Personal Lines Our Personal Lines business generated a 93.0 combined ratio, which outperformed our targets but was 0.6 points above the 2009 result. Net premiums earned grew 4%, while policies in force were up 7%, or more than three quarters of a million policies.
For our auto products, profitability was down almost a point versus 2009. In our special lines products, profitability was better than our targets by a considerable margin driven primarily again by the absence of severe weather on the coasts.
Policies in force growth was driven by both increases in new business applications and increases in policyholder retention. Agency auto new applications were up 4% for the year and Direct new auto applications were up 9%. The Agency auto performance reflects momentum from the previous year and continued progress penetrating preferred customer segments. The Direct auto new applications performance is half the growth rate we achieved in 2009 and reflects an increasingly competitive marketplace for Direct auto insurance. New applications in our special lines products were up 10% overall, resulting from significant growth from our Direct distribution. Retention improvement, as measured by policy life expectancy, was very good in Agency auto (+8%), positive in Direct auto (+2%), and down slightly in special lines (-1%). In aggregate, our average policyholder life expectancy for Personal Lines increased approximately 3% in 2010 over 2009.
Net written premium growth for the year was 5%. Our filed rate changes in our auto programs totaled an increase of approximately 2%. In our special lines programs, our filed rate changes totaled a decrease of slightly less than 1%. Actual average written premium changes for auto and special lines were -1% and -2%, respectively. The difference between the filed and actual price changes is explained by shifts in the mix of business across customer segments and geography.
We continue to adapt our products and services to meet our customers’ personal insurance needs throughout their lives. The Progressive Home Advantage® program, where we “private label” other companies’ property insurance products, is growing rapidly. This program allows us to attract new customers that bundle their dwelling and auto insurance and to meet the needs of current customers that desire that arrangement. Approximately 40% of U.S. homeowners bundle their home and auto insurance and when they do, their policy retention is materially better than stand-alone policies.
Towards the end of the year, we elevated a system that provides our customer service representatives household-level insight into our relationship with customers versus just a policy level view. We will elevate similar systems soon for our agents and our customers. We also expect to make it even easier to quote and shop for consumers that desire to bundle during 2011. Last year, we reported that we planned to roll out our patent-protected usage-based insurance rating feature MyRate® 2.0 in 2010. At year end, we had usage-based rating active in 27 states and have redesigned the marketing to SnapshotSM based on the “snapshot” of driving behavior captured by our in-vehicle device. We expect to broadly market Snapshot early in 2011. We have been very pleased with the percent of consumers that opt-in to Snapshot and the loss prediction power of usage-based rating continues to impress us.
Traditional rating segmentation has been, and will continue to be, a source of competitive advantage for Progressive. We are currently rolling out new product models within our auto and special lines programs and we have the next generation of product models in the pipeline. These models provide even greater accuracy in loss prediction and allow us to attract more customers from all target segments.
In 2010, we significantly increased our focus on the mobile space and we are confident we will be reporting much more on this in the future. We upgraded our mobile Web site for policy services and added the ability to quote auto insurance in 13 states during 2010. We also elevated apps for iPhones and Android devices during the year. We are investing in adding more mobile capabilities for consumers as we see this manner of accessing the Internet for personal insurance needs growing rapidly.
|Net premiums written (in billions)||$||13.0||$||12.5||5%|
|Net premiums earned (in billions)||$||12.8||$||12.4||4%|
|Loss and loss adjustment expense ratio||71.4||71.5|
|Underwriting expense ratio||21.6||20.9|
|Combined ratio||93.0||92.4||.6 pts.|
|Policies in force (in thousands)||11,702.7||10,940.6||7%|
Commercial Auto The commercial auto industry was characterized by a fourth consecutive year of declining total written premium. Modest growth in the number of insurable vehicles over the latter half of the year holds some promise of future premium growth, although generally strong industry underwriting profitability and increased capacity have kept prices from rising. The industry loss ratio began to rise in the third quarter and any continuation of that trend will put pressure on margins and eventually lead to a turn in pricing.
