boat and motorcycle, our recreational vehicle (motorhomes and travel trailer) business was unprofitable in 2016, due in part to more than double the weather-related losses in 2016 compared to 2015, combined with more than 20% growth in new policies, which run at lower profit margins during their first term. Expenses within special lines were also up slightly during the year as we replaced our Direct quoting systems and commenced deployment of a new core policy processing system to ensure we provide our multi-product customers a consistent customer experience across our product offerings. Special lines continues to provide a strategic advantage for Progressive as it delivers a substantial portion of Personal Lines annual underwriting profit while also attracting and retaining a large book of preferred customers to whom we can cross-market our auto and expanding property offerings.
Through the lens of maximizing growth at or below our 96 combined ratio, 2016 was an excellent year for Personal Lines as we delivered strong double-digit premium growth below our target combined ratio. In addition to solid financial performance, during 2016 we continued to accelerate our leadership in risk selection and segmentation by advancing our product designs and delivering those designs to market faster than ever before. This powerful combination of product innovation and delivery pace is a robust source of sustainable competitive advantage that enables continued progress towards our vision of becoming consumers’ number one choice and destination for auto and other insurance.
Personal Lines
| 2016 | 2015 | Change | ||||
|---|---|---|---|---|---|---|
| Net premiums written (in billions) | $ | 19.8 | $ | 17.7 | 12% | |
| Net premiums earned (in billions) | $ | 19.2 | $ | 17.3 | 11% | |
| Loss and loss adjustment expense ratio | 76.1 | 73.7 | 2.4 pts. | |||
| Underwriting expense ratio | 19.2 | 19.8 | (0.6) pts. | |||
| Combined ratio | 95.3 | 93.5 | 1.8 pts. | |||
| Policies in force (in thousands) | 14,656.8 | 13,764.7 | 6% |
Commercial Lines
| 2016 | 2015 | Change | ||||
|---|---|---|---|---|---|---|
| Net premiums written (in billions) | $ | 2.6 | $ | 2.2 | 20% | |
| Net premiums earned (in billions) | $ | 2.4 | $ | 2.0 | 21% | |
| Loss and loss adjustment expense ratio | 71.9 | 62.4 | 9.5 pts. | |||
| Underwriting expense ratio | 21.7 | 21.7 | 0.0 pts. | |||
| Combined ratio | 93.6 | 84.1 | 9.5 pts. | |||
| Policies in force (in thousands) | 607.9 | 555.8 | 9% |
Property
| 2016 | 2015 | Change | ||||
|---|---|---|---|---|---|---|
| Net premiums written (in billions) | $ | 0.9 | $ | 0.7 | NA | |
| Net premiums earned (in billions) | $ | 0.9 | $ | 0.6 | NA | |
| Loss and loss adjustment expense ratio | 63.2 | 57.3 | 5.9 pts. | |||
| Underwriting expense ratio | 33.0 | 32.6 | 0.4 pts. | |||
| Combined ratio | 96.2 | 89.9 | 6.3 pts. | |||
| Policies in force (in thousands) | 1,201.9 | 1,076.5 | 12% |
NA = Not applicable. Premiums only include business written after April 1, 2015, the date we acquired a controlling financial interest in ARX Holding Corp.; any Property business written by Progressive prior to April 1, 2015, was negligable.
Commercial Lines
The Commercial Lines business experienced strong premium growth in 2016, widely outperforming the industry in commercial auto profitability and achieving our internal underwriting profit objective. These strong results somewhat belie the current state of the commercial auto insurance market and the challenges encountered throughout the year. Our enduring commitment to achieve our underwriting profit target regardless of prevailing market conditions and only grow as fast as we can subject to that constraint guided our actions throughout 2016. Achieving the right balance was an area of focus in the second half of the year and remains so as we head into 2017.
Top line growth was exceptional with net premiums written increasing 20% to a market leading $2.6 billion. Premium growth was driven by a robust 9% year-over-year increase in policies in force and continued gains on average written premium per policy. Agents continue to value Progressive’s commercial auto products for being broadly available, competitive, and easy to use, and more small business owners are finding Progressive to be the right choice on a direct purchase basis. The latter is a particularly exciting development as other industry players ramp up investment in cultivating the direct channel for small business insurance. A shift in preference to the direct channel should benefit Progressive disproportionately given our current brand position and ongoing investment in this area. While our distribution, product, and branding strategies were, and remain, essential to growing the business, we cannot overlook the role market forces played in increasing our demand in 2016.
