Progressive's Agency operations enjoyed positive results in 2003. We were able to strengthen our position as the nation's largest writer of private passenger auto insurance through independent agents by growing 24% to $7.2 billion. Our Agency business now represents slightly less than 5% of the U.S. personal auto insurance market.

Despite the gradual softening of the market through the year, new application growth was healthy, helping to drive auto policies in force up 17%. Our drop in loss ratio reflects favorable loss trends for the year, particularly in frequency. Our expense ratio continues to be a competitive advantage relative to our Agency competitors.

The Agency business invested in technology improvements, enabling agents easily and quickly to service their customers online, and introduced a Web-based quoting platform. We improved phone service by creating a customer services team devoted exclusively to serving agents. We believe that our systems, coupled with the service provided by our claims and customer services groups, give us a distinct advantage in acquiring agents' business. We try to make it easy and efficient for agents to meet the demands of their customers. Internal and external survey data suggest that agents are aware of our strengths in service and technology and that it is an important factor in deciding whether to place business with us.

In addition, our special lines insurance products, primarily motorcycles, motor homes and watercraft, had another tremendous year, with policies in force growing 22%. Our broad-based distribution strategy (over 30,000 independent insurance agencies appointed across the country) helps ensure that these niche products continue to thrive. Technology and service strategies parallel to auto makes using these products an easy choice for our agents.

Progressive's Direct operations had a good 2003, growing 29% to $3.3 billion. The Direct business represents about 2% of the U.S. personal auto insurance market.

Our advertising continues to differentiate our brand by helping consumers better understand our focus on making car insurance easier. We increased our ad spending during the year as we attempted to broaden the reach of our messages while maintaining a strong presence in an increasingly crowded advertising space. Through continued analysis, we improved our media buying with the objective of optimizing our advertising dollars.

We also made our cost accounting even stronger, placing particular emphasis on how we measure the amount we will spend to acquire a customer, better understanding acquisition spend by channel, tier and medium, and forecasting how long we need to retain a customer in order to recover our fixed costs. We continued to refine our pricing to provide the most accurate prices possible. We invested further in developing a superior experience for our customers. A new customer can now benefit from more rate comparisons, faster quotes, a report that details how personal credit information affects prices (where applicable) and more counseling on coverages, limits and deductibles.

We are pleased with improvements in important measures such as sales conversion, early term retention, and customers' use of the Internet and electronic payments.

Commercial Auto had another strong year, solidifying our position as the third largest commercial auto carrier. Written premiums grew 35% to $1.4 billion, representing about 5% of the U.S. commercial auto insurance market. Competitors' rate actions moderated in 2003 after double digit increases the previous two years. However, as other carriers took actions to return their general liability and workers' compensation lines to profitability, many customer groups we serve were forced to shop for new auto coverage. This supported a 15% increase in new applications for the year and a 26% growth in policies. Like personal auto, the commercial business benefited from favorable loss frequency trends. These loss trends, coupled with rate actions we took in 2002, resulted in an eight point improvement in the loss/LAE ratio.

During the year, we made significant investments in systems to mirror the technology and service strategies of Personal Lines. Following parallel technology and service strategies aligns us with emerging standardized work flow within most agents' offices, making it much easier and more cost effective for agents to sell and service the small business owner who is a Progressive Commercial Auto customer.

Progressive has twice as many commercial customers now than at the end of 2000. This information has allowed us to refine underwriting and enhance coverages for key product groups. We are also mining this larger data set to improve our product model and price segmentation. Introducing these changes throughout 2004 and into 2005 should support moderate, but continued growth of our commercial business.

The investment environment in 2003 was more favorable than in 2002. We are pleased with our results on both an absolute basis and relative to our expectations at the start of the year. The economy improved, resulting in stronger valuations for stocks, modestly higher U.S. Treasury yields and generally lower risk premiums for non-U.S. Treasury bonds. We maintained our asset allocation discipline of investing approximately 15% of our portfolio in equities and 85% in fixed income securities. Both asset classes produced positive total returns, with stocks rebounding sharply. We kept our exposure to interest rate risk low and our credit quality high. During the year, our fixed income portfolio duration ranged from just under 3 years to 3.3 years at the end of 2003 and our weighted average credit rating ranged from AA to AA+. Substantial cash flow from operations and positive investment returns contributed to strong portfolio growth. We have increased the rigor of our portfolio analytics and plan to upgrade our ability to measure portfolio exposures.

We feel well positioned for the coming year. With the interest rates low on all fixed income sectors, we continue to like our short duration, high quality investment strategy. We continue to believe that the underwriting business remains the most attractive place to invest our capital.

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