Our Commercial Auto business produced a calendar-year combined ratio of 87.5, an increase of 1.7 points over the prior year, but still below our Commercial Auto target combined ratio. The combined ratio includes nearly 7 points of favorable loss development on prior accident years, as we continue to see beneficial claims settlement patterns. We did see an increase in accident frequency during the year, which we have begun to address with rate level adjustments in most states.
Net premiums written declined 6% for the year due primarily to lower average premium per policy. The decline in average premium was driven by shifts in policy mix toward lower average premium states, more policies qualifying for discounts, and a higher percentage of liability-only policies. The slow economic recovery continues to influence purchase patterns and the new vehicle replacement rate. Lower premium put pressure on fixed expenses and, as a result, the expense ratio increased 1.3 points to 22.4. Diligent workforce management allowed us to hold the line on our core efficiency measure, policies in force per full time equivalent employee, which achieved a modest 1% improvement.
While most states were characterized by solid underwriting profits and a return to growth in new policies, the business was hampered by profitability challenges in our largest state, Florida. Changes to underwriting and claims procedures, coupled with an increase in rates, led to steady improvement throughout the year with the state finishing 2010 with a small underwriting profit. Florida new business applications and policies in force were adversely affected by these changes and declined 45% and 16%, respectively. All other states combined saw new applications and policies in force increase 7% and 2% for the year. We are confident Florida is now positioned to meet profit targets in 2011, though rebuilding the policy base will be a longer-term proposition.
We cannot predict when the commercial auto market will begin to expand and to meet our expectations for growth we must capture share within the existing market. For the last few years we have focused on expanding the breadth of our products to serve more small business categories and intensifying our customer focus. In 2010, we refined our customer segmentation beyond the broad core groups of truck and business auto into five business market targets (BMTs). We have aligned our product structure, pricing, business metrics, and marketing around these groups and, while early in the implementation, are seeing encouraging results.
As the economy grew slowly in 2010, it was clear that the customer segments were recovering at very different rates, evidenced by different growth rates for new business prospects. Our new product model provided us with the flexibility to respond quickly and more precisely to changes in business mix and accident frequency by BMT, yielding more accurate pricing across the portfolio. Specifically, the combination of more responsive pricing and additional segment-oriented coverage for truck cargo and truckers liability assisted in achieving 10% growth in the for-hire transportation BMT, one area we are targeting for market share gains. We will expand on this customer segmentation approach in 2011 adding a sixth BMT.
Better customer segmentation also benefits our growing direct distribution to small business owner operations. Direct sales comprise a relatively small portion of the commercial auto market today and we are excited by the opportunity for growth and the chance to lead in this domain. 2010 was our best year yet for the Direct business with 13% growth in new customers. Yield on our awareness marketing spend continues to trend favorably and is aided by an enhanced capability to target specific business segments with relevant products and messages. Targeted marketing, combined with Progressive brand strength, promises to be a powerful combination moving forward.
In the past year, we launched our Progressive Commercial Advantage program in our Direct business. The program enables us to provide additional non-auto commercial insurance products, such as workers’ compensation and general liability, to our customers underwritten by two unaffiliated insurance carriers. Progressive Commercial Advantage is designed to enhance the value of our relationship leading to increased customer policy life expectancy. In 2011, we will add additional carriers and deploy Progressive Commercial Advantage to interested agents in a few pilot states.
Commercial Auto continues to make a significant contribution to companywide underwriting profits. Maintaining adequate rates and disciplined underwriting remains a top priority. With recent improvements in our products, customer segmentation, and distribution we look toward a return to profitable growth with an expectation of only modest improvements in market conditions.
|Net premiums written (in billions)||$||1.4||$||1.5||(6)%|
|Net premiums earned (in billions)||$||1.5||$||1.6||(9)%|
|Loss and loss adjustment expense ratio||65.1||64.7|
|Underwriting expense ratio||22.4||21.1|
|Policies in force (in thousands)||510.4||512.8||0%|