Operations Summary

Operations Summary

Personal Lines

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.

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.

Commercial Lines

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.