Progressive 2012 Annual Report Download - page 55

Rate increases taken during 2012 were also a primary factor in the year-over-year increase in written premium per policy
and the flattening retention (measured by policy life expectancy) experienced in our Agency auto business in 2012.
On a year-over-year basis, we saw a modest increase in total Agency auto quotes in both 2012 and 2010, while quotes
were relatively flat in 2011. In each of the last three years, we experienced solid increases in quoting on third-party
comparative rating systems. We strive to continually improve our presentation on these systems and identify opportunities
to ensure our prices are available for agents. Our Agency auto rate of conversion (i.e., converting a quote to a sale)
decreased in both 2012 and 2011 and was relatively flat in 2010.
The underwriting expense ratio in our Agency business was relatively unchanged in 2012 and was down 0.5 points in 2011,
compared to 2010.
The Direct Business
Growth Over Prior Year
2012 2011 2010
Net premiums written 8% 7% 9%
Net premiums earned 8% 7% 9%
Auto: policies in force 4% 6% 13%
new applications (2)% (2)% 9%
renewal applications 7% 11% 13%
written premium per policy 3% (1)% (3)%
policy life expectancy (2)% (3)% 2%
The Direct business includes business written directly by Progressive on the Internet, through mobile devices, and over the
phone. Similar to the Agency business, Direct auto new applications were affected by the rate increases taken during 2012
and changes to bill plans that require higher down payments. In addition, lower advertising spend in the second half of the
year also contributed to the decline in new auto applications. Out of our top 10 Direct auto states, four states experienced
an increase in new auto applications in both 2012 and 2011, compared to eight states in 2010.
Written premium per policy for our Direct auto business increased in 2012, primarily due to rate increases taken during the
year. Written premium per policy on both our new and renewal Direct auto business increased in 2012, with the increase for
new business about 3% higher than the increase for renewal business. The decline in written premium per policy in both
2011 and 2010 reflected shifts in the mix of our business (e.g., older age vehicles, state mix, and drivers with proof of prior
insurance).
We believe the decline in policy life expectancy for 2012 reflects the rate increases taken in most states during the year.
Similarly, the decline in policy life expectancy for 2011 reflects rate increases taken in Florida and Massachusetts, as well
as changes in bill plan presentation, which led to more customers paying in installments and, historically, these customers
tend to retain for shorter periods.
On a year-over-year basis, the total number of quotes in the Direct business decreased 4% and 3% in 2012 and 2011,
respectively, reflecting decreases in both Internet quotes and quotes generated via the phone, compared to an increase in
2010 of 2%; we continue to see more quotes coming from mobile devices. The decrease in 2012 partially reflects our
actions to reduce advertising on websites that historically generated significant quotes with low conversion rates. The total
Direct business conversion rate was relatively flat in both 2012 and 2011 and had a solid increase in 2010, compared to the
prior years.
The underwriting expense ratio for our Direct business decreased 1.3 points for 2012 and increased 0.5 points for 2011,
compared to the prior year. Higher earned premium in 2012, compared to 2011, was the primary contributor to the decrease
in the underwriting expense ratio for 2012. Year-over-year, total advertising spend was up slightly for 2012, but was
significantly lower in the second half of the year as we focused on rate adequacy. Advertising expenditures were up in both
2011 and 2010 over the prior years. We remain focused on maintaining a well-respected brand and will continue to spend
on advertising as long as our rate levels match our profitability targets. We continue to use “Flo” and the “Superstore” while
trying to find the right balance between the benefits of a highly recognizable campaign and keeping the content fresh and
engaging. We continue to invest in the infrastructure of both our mobile capabilities and our usage-based insurance
products.
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