Progressive 2012 Annual Report Download - page 41

Despite strong top line growth and higher realized gains recognized during the year, our net income was down 11% year-
over-year, reflecting both lower underwriting profit and recurring investment income. Rising claims costs, including about
$100 million of losses from Superstorm Sandy, the late season catastrophe, contributed to the decrease in underwriting
profitability. A lower pretax investment book yield drove our recurring income down for the year, despite an increase in our
invested assets year-over-year. However, our portfolio generated a 6.8% fully taxable equivalent total return, which was the
driver of our 17% increase in comprehensive income for 2012.
A. Operations
In 2012, our insurance subsidiaries generated underwriting profitability of 4.4%, which was consistent with our targeted
profitability objective of at least 4%. In our Personal Lines business, 36 states plus the District of Columbia met or exceeded
their profitability target; only four states generated an underwriting loss for 2012. In our Commercial Auto business, 41
states generated an underwriting profit during the year.
During the year, we realized $22.0 million, or 0.1 combined ratio points, of unfavorable prior accident year reserve
development, compared to 1.6 points of favorable development last year. Slightly more than half of the 2012 unfavorable
development was in our Commercial Auto business, with the remainder in our personal auto business. We also recognized
about 1.7 points of catastrophe losses, reflecting Superstorm Sandy and an active spring storm season. For the year, our
overall incurred severity increased about 5% and frequency was relatively flat compared to the prior year. In response to the
rising severity trends, we increased rates in our personal auto business about 6% during 2012.
On a year-over-year basis, net premiums written and earned increased 8% and 7%, respectively. Changes in net premiums
written are a function of new business applications (i.e., issued policies), premium per policy, and retention.
During 2012, total new auto applications decreased 1% on a year-over-year basis. Increases during the first half of the year
turned negative as we started raising rates. In terms of new applications, our Agency auto business was relatively flat year
over year, while Direct auto ended the year down 2%. On a state-by-state basis, we experienced year-over-year growth in
21 states and the District of Columbia in our Agency auto business and in 19 states in our Direct auto business. Our special
lines products (e.g., motorcycles, ATVs, RVs, mobile homes, watercraft, and snowmobiles) generated an increase in new
applications of about 1%, while new applications in our Commercial Auto business increased about 3% for the year.
In addition to our efforts to further penetrate customer households through cross-selling products, we remain focused on
several other programs/initiatives we have that are designed to help stimulate growth and provide consumers with
distinctive insurance options. These programs include:
• Snapshot, our usage-based insurance product – during the year, the annual premium of customers choosing
Snapshot crossed $1 billion
• Name Your Price®– a tool that allows consumers to name or select the price they would like to pay for auto
insurance and match it to a range of available coverage combinations
• New product models in both our Personal Lines and Commercial Auto businesses – these models are designed to
improve competitiveness with advanced segmentation and product features, and
• Additional functionality in the mobile device space – our mobile functionality includes:
• a feature that enables customers in most states to purchase insurance for up to three drivers and three
vehicles directly from their mobile devices after receiving a quote
• the nationwide rollout of a mobile quoting application for our Commercial Auto business and special lines
products
• an application available in certain states with the ability to use the camera in a mobile device to send a photo
of a driver’s license and/or insurance card, along with some additional information, to get an instantaneous
quote
• expansion of our agent offerings on tablet computers, including full quote/buy capabilities, and
• the comparison rate experience.
During 2012, on a year-over-year basis, our written premium per policy for both our Agency and Direct auto businesses
increased 3%, primarily reflecting rate increases taken in 2012, while our special lines products remained relatively flat.
Commercial Auto experienced a 10% increase in written premium per policy, primarily reflecting rate increases, as well as
growth in Florida and a shift to more for-hire transportation business, both of which have higher average premiums per
policy.
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