Financial results for our Personal Lines business were very consistent with our expectations going into 2013. Adjustments we made to our pricing during 2012 to address accelerating loss trends led to a 2.2 point improvement in our combined ratio versus 2012, driven predominantly by an increase in average premium per policy of 4%. Loss cost trends increased, but less so than we forecasted and priced into our products. Personal Lines, which includes auto and special lines products, had a combined ratio for the year of 93.4. Unit growth of 3%, or approximately 321,000 more policies in force, together with the average premium increase, allowed us to increase total earned premiums 7% or nearly $1 billion.
Customer retention in 2013 was an added challenge given our rate adjustments initiated mid-to-late 2012 that applied to customers generally on a subsequent six-month basis. We're pleased to report most underlying retention metrics, including our Net Promoter® Score, have recovered. Our policy life expectancy (PLE) measure that is based on a trailing 12-month view is also trending upward. We will always remain diligent in keeping our forward-looking pricing levels consistent with our outlook for loss cost trends and our 96 calendar-year combined ratio target. Our current outlook calls for modestly increasing our pricing levels in 2014 and, if true, we would expect more stability in customer retention based solely on more moderate price increases.
Non-loss cost progress is another reason we are more comfortable with our pricing levels. Naturally, the average premium per policy increase helped our expense ratio move down 0.4 points to 20.4. Underlying cost reduction efforts also assisted here with policies in force per FTE up 6% within Personal Lines, and what we define as “work content per policy in force” down 4% due predominantly to process re-engineering. Improving customer retention also helps our cost structure and we expect to enjoy more of that in 2014 and beyond.
New customer acquisition was slightly positive for 2013 versus 2012 in our auto business and down more than 7% for our special lines products. Overall conversion of new prospective customers was down for the year and especially so in the first half of the year. In the latter half of the year, it would appear that competitor rate actions caught up with our previous rate actions, and our conversion rate reached levels similar to previous years. In our Direct channel, prospective customer demand was the strongest we've ever seen, reflecting our strong brand, compelling creative execution, and increased media spending. New customer quoting in our agents’ offices was also strong, even after adjusting for material shifts in quoting activity to third-party comparative rating systems, most notably in California.
The shift to mobile device interactions with our agents, customers, and prospective customers continued at a very rapid pace during 2013. Volume in most categories essentially doubled from 2012. We continue to invest heavily in mobile and mobile-friendly systems but frankly still have more investments we need to make. The great news is that we are contending for the lead in mobile in our industry, and our performance metrics in mobile now rival those in our “traditional desktop” web offerings, which is critical given the shift in demand.
Another key shift in our customer and agent experiences with Progressive continues to be our shift towards orienting our offerings to customer households versus just vehicles. We are getting better at taking a household approach and utilizing tools and systems we’ve built to meet the broader needs of our customers. At year-end, almost a million of our customers enjoyed a policy through Progressive Home Advantage®, and an additional 700,000 customers enjoyed both an auto policy along with some other Progressive product in the same household. These “bundled” households stay with us longer than similar unbundled customers and also show better loss characteristics. Our intent is to expand this strategy further and ensure we can meet all of the Personal Lines needs of our customers going forward.
In 2014, we will test increasing consideration and trial amongst the bundled consumer segment by expanding upon our very successful offering of comparison rates. Historically, we have provided these comparison rates from leading competitors only for auto insurance. Our 2014 test will offer the Progressive Home Advantage bundle alongside a comparison of rates for auto/home bundles from leading competitors. If we are successful in shifting perception and demand with the bundled customer segment within our trial states, we will roll this feature out further.
Snapshot®, our usage-based rating system, continues to enjoy solid growth and surpassed the $2 billion mark for the year. We met our combined ratio goal on a customer life-time basis for those customers selecting Snapshot and were profitable on a calendar-year basis. Our calendar-year, Snapshot-specific expense ratio dropped another 60 basis points and we are now performing, on a customer lifetime basis, at about 1% added expense for the monitoring feature.
We expect to begin offering a revised Snapshot program tailored towards a more competitive environment later in 2014.
Needless to say, the data processing requirements for more than 9 billion driving miles captured at one second intervals are material. Similar processing needs exist in our web marketing organization where we deliver billions of advertising impressions annually. Less similar, but equally complex processing opportunities exist in fighting claims fraud. All of these opportunities rely on our ability to process "big data" and we're glad to report we continue to make headway here and believe our abilities are matching our opportunities.
We continue to make other pricing segmentation and feature enhancements beyond usage-based ratings in our auto and special lines programs. In 2013, we expanded our offering of a Deductible Savings Bank® in our auto programs and refined our approach to rating existing customers that exhibit less-than-optimal loss and payment performance. In our special lines programs, we began rating based on consumer channel choice. We also refined and expanded our new and existing customer underwriting efforts.
Our 2014 agenda focuses heavily on continuing to improve customer retention — ensuring we meet our customers’ product needs and ensuring their interactions with us enhance their confidence that we should be their ultimate destination for all their personal lines insurance. More robust mobile offerings, a new auto and usage-based product offering, moving closer to completion of our new auto policy processing system, entry into the Agency channel for auto insurance in Massachusetts, and some greater participation in our broadening product offerings round out key initiatives that will position us well for 2014 and beyond.
|Net premiums written (in billions)||$||15.6||$||14.6||6%|
|Net premiums earned (in billions)||$||15.3||$||14.4||7%|
|Loss and loss adjustment expense ratio||73.0||74.8||(1.8) pts.|
|Underwriting expense ratio||20.4||20.8||(.4) pts.|
|Combined ratio||93.4||95.6||(2.2) pts.|
|Policies in force (in thousands)||13,056.4||12,735.3||3%|
Progressive’s Commercial Lines business in 2013 was characterized by an unevenness of market conditions, environmental influences, cost trends, and outcomes across the various business market targets we serve. This challenged our product management driven organization and affirmed our earlier decision to organize our product design, key processes, and customer service around specific targeted business markets. The ability to implement a range of action plans, both proactive and reactive, to different circumstances and opportunities by market is an important design element of our operating model.