The Commercial Lines combined ratio was 93.6, a quite satisfactory result given strong growth in new business and general degradation in commercial auto market results. The U.S. commercial auto insurance industry will produce its sixth consecutive calendar year underwriting loss in 2016 and is not likely to show any improvement from 2015’s dismal result. For Progressive, strong new business sales, improving policy retention, and diminishing outside market availability was met by a greater than anticipated uptick in accident frequency in June, producing a few months of above target combined ratios. We responded quickly by restricting certain high-frequency business classes and adjusting rates across the portfolio to levels more appropriate for the environment. With accident frequency beginning to stabilize at a new higher level, we enter 2017 comfortable with our rate adequacy. As always, we will continue to monitor and respond to changes with alacrity. Our history in commercial auto has shown that decisive and disciplined action in the face of deteriorating market conditions can provide the foundation for a period of sustained, profitable growth.
We aspire to be a highly efficient and low cost provider of commercial auto insurance and other business protection to America’s small business owners. We have maintained a very competitive commercial auto expense ratio for several years and this remains an ongoing point of emphasis and comparative advantage. In 2016, we increased investment in a number of strategically important areas including core systems replacement, new product development, and small business owner brand building. These investments created upward pressure on expenses throughout the year. The increased spending was paired with proportional gains in premium, leaving our year-over-year operating expense ratio unchanged. Nonetheless, we remain committed to lowering our operating expenses over time and are confident these investments will propel us along that path by providing long-term gains in scalable growth, sustainable customer relationships, and an even more efficient operating model.
In April 2016, we entered into an agreement to provide commercial auto insurance and claims service to an Uber Technologies subsidiary in the State of Texas. We are excited for the opportunity to learn alongside a leading technology platform in the sharing economy while simultaneously creating new auto insurance opportunities, both commercial and personal, with ridesharing and other vehicle matching service models.
The fusion of new vehicle technologies, increased connectivity of people and things, and the corresponding proliferation of large data sets through telematics and other similar devices will continue to drive change in commercial lines and create the need for new products. In the near term, new revenue from these emerging products and technologies are uncertain and, in any event, likely to be limited relative to the size of our Commercial Lines business. However, we continue to invest in developing the data, relationships, and capabilities that will allow us to capitalize on the oncoming disruption. Most notable among these changes may be the slow, but determined, march towards autonomous vehicles, a phenomenon likely to first take hold in the commercial space as businesses seek to reduce driver-related costs.
The strength and momentum of our foundational commercial auto business, combined with core capabilities in claims resolution, risk segmentation, and big data management, leave us well positioned and excited about our future in Commercial Lines.
Property
Our property strategy is meant to complement our multi-channel auto offerings with leading property products in order to increase our share of the bundled home and auto market. In the Agency channel, we offer residential property insurance for homeowners, other property owners, and renters primarily through our majority-owned insurance company, American Strategic Insurance (ASI). In the Direct channel, we distribute residential property insurance policies underwritten by ASI and other non-affiliated carriers directly to consumers both on and offline through our Progressive Home Advantage® (PHA) program.
During 2016, our Property business, which includes ASI property insurance and Progressive’s renters insurance, had net premiums written of $935.7 million and a combined ratio of 96.2. Higher than average catastrophe losses contributed about 19.7 points to the Property business combined ratio in 2016. According to data collected by the Insurance Services Office (ISO), a national aggregator of carrier data, industry losses from severe thunderstorm catastrophes were double the most recent 19-year average based on the state mix of our Property business. The non-catastrophe loss ratio, a more stable indicator of recurring results, outperformed our annualized target. In addition, the combined ratio included about 7.2 points of amortization expense, predominately associated with our acquisition of a controlling interest in ARX Holding Corp. (ARX) and not its ongoing operations.
ASI purchases substantial levels of reinsurance to reduce volatility and increase the likelihood of achieving target profit margins. During 2016, the amount of our reinsurance recoverable was limited to severe thunderstorms. The nature of those severe thunderstorms and ASI’s other weather-related losses and their geographic distribution resulted in most losses falling short of the reinsurance coverage thresholds and thus impacted the Property business’ bottom line for 2016. For 2017, ASI added “aggregate stop loss” reinsurance protection to better insulate the business from volatility in losses. This protection will reimburse ASI for losses (excluding named hurricanes and named tropical storms and liability coverages) above a specified loss ratio subject to a maximum pay out. Named storm protection is reinsured to similar limits as in previous years with possibly smaller retention amounts for third and subsequent named storms.
