Progressive 2013 Annual Report Download - page 55

We increased rates in our personal auto business during the second and third quarters of 2012 in response to rising claims
costs, driven primarily by increased severity. For our Commercial Lines business, the overall increase in written premium
per policy primarily reflects average premium increases on our renewal business from rate increases taken during both
2012 and 2013. For new Commercial Lines business, written premium per policy decreased in 2013, compared to 2012,
due to a shift in the mix of our business away from our for-hire transportation and for-hire specialty business market targets,
both of which have higher average premium per policy. Adjusting rates is a continuous process and we will continue to
evaluate future rate needs and react quickly as we recognize changing trends at the state level. See below for additional
discussion on written premium per policy for our Agency and Direct auto channels and our Commercial Lines business.
Another important element affecting growth is customer retention. One measure of retention is policy life expectancy, which
is our actuarial estimate of the average length of time that a policy (including any renewals) will remain in force before
cancellation or lapse in coverage. The following table shows our year-over-year changes in policy life expectancy:
Change Over Prior Year
2013 2012 2011
POLICY LIFE EXPECTANCY
Personal Lines:
Auto (4)% (1)% 2%
Special lines (2)% 0% (1)%
Commercial Lines 2% 0% 0%
Although we experienced an increase in the number of personal auto renewal applications year over year, our estimate of
the expected tenure of our customers has declined for 2013, primarily reflecting rate increases taken in many states in the
second half of 2012. As our rates became more competitive in the second half of 2013, we did see a slight increase in
renewal rates from the measures recorded earlier in the year. Policy life expectancies for our special lines products declined
for 2013, reflecting increased rates at renewal on our motorcycle policies. Our Commercial Lines business saw an increase
in policy life expectancy for 2013, in part due to shifts in the mix of our business away from our for-hire transportation
business market target to our business auto market, which tends to have a higher rate of retention. Recognizing the
importance that retention has on our ability to continue to grow profitably, we continue to emphasize competitive pricing,
quality service, and having the products and services available for our customers as their needs change during their
insurable life.
B. Profitability
Profitability for our underwriting operations is defined by pretax underwriting profit, which is calculated as net premiums
earned plus “fees and other revenues” less losses and loss adjustment expenses, policy acquisition costs, and other
underwriting expenses. We also use underwriting profit margin, which is underwriting profit expressed as a percentage of
net premiums earned, to analyze our results. For the three years ended December 31, our underwriting profitability results
were as follows:
2013 2012 2011
Underwriting
Profit (Loss)
Underwriting
Profit (Loss)
Underwriting
Profit (Loss)
($ in millions) $ Margin $ Margin $ Margin
Personal Lines
Agency $ 542.9 6.3% $338.9 4.2% $ 564.9 7.4%
Direct 473.9 7.0 289.5 4.6 354.4 6.1
Total Personal Lines 1,016.8 6.6 628.4 4.4 919.3 6.8
Commercial Lines 114.1 6.5 86.3 5.2 133.5 9.1
Other indemnity1(10.8) NM (5.8) NM (5.5) NM
Total underwriting operations $1,120.1 6.5% $708.9 4.4% $1,047.3 7.0%
1Underwriting margins for our other indemnity businesses are not meaningful (NM) due to the low level of premiums earned by, and the variability of
loss costs in, such businesses.
App.-A-55