Commercial Lines achieved net premiums written growth of 2% and earned premium growth of 7%. Premium growth was down from 2012, which produced corresponding gains of 13% and 12%. The slower revenue growth can be directly attributed to pricing and underwriting actions taken in our high average premium for-hire transportation (FHT) and for-hire specialty (FHS) business market targets. Those steps collectively slowed new customer acquisition and led to the selective non-renewal or cancellation of about 3,000 accounts. The reduction in FHT and FHS accounts was partially offset by double digit gains in average written premium per policy. We also experienced modestly lower sales conversion rates in our contractors and towing businesses as we completed 109 program rate revisions during the year and placed some restrictions on nonstandard business where we could not charge an adequate rate. The combined ratio was 93.5 for 2013, an improvement of 1.3 points over the prior year and in line with our target. We continued to recalibrate rate and underwriting decisions throughout the year and are beginning to see more stability in our segment results.
The for-hire transportation business saw a continuation of the persistent increasing loss cost trends that emerged in 2010 as the economy came out of recession. This was one of the first business segments to see accident frequency increase as upticks in consumer confidence and consumption spurred recovery in freight transport. Our most aggressive rate and underwriting actions of 2013 were made within FHT as loss trends showed no indication of moderating in the first half of the year. As a result, we experienced a reduction of policies in force of 19%. This was an acceptable outcome as we refocus this business on owner/operators with average, or better, safety and accident histories, but by necessity diverges from a Progressive principle of finding the right rate for any risk. Toward the end of the year, FHT results improved and began to track with our expectations for profitability. Unlike other commercial auto markets where industry level rate increases have begun to slow, transportation is continuing to see reductions in capacity, rising rates, and restrictive underwriting. We ended 2013 with a hard market for transportation business and a reasonable belief that we can again grow our share selectively and profitably in FHT.
Improvement in the housing and construction sectors led to increased prospect flow for our contractors business and the emergence of higher loss cost trends for the for-hire specialty business. Our contractor segment grew slightly in policies in force with solid margins. Growing the contractor business is an area of emphasis and we enter 2014 in a position of relative strength.
For-hire specialty was more challenging as we experienced higher than normal variance in loss patterns, which made pricing at the local level challenging. Concern over fast-rising loss costs led us to curtail the FHS business in Texas and some other key markets as we moved to implement rate increases that averaged 20%. In addition to general increases in claims, we saw spikes in frequency tied to major infrastructure projects coming on line in a number of states. In some cases, heavy dump trucks that had been operating at less than full capacity began running extended hours, dramatically changing the exposure base. For-hire specialty policies in force declined by 8% as we adjusted rates for each local environment. Our prospect flow for FHS has historically tracked closely with U.S. aggregate production, but in the second half of 2013 we broke from this pattern, suggesting a real opportunity cost associated with our remedial actions. Specialty trucking is a core component of our Commercial Lines franchise and one we will look to rebuild as the new rate level earns in and results stabilize.
The more broadly based business auto market target performed well in 2013 with 4% year-over-year growth in new business and a 3% gain in policies in force. Policy retention held steady. Our focus on profitability and the high degree of variability we encountered in the other Commercial Lines business market targets undoubtedly lent a degree of conservatism to our pricing and management of business auto in the first half of 2013, leaving us less competitive than we desired to be on business we want and on which we can earn good margins. We began to make adjustments on a state-by-state basis toward the end of the year and look forward to competing even more effectively as we enter the 2014 peak season.
We continued to make progress in addressing the other business insurance needs of our customers and developing broader brand awareness with small business owners. Our in-house agency, Progressive Commercial AdvantageSM, added commercial lines markets in 2013 and now has a national footprint for business owners policies and general liability policies, and offers workers’ compensation insurance, written by unaffiliated underwriters, in all voluntary market states. Revenue more than doubled as the agency achieved greater than 75% growth in both total policies in force and, importantly, policy bundles.
Continued investment in broad market advertising to small business owners and enhancement of our capabilities for mobile quoting and policy service helped Progressive become the #1 Commercial Auto brand in 2013 based on a third-party assessment of unaided awareness. More importantly, the increased reach of our brand led to substantial growth in visits to progressivecommercial.com and a healthy year-over-year gain in direct prospects quoted. We are gaining confidence in our ability to efficiently generate and manage direct demand in the small business owner space, adding meaningfully to the growth prospects for our direct business.
|Net premiums written (in billions)||$||1.8||$||1.7||2%|
|Net premiums earned (in billions)||$||1.8||$||1.6||7%|
|Loss and loss adjustment expense ratio||71.9||72.6||(.7) pts.|
|Underwriting expense ratio||21.6||22.2||(.6) pts.|
|Combined ratio||93.5||94.8||(1.3) pts.|
|Policies in force (in thousands)||514.6||519.6||(1)%|