Progressive 2003 Annual Report Download - page 31

- APP.-B-31 -
The Company’s Commercial Auto Business unit writes primary liability, physical damage and other auto-related insurance
for automobiles and trucks owned by small businesses. In 2003, the Commercial Auto Business represented 11% of the
Company’s total net premiums written.Although the Commercial Auto Business differs from Personal Lines auto, both
businesses require the same fundamental skills,including disciplined underwriting and pricing, as well as excellent claims
service.The Company’s Commercial Auto Business is primarily distributed through the independent agency channel.The
Company’s Commercial Auto Business ranked fourth in market share on a national basis based on data reported by A.M.Best
Company Inc.in 2002 and estimates that it moved into the third position for 2003.
The Company is still benefiting from actions taken in 2002,when competitors raised rates and restricted the business they
wrote.Commercial Auto also benefited from favorable loss frequency trends during 2003.The Company continues to focus
on writing insurance for small business autos and trucks,with the majority of its customers insuring three or fewer vehicles.
Approximately 52% of the Company’s 2003 Commercial Auto net premiums written were generated in the light and local
commercial auto markets, which includes autos, vans and pick-up trucks used by contractors,such as artisans, landscapers,
plumbers,etc.,and a variety of other small businesses.The remainder of the business was written in the specialty commercial
auto market,which includes dump trucks,logging trucks and other short-haul commercial vehicles.There are many similarities
between the Company’s commercial and personal auto business; however, since the commercial auto policies have higher
limits (up to $1million) than personal auto,the Company monitors this segment closely.
Other Businesses The Company’s other businesses,which represented less than 1% of the 2003 net premiums written,principally
include writing directors' and officers' liability insurance and providing insurance-related services,primarily processing CAIP
business.The other businesses are also managing the wind-down of the Company’s lender’s collateral protection program,
which the Company decided to cease writing as of September 30, 2003.During 2002,the Company lost some key accounts
for the lender’s collateral protection products and determined that this business was unable to meet its profitability target.
Management believes that exiting this line of business will not materially affect the Company’s financial condition,results of
operations or cash flows. The remaining ongoing indemnity products in the Company’s other businesses are continuing to
grow profitably.
The Company processes business for the CAIP plans,which are state-supervised plans serving the involuntary market,in
25 states.The Company processes over 49% of the premiums in the CAIP market and competes with two other providers
nationwide.As a service provider, the Company collects fee revenue that is earned on a pro rata basis over the term of the
related policies.The Company cedes 100% of the losses to the CAIP plan. To the extent the Company fails to comply with
contractual service standards, the Company would be restricted from ceding business to the CAIP plan.The Company has
maintained,and plans to continue to maintain,compliance with these standards.Any changes in the Company’s participation
as a CAIP service provider would not materially affect the Company’s financial condition,results of operations or cash flows.
Litigation The Company is named as a defendant in a number of putative class action lawsuits,such as those alleging damages
as a result of the Company’s use of after-market parts, total loss evaluation methodology, use of credit in underwriting,
installment fee programs, using preferred provider rates for payment of personal injury protection claims or for paying first
party medical benefits,worker classification issues,use of third-party vendors to analyze the propriety of payment of medical
bills,offering alternative commission programs,rating practices at renewal or the alleged diminution of value to vehicles which
are involved in accidents, and cases challenging other aspects of the Company’s claims and marketing practices and business
operations.Other insurance companies face many of these same issues.During 2002,the Company settled several long-standing
class action lawsuits relating to diminution of value, handling of betterment in claim settlements, use of alternative agent
commissions programs and a California-specific labor classification claim.See Note 11 – Litiga tion for a more detailed discussion
.
Commercial Auto Growth over prior year
2003 2002 2001
Net premiums written 35% 51% 51%
Net premiums earned 39% 59% 44%
Auto policies in force 26% 38% 23%