Progressive 2013 Annual Report Download - page 56

Our underwriting margin met or exceeded our long-term profitability target of at least 4% for the last three years. Pricing and
market conditions are always significant drivers of underwriting margins over any defined period. The increase in our
underwriting margin in 2013, compared to 2012, was primarily due to an improved loss ratio from our 2012 rate increases,
reduced catastrophe losses in 2013, and a lower cost structure. The lower underwriting margin in 2012, compared to 2011,
primarily reflects unfavorable loss reserve development in 2012, compared to favorable development in 2011, increased
auto claims severity, and higher catastrophe losses.
Further underwriting results for our Personal Lines business, including results by distribution channel, the Commercial Lines
business, and our underwriting operations in total, as defined in Note 10 – Segment Information, were as follows:
Underwriting Performance12013 2012 2011
Personal Lines – Agency
Loss & loss adjustment expense ratio 73.5 75.2 71.8
Underwriting expense ratio 20.2 20.6 20.8
Combined ratio 93.7 95.8 92.6
Personal Lines – Direct
Loss & loss adjustment expense ratio 72.3 74.2 71.4
Underwriting expense ratio 20.7 21.2 22.5
Combined ratio 93.0 95.4 93.9
Total Personal Lines
Loss & loss adjustment expense ratio 73.0 74.8 71.6
Underwriting expense ratio 20.4 20.8 21.6
Combined ratio 93.4 95.6 93.2
Commercial Lines
Loss & loss adjustment expense ratio 71.9 72.6 68.9
Underwriting expense ratio 21.6 22.2 22.0
Combined ratio 93.5 94.8 90.9
Total Underwriting Operations2
Loss & loss adjustment expense ratio 73.0 74.6 71.4
Underwriting expense ratio 20.5 21.0 21.6
Combined ratio 93.5 95.6 93.0
Accident year-Loss & loss adjustment expense ratio372.7 74.5 73.0
1Ratios are expressed as a percentage of net premiums earned; “fees and other revenues” are netted with underwriting expenses in the ratio
calculations.
2Combined ratios for the other indemnity businesses are not presented separately due to the low level of premiums earned by, and the variability of
loss costs in, such businesses. For the years ended December 31, 2013, 2012, and 2011, these businesses generated an underwriting loss of
$10.8 million, $5.8 million, and $5.5 million, respectively.
3The accident year ratios include only the losses that occurred during the period noted. As a result, accident period results will change over time,
either favorably or unfavorably, as we revise our estimates of loss costs when payments are made or reserves for that accident period are
reviewed.
Losses and Loss Adjustment Expenses (LAE)
(millions) 2013 2012 2011
Change in net loss and LAE reserves $ 457.5 $ 516.2 $ 93.2
Paid losses and LAE 12,014.9 11,431.8 10,541.6
Total incurred losses and LAE $12,472.4 $11,948.0 $10,634.8
Claims costs, our most significant expense, represent payments made, and estimated future payments to be made, to or on
behalf of our policyholders, including expenses needed to adjust or settle claims. Claims costs are a function of loss severity
and frequency and are influenced by inflation and driving patterns, among other factors. Accordingly, anticipated changes in
these factors are taken into account when we establish premium rates and loss reserves. Our estimated needed reserves
are adjusted as these underlying assumptions change. See Critical Accounting Policies for a discussion of the effect of
changing estimates.
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