Progressive 2009 Annual Report Download - page 21

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Commercial Auto Progressive’s Commercial Auto business
produced a combined ratio of 85.8, an improvement of
8.9 points versus the prior year. The combined ratio ben-
efit
ted from an increased focus on high exposure claims
handling, lower claims frequency, gains in operating
efficiency, and reflects prior rate increases. The combined
ratio includes several points of favorable development on
prior accident years. Rate increases taken in the first half
of 2009, combined with favorable loss trends, allowed us,
by May, to make all product options available in Califor-
nia, one of our largest markets.
While the general economy began to show signs of re-
covery, the commercial auto insurance sector continued
to contract in 2009. Depressed levels of employment, con-
struction spending, and new business creation, combined
with constraints on commercial credit, led to a reduction
in insurable risks, particularly for small businesses, our
primary customers
. For the year, Commercial Auto net
premiums written declined 10%, which was in step with
industry
results but still disappointing.
The written premium decline was driven by both a re-
duction in policies written and business mix changes to-
ward lower average premium business auto policies and
more preferred risk profiles. Policies in force declined 5%
as new business applications fell 9% and we experienced
no change in our policy life expectancy. The negative pro-
duction trends were more conspicuous in the specialty
truck category, since these policies have higher average
premiums, than with business auto.
Faced with soft demand and the prospects of a slow eco-
nomic recovery, we sought and found opportunities to
improve our operating efficiency. Improvements in work-
force management and key business processes yielded a
reduction in operations cost per policy in force and a signif-
icant gain in our core efficiency measure, policies in force
per FTE (full time equivalent).As a result, the Commercial
Auto expense ratio declined 0.4 points to 21.1, a gratifying
result against a background of declining premium. We
believe that our low relative cost structure provides us
with an ongoing pricing advantage.
Commercial Auto policies have higher average policy
limits than our Personal Lines policies. In 2009, we inten-
sified our focus on high exposure claims through the con-
solidation of their handling by a smaller number of more
seasoned adjusters and increased training. We have seen
measurable improvement in investigation, diagnosis, and
exposure recognition for large losses. These improvements
increase the accuracy of our loss cost estimates and pricing
and allow us to be more responsive to changes in the envi-
ronment. As our large loss claims handling improves and
cycle time comes down, we reduce both indemnity and
handling costs associated with these claims. Inclusive of the
improvements in large loss handling, Commercial Auto’s
loss adjustment expenses declined significantly for the year.
In response to an increasingly competitive, yet con-
tracting, market sector, we invested heavily in product
development. In December, we rolled out our new Com-
mercial Auto product in Arizona. This new design improves
pricing segmentation and more accurately allocates costs
associated with high limit policies by business type. The
program will roll out nationally in 2010. We also developed
a series of program enhancements that broaden risk
acceptance and increase appeal for the specialty truck and
transportation categories. These will also hit the market
in the first quarter 2010.
We enter 2010 confident in our pricing and with the
flexibility to respond quickly to changes in the environ-
ment. Continued discipline on expense management and
process improvement gives us a relative cost advantage
and the ability to continue investing in the business during
a down economy. With new products that improve segmen-
tation and expand market reach, we are well positioned to
take advantage of current opportunities and the antici-
pated economic recovery.
Commercial Auto
2009 2008 Change
Net premiums written (in billions) $ 1.5 $ 1.7 (10)%
Net premiums earned (in billions) $ 1.6 $ 1.8 (8)%
Loss and loss adjustment expense ratio 64.7 73.2 (8.5) pts.
Underwriting expense ratio 21.1 21.5 (.4) pts.
Combined ratio 85.8 94.7 (8.9) pts.
Policies in force (in thousands) 512.8 539.4 (5)%
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