Policies in force for our Property business increased 12% in 2016, compared to 2015. About 9 percentage points of the increase is a result of the June 1, 2016 exchange transaction in which ARX acquired an insurance company that writes residential property insurance and disposed of an insurance subsidiary that writes commercial property insurance. This transaction added a net 96,000 Florida policies and allowed us to focus on the residential property business and divest the non-strategic commercial business.
The four key priorities in support of our property strategy include: 1) expanding ASI’s product availability and agent distribution in new and recently entered states; 2) increasing the competitiveness of Progressive auto and ASI home bundles; 3) improving agent ease of use for quoting and selling bundled ASI/Progressive policies; and 4) expanding our PHA property offering through investing resources to increase consumer awareness and maximize sales yield. Against this landscape, 2016 saw significant progress toward each of these priorities.
During the year, ASI expanded to seven additional states, including two of the largest property markets, New York and California, bringing the total to 38 states and the District of Columbia, which represents nearly 95% of U.S. homes. In these states, we continued to expand our Platinum offering which enhances home and auto bundling through a unique combination of agent and customer benefits. We now offer the Platinum program in 34 states, where we more than tripled the number of Platinum agents during the year. We also increased our non-Platinum Property agent count by more than 30% in order to ensure we’re available where, when, and how consumers want to purchase property protection. In addition, during 2016, we expanded our Progressive renters program to 12 additional states for a total of 34 states. This program is strategically important to our long-term strategy as it provides a future pipeline of home and auto bundlers.
The agencies that target the Wrights and Robinsons have a wide variety of choices when it comes to property carriers, especially for the preferred properties targeted by ASI. To this end, our property and auto product management teams work closely together to explore solutions that improve both auto and property competitiveness for those customers seeking to bundle. Specific progress on the Property side during the year included the introduction of expanded coverage options for select agencies via our Platinum endorsement, expanded acceptability and underwriting criteria in several states, and unique property rating segmentation that affords more competitive pricing for bundled customers. Throughout the year, we also completed research that facilitates more competitive rates for older homes through new rating variables and updated underwriting requirements, and we implemented these enhancements in a handful of states. Early results are encouraging and these changes will be more broadly implemented in the future.
As we expand ASI from a successful writer of newer, preferred homes in coastal markets to becoming, along with Progressive, a leading writer of preferred bundled auto and home business nationwide, its mix of states, distributors, and policy contracts will continue to evolve. During 2016, ASI shifted its mix of policies in force by growing faster in traditional independent agencies than with some of its larger national partners and increasing its mix of bundled home and auto policies. We expect the geographic concentration of ASI’s Property business to shift over time. For 2016, ASI’s business in Florida represented 19% of new homeowners’ policies, Texas represented 18%, and the rest of the country accounted for the balance. ASI’s Florida direct premium concentration increased by about 4.5 points this year, aided by the exchange transaction, while their concentration in Texas was reduced about 3 points. As ASI gains traction in new markets, we expect the percent of business written in Florida and Texas to decline.
Competitive home and auto products are necessary, but alone are not sufficient to win business in the highly competitive agency marketplace. We must also strive to provide simple and easy to use agent-facing technology and underwriting processes. During 2016, ASI launched a pilot of streamlined underwriting verification processes for certain property types and piloted a new home and auto quoting system that leverages external data-fill to make it faster and easier for agents to quote the auto/home bundle. After piloting this system in three states over several months, we are using the learnings to continue to make improvements to our agency quoting platforms.
Beyond the Agency channel, we continue investing in PHA to increase consumer awareness of our direct-to-consumer property offering and expanding our capabilities both online and offline to better meet consumers’ needs. During the year, we expanded marketing of property products within our online auto quoting applications and enhanced our quoting experience for multi-product shoppers. Offline we continued to optimize the routing of traffic to maximize sales yield and invest to expand the capabilities within our in-house agency. These investments include technology and process improvements, adding staff, and expanding product availability through additional state and carrier combinations. These actions are expected to improve overall sales yield and should enable us to better meet our Direct customers’ property needs.
We feel very good about the investments made throughout the year in support of more closely integrating ASI as part of our Destination Era strategy and expanding the capacity and competitiveness of our direct to consumer offerings. Progressive has made significant progress during 2016, transforming into a national writer of bundled auto and home business and, more importantly, we have laid the foundation for the growth and profitability we hope to achieve in 2017 and beyond. We enter 2017 with tremendous momentum and optimism.