Operations Summary
> Personal Lines Managing to our 96 calendar year combined ratio target was more than the normal challenge for the Personal Lines group during 2012. Within our auto programs, severity of claims payments rose faster than anticipated and prior year reserve development was modestly adverse, compared to favorable development in the past few years. Our special lines programs, led by motorcycle, saw the frequency of claims jump markedly due to an early and relatively dry summer. Additionally, we experienced our second worst catastrophe ever with Superstorm Sandy incurring approximately $100 million of losses companywide. Due in large part to mid-year actions to raise prices approximately 6%, our combined ratio of 95.6 surpassed our calendar year 96 target by 0.4 points; accident year results matched the calendar year results.
Unfortunately, but as expected, the mid-year price increases took a toll on new business production as well as customer retention. Policy growth for the year was 4%, yielding approximately 12.7 million policies in force at year end. While somewhat adverse to customer volume, our price increases helped us write over $1 billion more in premiums in 2012 than in 2011, an increase of 8%. Auto written premium per policy was up 3% for the year. New auto business applications, however, were down 1% and up nearly 1% in our special lines programs. Retention of customers, as reflected by policy life expectancy, was down less than 1% in our auto programs and essentially flat in special lines.
We continued to improve our cost structure in 2012. Our underwriting expense ratios improved in-part due to the higher average prices, but also due to efforts to decrease the work per policy in force, a longer sustaining structural gain. We also continued to reduce low value added costs. As an example, more than half of our auto customers now receive policy correspondence from us via electronic means, avoiding significant paper, processing, and mail costs. Progress on our core policy servicing system redesign advanced during the year, and we now have about 15% of our auto customer policies migrated to the new system.
Heading into 2012, we set out to attain leadership in the highly dynamic mobile sales and service space in our industry and we feel we achieved that goal. We elevated the capability for households with multiple drivers and vehicles to quote and buy via mobile devices in around 90% of the country, and consumer response exceeded our expectations. In 36 states and the District of Columbia, we added an innovation in the quote flow that allows consumers to snap a picture of a driver license and insurance ID card and avoid manually entering most of the required data fields. We also added the highly successful competitor comparison rate experience to our mobile offering in most of the country. We will continue to invest heavily in mobile sales and servicing capabilities as agent and consumer preferences shift rapidly in this direction.
During the year, annualized premiums written within our Snapshot® usage-based rating programs surpassed $1 billion. Our lead within the industry in usage-based insurance rating is significant in terms of experience, scale, and consumer awareness. We extended our patent coverage here as well, with three additional U.S. patents granted since the beginning of the year to bring our total to six. While our introduction of the ability to “test drive” Snapshot before buying a Progressive policy met with less demand than expected, the customers that do try and buy are proving to be very much the customers we seek in this unique approach. We expect to revise our marketing approach for this offering as the consumer proposition and economics are compelling. Our usage-based offerings continue to help us grow in the near term and establish frameworks for dramatically different approaches to matching risk to price in our industry going forward.
We continue to see huge growth potential amongst consumers that bundle their home and auto insurance and made meaningful progress during the year with our Progressive Home Advantage® program. The number of households that maintain more than one product through Progressive grew by 13% in 2012. We now work with a number of different property providers and offer the Home Advantage option through our agents in 22 states, plus D.C., and in 48 states, plus D.C., online, via phone sales at the Home Advantage underwriter, or via phone sales within Progressive call centers. In short, we want to meet customer bundling needs where, when, and how they would like to interact with us.
Remaining at the forefront of our industry in terms of innovative approaches to pricing, distribution, and the consumer experience is at the core of our foundation. Beyond usage-based rating enhancements, we continued to roll out improvements in our auto programs including occupation rating, household rating structures, and refinements in segmentation of non-indemnity costs. In our special lines programs, we added further segmentation around operating experience of special lines vehicles. Optional coverages tailored to the unique needs of special lines customers were also added, such as Propulsion Plus® in our boat programs, which covers mechanical damage to lower units and outdrives. We continued to enhance our desktop auto online quoting system with a Coverage Checker solution that allows consumers to know that they’re not just getting a great price, but also makes sure they’re still getting the coverage they need. Our agent quoting and marketing offerings continue to lead the industry and we implemented recent enhancements that make it easier for our agents to optimize conversion of prospective consumers, cross-sell current customers, and re-solicit unsold prospects.
In 2013, we will work to advance our Snapshot and mobile offerings and ensure more customers can enjoy multiple products through Progressive. Our auto and special lines programs will retain what we believe are the broadest acceptability guidelines in the industry and, at the same time, strive to be appropriately selective with shoppers and customers to ensure that we are adequately priced for all. These approaches will, we believe, both fuel new customer growth and increase the likelihood of our current customers remaining with us.
