Progressive 2003 Annual Report Download - page 27

- APP.-B-27 -
RESULTS OF OPERATIONS UNDERWRITING OPERATIONS Growth The Company’s premiums written,on both a direct and net
basis,increased 26% in 2003,as compared to last year.Direct premiums written were $12.2 billion in 2003,$9.7 billion in 2002
and $7.4 billion in 2001. For 2003, 2002 and 2001, net premiums written were $11.9 billion, $9.5 billion and $7.3 billion,
respectively.The primary difference between direct and net premiums written is attributable to premiums written under
state-mandated involuntary Commercial Auto Insurance Procedures (CAIP),for which the Company retains no loss indemnity
risk,and premiums ceded to state-provided reinsurance facilities.
Net premiums earned, which are a function of the premiums written in the current and prior periods,were recognized
into income over the policy term using a mid-month convention.Insurance premiums written in 2004 and forward are being
earned using a daily earnings convention.This change to a daily earnings method will improve the precision of the Company’s
premium recognition on a monthly basis. For 2003, 2002 and 2001, premiums earned increased 28%, 24% and 13%,
respectively.
Rate adequacy, improved customer retention and new business growth drove the increase in premium growth. On a
companywide basis,policies in force increased 19% during 2003 and 16% compounded annually over the three-year period
ended December 31, 2003. During 2003, the Company implemented 87 auto rate revisions in various states, with aggregate
filed rate changes of approximately a 4% net increase.Despite the strong underwriting margins the Company earned in 2003
(discussed below),the Company does not plan to reduce rates as a primary strategy in 2004,although selective rate reductions
may occur in some markets.
Another important element affecting growth is customer retention.One measure of improvement in customer retention
is policy life expectancy,which is an estimate of the average length of time that a policy will remain in force before cancellation
or non-renewal.The Company experienced a modest increase in retention in its Personal Lines segment,in both the Agency
channel and the Direct channel,during the first half of 2003.During the second half of the year,retention declined slightly,
leaving retentions levels at year end slightly below those of the prior year.Beginning late in 2003 and into 2004,the Company
is seeing retention flattening.Multiple factors affect retention,such as market conditions,competitors achieving rate adequacy
and the Company’s mix of business, as well as improvements in processes and customer service.The Company’s primary
approach to increasing retention is to drive down the cost of auto insurance to consumers and to improve consumers’
experience with the Company.
Profitability For the years ended December 31, 2003, 2002 and 2001,the Company generated net income of $1,255.4 million
($5.69 per share), $667.3 million ($2.99 per share) and $411.4 million ($1.83 per share),respectively. The 88% increase in net
income for 2003 was generated by several factors. During 2003,the Company’s underwriting margin improved 5.1points to
12.7%, compared to 7.6% in 2002 and 4.8% in 2001. For 2003, 2002 and 2001, investment income, on a pretax basis net of
investment and interest expenses, was $358.3 million, $369.1 million and $348.7 million, respectively, excluding net realized
gains (losses) on securities of $12.7 million, $(78.6) million and $(111.9) million. In addition, during 2003, the Company
recognized $31.2 million of interest income earned on an expected tax refund of approximately $58 million. This income
tax refund reflects the fact that the Joint Committee of Taxation of Congress had completed its review of a Federal income
tax settlement agreed to by the Internal Revenue Service (IRS) and the Company, primarily attributable to the amount of
loss reserves deductible for tax purposes. In February 2004, the Company received $88.5 million, representing the refund
and interest from the IRS.