Operations Summary
The Progressive Corporation 2017 Annual Report
We write personal and commercial auto insurance, residential property insurance, and other specialty property-casualty insurance and provide related services throughout the United States. Our Personal Lines segment writes insurance for personal autos and recreational vehicles. Our Commercial Lines segment writes primarily liability and physical damage insurance for automobiles and trucks owned and/or operated predominantly by small businesses. Our Property segment writes insurance for single family homes, condominium units, etc. for homeowners, other property owners, and renters. We distribute our products through both the Agency and Direct channels.
Personal Lines
| 2017 | 2016 | Change | ||||
|---|---|---|---|---|---|---|
| Net premiums written (in billions) | $ | 22.9 | $ | 19.8 | 16% | |
| Net premiums earned (in billions) | $ | 21.9 | $ | 19.2 | 14% | |
| Loss and loss adjustment expense ratio | 73.6 | 76.1 | (2.5) pts. | |||
| Underwriting expense ratio | 19.5 | 19.2 | 0.3 pts. | |||
| Combined ratio | 93.1 | 95.3 | (2.2) pts. | |||
| Policies in force (in thousands) | 16,075.5 | 14,656.8 | 10% |
Commercial Lines
| 2017 | 2016 | Change | ||||
|---|---|---|---|---|---|---|
| Net premiums written (in billions) | $ | 3.1 | $ | 2.6 | 20% | |
| Net premiums earned (in billions) | $ | 2.8 | $ | 2.4 | 15% | |
| Loss and loss adjustment expense ratio | 70.3 | 71.9 | (1.6) pts. | |||
| Underwriting expense ratio | 22.0 | 21.7 | 0.3 pts. | |||
| Combined ratio | 92.3 | 93.6 | (1.3) pts. | |||
| Policies in force (in thousands) | 646.8 | 607.9 | 6% |
Property
| 2017 | 2016 | Change | ||||
|---|---|---|---|---|---|---|
| Net premiums written (in billions) | $ | 1.1 | $ | 0.9 | 17% | |
| Net premiums earned (in billions) | $ | 1.0 | $ | 0.9 | 14% | |
| Loss and loss adjustment expense ratio | 70.8 | 63.2 | 7.6 pts. | |||
| Underwriting expense ratio1 | 34.3 | 33.0 | 1.3 pts. | |||
| Combined ratio1 | 105.1 | 96.2 | 8.9 pts. | |||
| Policies in force (in thousands) | 1,461.7 | 1,201.9 | 22% |
1Underwriting expense and combined ratios for 2017 and 2016, include 6.7 points and 7.2 points, respectively, of amortization expenses predominately associated with the acquisition of a controlling interest in ARX.
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. While this philosophy is unwavering, as we reported last year, market conditions and weather volatility can result in varied outcomes from year-to-year and, in 2017, market conditions were very favorable for profitable growth of our Personal Lines business. Unlike 2016 when the combination of lower underlying margins and abnormally high weather-related losses forced us to temporarily pull back on some advertising late in the year, our rate increases during 2016 positioned us well for 2017, where weather started off like a lamb and went out like the proverbial lion with our two largest states getting hit by category 4 hurricanes during the third quarter.
2017 was an outstanding year for Personal Lines by all key performance indicators. Profitable growth (in that order) is our primary performance metric and Personal Lines ran at just over a 93 combined ratio and grew premiums written 16% during the year. The year-over-year profitability improvement was driven primarily by loss ratio improvements, while loss adjustment expenses were flat and our expense ratio climbed slightly due primarily to increases in our advertising spend. The loss ratio improvement is particularly impressive given we incurred just over $500 million in Personal Lines catastrophe losses this year, up nearly 40% over 2016. Our loss ratio improvement was driven by the combination of increasing auto rates about 3%, and benign pure premium trends resulting from our product and underwriting models attracting and retaining lower pure premium customers. We aspire to provide a rate for every risk, however, we also recognize that there are segments within the market who don’t use our products as intended, or for whom our current product model doesn’t adequately price, and underwriting these risks out of our book enables us to offer more competitive prices for the vast majority of consumers. We continued to advance our auto underwriting models and move variables from underwriting into rating during 2017. This powerful combination ensures we initially block auto risks that we’re unable to accurately price, and follow up by pricing for many of these segments in our next product releases. These product and underwriting advancements helped us increase new auto policies written 18% during the year, increase total Personal Lines policies in force 10%, and add well over a million new Personal Lines customers, which contributed to more than $3 billion additional premiums written during the year.
