Progressive 2008 Annual Report Download - page 23

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Commercial Lines Progressive’s Commercial Auto business
encountered strong headwinds throughout 2008 as the general
economy stumbled into recession. Spending on residential con-
struction, a key customer segment, was significantly lower than
any of the previous four years, lowering demand for both our
business auto and truck products.
Short-haul trucking was adversely affected by increases in
diesel fuel prices, the overall reduction in economic activity, and
a decline in goods shipped. Our customers are primarily small
business owners and the tightening of the credit markets has left
many of them vulnerable, which is reflected in the increasing
small business bankruptcy rate.
Our efforts in 2008 were directed at ensuring profitable under-
writing results, retaining current customers, enhancing our
processes and skills for handling high exposure commercial
claims, and building out the product portfolio. For the year, Com-
mercial Auto net premiums written declined 7%, primarily due to
a decline in new business applications versus the prior year. The
balance of the decline can be attributed to declines in average
policy premiums as prior year rate decreases earned in and
customers bought less coverage.
Policies in force remained relatively unchanged for the year,
as new business production slowed and we experienced an in-
crease in policy cancellations due to business failures. The 2008
combined ratio was 94.7, an increase of 4.8 points versus the
prior year but more in line with our profit target. The combined
ratio included 1.6 points of adverse development and reserve
strengthening on prior accident years. The Commercial Auto ex-
pense ratio came in at 21.5, an increase of 1.3 points from 2007,
largely a function of reduced premium levels.
During 2008 we increased rates in most markets in response
to increasing loss costs. These increases have begun to stabilize
average premiums which, for business auto, began to trend pos-
itive by year end. We finished the year confident in the overall
adequacy of our rates and will remain vigilant in responding to
changes in loss cost trends. An area of concern at the end of 2008
was California business auto where we put new business restric-
tions in place in October. We have since received approval on
two rate increases there and continue to work closely with the
California Department of Insurance to secure an adequate rate
level before any restrictions are lifted.
We continued the deployment of our enhanced truck and tow
coverages throughout the year and they are now available in 29
states. The sale of enhanced coverages is designed to attract
higher retaining customers, increase average policy premiums,
and contribute to profitability and growth of the business. We
will complete this deployment in 2009.
Our focus on the foundational issues of claims handling, pric-
ing accuracy, and products that respond to customer needs keeps
us well positioned as a top four commercial auto insurer able
to respond as the economy recovers and expansion resumes.
2008 2007 Change
Net premiums written (in billions) $ 1.7 $ 1.8 (7)%
Net premiums earned (in billions) $ 1.8 $ 1.8 (5)%
Loss and loss adjustment expense ratio 73.2 69.7 3.5 pts.
Underwriting expense ratio 21.5 20.2 1.3 pts.
Combined ratio 94.7 89.9 4.8 pts.
Policies in force (in thousands) 539.4 539.2 —%
policies. We fully intend that doing so and
offering more cohesive bundles of prod-
ucts and services will lead to continued
retention gains. A growing percentage of
our customers have more than one Pro-
gressive policy in their household. We are
also now able to meet customers’ prop-
erty insurance needs and are pleased
with the success here, especially for our
Direct customers. Almost 4% of our Direct
auto customers also have a Progressive
Home Advantage policy.
A key ongoing tactic for our business
is to lead the market in rating segmenta-
tion. In addition to progress such as the
7.0 program roll out, we also made con-
siderable progress on what we perceive
to be a transformational approach to rat-
ing for auto insurance in our patented
MyRateSM program. We added this pro-
gram in 6states during 2008, bringing the
total to 9, and also made significant im-
provements in the customer experience.
Customers now simply plug a device into
a port in their vehicle and the device trans-
mits driving behavior to Progressive virtu-
ally real-time via a cellular connection.We
expect to continue to broaden the avail-
ability of this program in 2009.
Our priorities for 2009 are clear: continue
to improve customer retention; continue to
reduce non-claims costs; ensure we maxi
-
mize new business sales across all distri-
bution points; and ensure we improve the
breadth and competitiveness of the prod-
ucts we and our agents offer consumers.