Progressive 2006 Annual Report Download - page 22

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Direct Business In 2006, the Direct Business continued to generate
excel
lent profitability with a combined ratio of 86.9. Growth, however,
did not meet our expectations as policies in force grew only 4% as a
result of fewer new customers and some degradation in retention
rates of existing customers. A reduction in quotes drove the new
customer decline and more than offset an increase in the rate of
conversion. On a relative basis, we saw a greater decline in phone
quotes than Internet quotes in 2006. We are seeing the majority of
our new customers not only beginning their shopping process on the
Internet, but they are also fully initiating their policies online.
During the first half of 2006, average premium per policy was fairly
stable to slightly increasing. We began lowering rates in the latter half
of the year to move closer to our pricing targets. For the year, average
premium dropped 2% for new customers and 1% for renewal cus-
tomers. Total premium earned for the year grew 6% relative to 2005.
Our expense ratio increased slightly due to higher levels of adver-
tising that delivered diminished returns relative to 2005. The
dramatic increase in competitors’ advertising spend that we first
noted in 2005 continued through 2006 and will likely continue in
2007. Our media mix continued to shift toward the Internet and away
from more traditional means such as direct mail. And, in October, we
retained a new primary advertising agency and have subsequently
migrated to a new overall Progressive brand positioning characterized
by our new tagline, “It’s about you. And it’s about time.
SM
”
In addition, we rolled out our patented usage-based discount pro-
gram, TripSense®, in two more states, bringing the total to three states,
and remain committed to a usage-based approach because it helps to
give drivers control over what they pay. During the year, we were also
awarded a patent on functionality available at our online customer
service site, available at progressive.com.
Continue to offer choices in
how to shop for, buy and own
a Progressive policy.
2006 2005 Change
Net premiums written (in billions) $4.4$4.2 4%
Net premiums earned (in billions) $4.3$ 4.1 6%
Loss and loss adjustment expense ratio 66.8 68.4 (1.6) pts.
Underwriting expense ratio 20.1 19.9 .2 pts.
Combined ratio 86.9 88.3 (1.4) pts.
Auto policies in force (in thousands) 2,428.5 2,327.7 4%