Consumers rarely switch auto insurance companies to pay more for coverage, and that recognition drives our relentless focus on providing consumers greater value for their premium dollar through enhanced segmentation, claims accuracy, and lower operating expenses. During the year, we continued to grow premiums faster than our overhead costs, successfully reducing our Personal Lines non-acquisition expense ratio by 4%. Savings messages are pervasive in insurance marketing today and we’re pleased to report that new customers who saved money by switching to Progressive during 2017 saved more money doing so than in any previously reported period. Competitive rates are a key pillar of our strategy and during 2017 we continued to advance the science of matching rate to risk. At the end of 2017, our latest auto product model was available in 36 states, nearly triple the number of states we were in the prior year, which represented almost 75% of eligible households. We closely monitor the performance of our new product models and are pleased to report that the latest model is delivering higher conversion and retention rates at our target new and renewal profit margins.
A key element of matching rate to risk is our Snapshot® usage-based insurance program, and we’ve now collected more than 22 billion miles of driving data. Optimizing the presentation of Snapshot to increase participation continues. During the year, we expanded the mobile app version of Snapshot to 42 states and the District of Columbia and we continue to see more and more of our eligible customers opting for the app-based solution instead of the traditional hardware-based version. The mobile-app data affords us a unique perspective on mobile device usage, vehicle operation, and accidents, and work commenced this year to build a mobile-app version of our usage-based rating algorithm that includes device usage parameters.
We’ve consistently invested to ensure consumers can shop for, purchase, and own Progressive policies where, when, and how they choose. These investments have driven our personal auto premiums written above $20 billion during 2017 and we’re thrilled to see both our Agency and Direct businesses thrive in the highly competitive Personal Lines marketplace. Considered separately, our Agency and Direct businesses each would be one of the top seven U.S. auto insurance companies. During the year, both Agency and Direct Personal Lines grew premiums written 16% at combined ratios of 93 and 94, respectively; phenomenal performance given the competitive nature of the U.S. private passenger auto market.
Our Agency auto business delivered 17% growth in premiums written at a 93 combined ratio. New policies written grew more than 20% and policies in force increased double digits during the year. Consistent with prior periods, we continue to grow our Agency footprint. In 2017, we added more than 1,500 new agencies, while simultaneously investing to increase productivity from agencies, and cut the time from appointment to first policy produced by almost half. Our Agency auto new policy growth was driven equally by increases in demand from agents (as indicated by increasing quote volume) and better meeting the needs of end consumers (as indicated by higher conversion). While quote volumes originating from both our proprietary systems and comparative raters increased, similar to 2016, the increases on our proprietary systems were greater, indicating that agents are increasingly coming to us first to meet their clients’ needs. Conversion was also higher on quotes originating from both systems, although comparative rater conversion increased significantly faster, another indication of our more competitive product offerings. We experienced double-digit new application growth across all consumer segments in Agency, with solid growth across Sams, Dianes, and Wrights, and our investment in more available and competitive bundled auto and home products resulted in explosive Robinsons new auto application growth more than five times faster than our other segments in the aggregate (albeit still on a smaller base). Many of these Robinsons new applications originated from our Platinum agents, who more than doubled bundles created during the year. We’re thrilled to see our Platinum program continue to thrive as evidenced by Platinum agents producing four times the monthly bundle volume of our non-platinum property agents. Our more competitive product offering also helped improve retention across all consumer segments, which drove up the trailing 12-month policy life expectancy more than 7%. New application growth, combined with PLE improvements, grew auto policies in force double digits across all consumer segments and the strong Robinsons new application growth in 2016 and 2017 resulted in Robinsons policies in force growth that was more than four times faster than within our other tiers.
Our Direct auto business continued its strong track record of profitable growth by delivering 16% premium growth at a 94 combined ratio. Premium growth resulted from the combination of 13% policies in force growth and average premium increases resulting from rate and mix changes. Direct auto policies in force growth was driven by 16% new application growth and a 4% increase in trailing 12-month policy life expectancy resulting from higher renewal rates and lower mid-term cancellation rates. For the full year of 2017, we leveraged enhanced segmentation across media channels in order to efficiently increase our advertising spend more than 30%, which drove up quote volumes, while our more competitive product offering and process investments to improve our mobile device quote experience drove up quote conversion. Similar to our Agency business, in Direct auto we grew new applications double digits across all consumer segments and marketing investments that targeted auto/home bundlers helped us grow Direct auto new Robinsons applications more than three times as fast as our other segments. During the year, we launched our HomeQuote Explorer® (HQX) application, bringing a multi-carrier direct-to-consumer online property offering to market and expanded the offering countrywide. HQX enables consumers to quickly and easily quote and compare homeowners insurance online from Progressive Home (ASI) and other carriers. As we increase our penetration of the more complex, multi-product customers that fuel our Destination Era success, it’s essential to continue to expand our portfolio of additional protection products and, in 2017, we added mobile phone, portable electronics, and home-sharing coverages to our Progressive Advantage portfolio.