Personal Lines
| > 2012 | 2011 | Change | ||||
|---|---|---|---|---|---|---|
| Net premiums written (in billions) | $ | 14.6 | $ | 13.6 | 8% | |
| Net premiums earned (in billions) | $ | 14.4 | $ | 13.4 | 7% | |
| Loss and loss adjustment expense ratio | 74.8 | 71.6 | 3.2 pts. | |||
| Underwriting expense ratio | 20.8 | 21.6 | (.8) pts. | |||
| Combined ratio | 95.6 | 93.2 | 2.4 pts. | |||
| Policies in force (in thousands) | 12,735.3 | 12,283.8 | 4% |
> Commercial Auto Progressive’s Commercial Auto business outperformed the industry in 2012 and made substantive progress penetrating business market targets and selectively broadening our market scope. The positive industry growth trends, which emerged in the latter part of 2011, carried over into 2012 and we were beneficiaries of those trends. Top line growth was strong, with net premiums written increasing 13% over 2011. This compares favorably to commercial auto industry growth, which we estimate will be in the 4% to 5% range when final results are tabulated. Our combined ratio for 2012 was 94.8, representing a deterioration of 3.9 points from 90.9 for the prior year. We believe this combined ratio result will, however, be materially better than final industry results, perhaps by 8 points or more. The relative performance advantage was nice to see and reaffirmed the merit of being disciplined in the pursuit of a defined and consistent underwriting profit target over time and across a range of market conditions. Nonetheless, we fell a bit short of our own expectations and entered 2013 with renewed ambition to do even better.
Commercial Auto premium growth resulted from a 2% increase in policies in force and a double digit increase in written premium per policy. The increase in written premium per policy reflects the cumulative effect of 88 state level rate revisions executed throughout the year, along with a planned shift in the mix of business toward higher average premium states and business types. The market was generally accepting of the necessary price increases and our policy retention held steady throughout the year, somewhat indicative of overall industrywide strengthening of commercial auto pricing. The industrywide price strengthening was a welcome development and not surprising given the industry’s current underwriting results. We did, however, experience declines in new prospect sales conversion consistent with our rate actions in a market that remains competitive with ample capacity. We continue to develop new and creative ways to grow our Commercial Auto business, in balance with our profit targets.
Much attention was focused on our for-hire transportation business market target to ensure this important customer group meets our profit expectations. We have invested heavily in developing this market, securing the position of America’s number one insurer of non-fleet trucks. In 2012, the for-hire transportation market saw increases in accident frequency, collision severity, and stronger policy growth in some higher severity states, which collectively challenged our profit targets. We addressed this through targeted rate increases, tighter underwriting filters, and more robust premium auditing on both new and renewal policies. Over the course of the year, we gained greater confidence in both our pricing and business model for this owner/operator-oriented market and identified additional opportunities to solidify the integrity of our underwriting.
Two other core business market targets, contractors and business auto, performed well in 2012, with policies in force growth of 2% and 1%, respectively, and gains in net premiums written of 7% and 6%. Profitability for both was in line with our targets and we are well positioned to benefit from growth opportunities if competitors take actions consistent with underlying industry results. While economic growth remained tepid, signs of a housing recovery began to emerge late in the year and we saw a corresponding increase in our flow of contractor prospects. Our towing business market target benefited from a stronger pricing environment yielding 11% net premiums written growth, while achieving its underwriting profit target.
Investment in direct distribution of Commercial Auto continued in 2012. Growth in prospects was realized with increased calls to our sales center in the second half of 2012 and a very significant increase in visits to ProgressiveCommercial.com. Buoyed by prior years’ success in growing the direct business through highly targeted small business and trucking advertising efforts, we expanded our direct marketing to include broad market advertising. The first Progressive television ad wholly dedicated to small business Commercial Auto was developed and began airing in the second quarter, supported by a coordinated print and radio campaign. Progressive already enjoys strong consumer awareness as a commercial auto insurer. We want to build on that and create a stronger call to action for small business owners who are assessing their insurance options. The campaign will again be featured in advance of the 2013 peak insurance shopping season. To support our direct customers, several projects were initiated to enhance, as well as introduce, new online and mobile services. Mobile device optimization of ProgressiveCommercial.com and the online quoting application was deployed during the year allowing small business customers who are often on the go to easily interact with us.
We continue to deepen our understanding and focus our resources on key Commercial Auto customer markets that share common characteristics and are generally subject to a similar set of economic and market forces. We see many benefits to this approach that go beyond assessing near-term market opportunities and aligning marketing and sales resources accordingly. Business market targeting provides better understanding of loss costs, claims development patterns, and changes in exposure. We have aligned many of our claims, actuarial, and product management processes around this concept in order to achieve advancements in pricing accuracy, segmentation, and loss cost management. The results have been encouraging and there is opportunity to do much more.
We have also begun to identify meaningful differences in customer requirements for product design, customer service, customer communication, and distribution. With that understanding, we have begun to more closely align our service organization and research and development group around the same business market targets. Fully operationalizing the concept will be a 2013 priority. A good example of the results we believe are possible is the dedicated route driver program we rolled out in 2012 with a customized solution for these small business owner/operators that purchase and deliver branded products over defined delivery routes. These vehicle-centric businesses are a great fit for Progressive, and we look forward to developing the business model further in 2013.
Commercial Auto
| > 2012 | 2011 | Change | ||||
|---|---|---|---|---|---|---|
| Net premiums written (in billions) | $ | 1.7 | $ | 1.5 | 13% | |
| Net premiums earned (in billions) | $ | 1.6 | $ | 1.5 | 12% | |
| Loss and loss adjustment expense ratio | 72.6 | 68.9 | 3.7 pts. | |||
| Underwriting expense ratio | 22.2 | 22.0 | .2 pts. | |||
| Combined ratio | 94.8 | 90.9 | 3.9 pts. | |||
| Policies in force (in thousands) | 519.6 | 509.1 | 2% |