Overview | Financial Condition | Results of Operations | Critical Accounting Policies

The Progressive Corporation and Subsidiaries

Management’s Discussion and Analysis of Financial Condition and Results of Operations

2006 1st Quarter


Overview For the first quarter 2006, The Progressive Corporation’s insurance subsidiaries generated strong profitability and experienced slower growth. On a companywide basis, our combined ratio was 85.2 for the quarter, and net premiums written increased 2% over the same period last year. For the first quarter 2006, net income was $436.6 million, or $2.21 per share.

Current market conditions, where rates are stable or decreasing, continue to influence our growth rates. Premium growth can be explained by some combination of new business applications, premium per policy and retention. During the first quarter 2006, new business applications were down 8% in our Personal Lines businesses, but up 10% in Commercial Auto. The industry is continuing to experience “soft market” conditions as explained in the Results of Operations section. The decrease in new personal auto applications was the most significant contributor to lower growth rates during the quarter. The increase in renewal applications remained relatively strong during the first quarter 2006, as compared to the same period last year. In addition, premium per policy was down on both new and renewal business compared to prior year levels. Policy life expectancy, which is one measure of retention, lengthened since the end of 2005, but is down as compared to the first quarter last year in most of our Direct auto and Commercial Auto tiers, and up for Drive auto. Companywide policies in force grew 7%. We continue to believe our market response is the best balanced course of action for us and that we are on track in executing our strategic agenda, as discussed in the 2005 Annual Report to Shareholders.

Profitability remains very strong for each reporting segment. On a companywide basis, the combined ratio is very comparable to the first quarter 2005, although we had expected our loss cost trends to begin pushing our underwriting margins closer to our long-term goal of a calendar year 96 combined ratio. We are continuing to experience reduced accident frequency trends that have characterized the auto insurance industry for some time. Severity trends, while increasing, were unremarkable for the quarter. Our strong underwriting margins in the first quarter also benefited from 3.0 points of favorable reserve development. This favorable development reflects both actuarial adjustments, as well as other favorable development (e.g., claims settling for less than reserved).

During the quarter, we expanded our coverage in the New Jersey personal lines market by offering our motorcycle and specialized boat insurance through both the Drive and Direct channels.

We have made no substantial changes in the allocation of our investment portfolio during the quarter. Our investment portfolio produced a fully taxable equivalent total return of 1.0%, with positive total returns for the quarter in both fixed-income securities and common stocks. We continued to keep our credit quality high and exposure to interest rate risk low. At March 31, 2006, the fixed-income portfolio duration was 3.1 years with a weighted average credit quality of AA.

 

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See Archived Version:
Management’s Discussion and Analysis of Financial Condition and Results of Operations, 2005 Annual Report