Our special lines products (e.g., motorcycle, boat, recreational vehicle) underperformed slightly from a profit perspective during the year due to significantly higher weather-related losses and expense ratio increases resulting from increases in advertising and IT costs for the replacement of our policy issuance and maintenance system. Loss ratios were elevated due primarily to more than $100 million in catastrophe losses, including those from hurricanes Harvey and Irma as they hit our largest and second largest special lines states. Our focus on building specialized products to meet the needs of special lines enthusiasts affords us strong market share across these products and, during 2017, we grew policies in force by 2% driven by single digit new application growth and slight increases in policy life expectancy. 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, 2017 was an excellent year for Personal Lines as we delivered strong double-digit premium growth, adding more than $3 billion incremental premiums written at profit margins better than our targets. Beyond current calendar-year performance, we continue to invest to ensure we can achieve our vision of becoming consumers’ #1 choice and destination for auto and other insurance through enhancing our strong brand, building and rapidly deploying highly competitive products, and expanding the breadth and depth of our products and services to ensure we can meet consumers’ needs throughout their lifetime.
COMMERCIAL LINES
The past was prologue for Commercial Lines in 2017, once again delivering strong top-line growth and achieving our underwriting profit target while confronting a distressed, and generally unprofitable, commercial auto market. Our ongoing commitment to broad, multi-channel distribution and maintaining a wide aperture on underwriting can leave us exposed to very high new business submission rates when parts of the market become destabilized. That was certainly the case for much of 2017 in the transportation, specialty trucking and towing market tiers of commercial auto. If not properly managed, high rates of new business growth can pressure margins, challenge our capacity to serve policyholders and agents, and leave our pricing exposed to large shifts in portfolio composition. Successfully navigating this environment through proactive rate management, targeted underwriting actions, and new business restrictions, as well as an intensified focus on our large loss claims process, led to a remarkable year of growth and profit.
For the second consecutive year, net premiums written increased 20% on a year-over-year basis, finishing at a market leading $3.1 billion, an incremental gain of just over half a billion dollars. Top-line growth was achieved through a combination of policy growth and gains in average written premium per policy.
We entered 2017 with new business restrictions in place for a number of trucking and towing risk profiles. This served to slow new business production in high growth areas, while allowing us to implement rate and underwriting adjustments, build staff, and improve process in customer care and claims. Once comfortable with the adjusted rates and our assessment of future trend in an economy gaining steam, we removed the majority of restrictions by the second quarter. Growth in policies in force built from that point forward finishing at +6% for the year. Average written premium per policy increased 12%, primarily the result of an aggressive revision schedule during the fourth quarter of 2016, with a resumption of truck growth and a modest gain in vehicles per policy also contributing.
The Commercial Lines combined ratio for the year was 92.3, an outstanding result for a line of business in which the industry will once again produce a substantial underwriting loss. We are unwavering in our commitment to manage our Commercial Lines business to an annual underwriting profit consistent with our long-standing target and will continue to forgo additional growth opportunities when we believe that target cannot be met. Being consistently profitable from year-to-year enables us to invest in new businesses and systems, while providing a reliable market to our agents and policyholders.
Going back-to-back with two years of exceptional growth and profitability does not leave us complacent in the present or fully satisfied with our prospects going forward. In fact, it has quite the opposite effect. We are mindful of the volatility inherent in Commercial Lines, particularly as our policy limits profile has shifted upward over the last half decade. We continue to invest in and grow our commercial casualty and large loss specialty claims units and employ a limited use of excess of loss reinsurance to manage this volatility to our competitive advantage. We are sensitive to changes in the economy, which continues to experience a period of expansion, and the corresponding implications for commercial miles driven and accident frequency. We are carefully monitoring the impact tax reform may have on competitive pricing, especially from those competitors that appear to be most driven by return on equity. As in years past, we will be proactive in responding to changes in the environment and measured in our approach to expanding our auto business or introducing product changes.
Looking forward, the success, size, and scale of our Commercial Lines business helps fund important investments in the future. We were pleased to launch an important new initiative for Commercial Lines in 2017. Our SmartHaul usage-based insurance program for Motor Carriers went live in 41 states just as the Federal mandate for electronic logging devices (ELDs) went into effect in December. SmartHaul allows owner operators to earn discounts up to 18% for agreeing to share their ELD-generated driving data with us. Having captured and modeled motor carrier driving data for several years, we anticipate this being our most significant advancement in rate segmentation for this important business segment. Early market response has been quite encouraging and market demand is expected to grow throughout 2018 as stricter enforcement of the ELD law motivates device installation and more operators develop verifiable telematics driving histories that qualify them for larger discounts.
Our involvement in, and understanding of, the transportation networking company (TNC) space continues to grow. Our insurance relationship with Uber Technologies moved beyond the pilot stage in 2017, and we will be expanding with them to additional markets in 2018. We expect TNCs to have even greater influence on how people choose to get around in the years ahead and we are committed to becoming a preferred supplier to this industry.
Finally, we ramped up our investment in non-auto small business insurance during the year, focusing on product and system development and building new digital distribution capability. This effort enjoys broad enterprisewide support, including more than 100 individuals dedicated on a full-time basis. We already enjoy the trust of more than half a million small business customers, have a widely recognized brand, and strong small business owner demand in our agent and direct channels. We greatly anticipate bringing more small business insurance products to market for these customers.
We are excited about all that we have on the horizon in Commercial Lines and feel that we are well positioned to capitalize on these initiatives while continuing to grow our core business.
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 through our majority-owned insurance company, American Strategic Insurance and subsidiaries (ASI). In the direct channel, we distribute residential property insurance policies written by ASI and other non-affiliated carriers directly to consumers both online and over the phone.
During 2017, our Property business, which includes ASI property insurance and both Progressive’s and ASI’s renters insurance, had net premiums written of $1.1 billion at a 105.1 combined ratio, which includes 6.7 points of amortization expense on intangible assets. New property applications increased 48%, with policies in force ending the year at 1.5 million. The combination of ASI property and Progressive auto insurance in states beyond ASI’s original coastal states is producing a continued shift in the state mix of our Property business. For 2017, Florida accounted for 14% of new homeowners policies and Texas accounted for 16%, with the remaining states accounting for the balance. As of year-end 2017, the mix of homeowners policies in force is 29% in Florida, 18% in Texas, and 53% in other states.
The four key priorities for our Property strategy remain the same as reported last year: 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 ASI/Progressive policies; and 4) expanding our direct property offering through investing resources to increase consumer awareness and maximize sales yield. We made significant progress against these goals during 2017.
ASI entered three new states in 2017, bringing our total to 41 active states and the District of Columbia, representing 96% of the homeowner’s insurance market. We added the Progressive renters product to seven new states plus D.C. in 2017, bringing the total to 42 jurisdictions that comprise 91% of Progressive’s auto insurance customers. The renters product helps us attract and retain future home and auto bundle customers.
Momentum is building in the Platinum agent program. New Property homeowners applications from Platinum agents were up about 50% in 2017, with auto and home bundles from Platinum agents up just over 100%, albeit from a smaller base.
In August 2017, we announced to our agents that we’ll transition ASI’s homeowners insurance product brand to Progressive Home. Feedback from agents was positive, indicating that many are already telling their customers that ASI is Progressive’s homeowners insurance product. We expect that this branding change will make it easier for agents to sell the Progressive auto and home bundle. We have already made this branding change in our direct quoting applications. We will begin implementing the change for our policy management system, policy documents, and customer communications during 2018 and 2019.
In the direct channel, we announced a new online quoting platform called HomeQuote Explorer® (HQX) in July. Prior to the launch of HQX, ASI quotes were available only to direct consumers who quoted over the phone. This new quoting platform allowed us to present ASI quotes, alongside quotes from other non-affiliated property carriers, for online shoppers. The addition of internet shoppers resulted in significant growth in new ASI direct homeowner sales. We also launched ASI’s direct-to-consumer renters quoting and sales application in October 2017. Direct homeowners and renters policies accounted for just over 8% of ASI’s new homeowner and renters policy sales in the first quarter of 2017, growing to 25% of new sales in the fourth quarter.
We feel good about our progress in 2017 in expanding the capacity and competitiveness of our Property offerings in both the agency and direct channels. We enter 2018 with strong momentum and optimism about our ability to attract bundled auto and home customers.