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Progressive poised to widen commercial auto leadership with rapid Q3 growth

Progressive Corp.'s rapid return to double-digit rates of commercial lines premium growth begs a number of questions about the company's competitive position and the direction of the market as a whole.

The company, which is already the No. 1 U.S. commercial auto insurer, might be taking additional share from competitors, some of which have grown more cautions due to past profitability challenges. Or its book could be particularly well-positioned to benefit from dramatic changes in underlying consumer demand for many commercial auto insureds. Perhaps it is a combination of the two.

The company's latest earnings release shows nearly 36% growth in commercial lines net premiums written in September, one month after the segment produced outsized expansion of 48.8%. For the third quarter, S&P Global Market Intelligence calculates that the company's commercial lines net premiums written surged by more than 33.6%, the segment's largest increase in a fiscal quarter since the three-month period ended March 31, 2018. Its year-over-year rates of change, as calculated by S&P Global Market Intelligence using monthly earnings data, were an increase of just over 1% in the second quarter and a decrease of 1.8% in the first quarter.

Progressive's monthly premium volumes are subject to calendar-related noise. The most recent release included two days of fiscal October, for example, potentially conferring somewhat of an artificial boost to the September and third-quarter trends. So trailing-12-month results may offer a more complete picture of trends in business volume.

On that basis, commercial lines net premiums written increased by 15.5% through September. Only two months prior, the trailing-12-month growth rate had fallen to only 2.4%. Both comparisons suffered from Progressive's March recognition of a $110.5 million premium reduction in its transportation network company businesses, reflecting a decrease in actual miles driven during the month and a revised estimate of the miles to be driven during the remainder of the policy terms. When excluding that one-time item, Progressive's trailing-12-month growth rates in the commercial lines would have been 17.9% in September and 4.7% in July.

For the first nine months of 2020, the premium growth rate was 11.2%, or 14.3% when normalizing for the one-time transportation network company item.

Progressive's commercial lines results include auto-related primary liability and physical damage insurance, as well as general liability and property insurance, predominantly for small businesses.

Statutory results for the company's U.S. property and casualty subsidiaries suggest that commercial auto represents the lion's share of the premium writings. While quarterly data does not distinguish between personal and commercial auto physical damage business, commercial auto accounted for 85.2% of Progressive's commercial lines writings in 2019. The company's commercial multiperil and other liability direct premiums written increased by 21.4% in the second quarter to $71.8 million as compared with commercial auto liability premium volume for that period of $865.9 million.

Its statutory-basis commercial auto liability premiums increased by only 0.1% in the second quarter, but that was well in excess of the 6.6% decline posted by the rest of the industry on a combined basis. Results among the top 10 commercial auto liability writers varied widely during the period, from a drop of 39.5% at Berkshire Hathaway Inc. to an increase of 17.5% at American International Group Inc. Berkshire Hathaway companies extended COVID-19 premium credits to their biBERK Insurance Services small business customers, but those credits were not nearly as ubiquitous around the industry in commercial auto as they were in personal auto. Commercial auto business has also been subject to broad-based rate increases as many companies seek to address poor underwriting results in that line.

Macroeconomic trends during the pandemic have impacted commercial enterprises in vastly different ways, particularly in light of dramatic changes in consumer behavior and the implementation of governmental restrictions on certain activities.

Against that backdrop, Progressive observed "substantial growth" in the for-hire trucking business in September due to greater demand for shipping services. The insurer also said its transportation network company business grew net premiums written by 29.5% to $114 million.

Growth rates in premium volume continued to exceed expansion in policy counts. Progressive reported approximately 803,900 commercial lines policies in force in September, up 7.4% from a year earlier. The pace of expansion has remained within a relatively tight range of between 5.5% and 8.7% on a month-to-month basis for almost the past three years.

All the while, underwriting results have remained strong in Progressive's commercial lines business. The September commercial lines combined ratio of 85.5% marked the seventh time in the past 10 months that the figure was below 90%. The company achieved the same feat 20 times in the past 33 months during what has otherwise been a historically challenging time for commercial auto results across the industry.

For the first nine months of 2020, Progressive's commercial lines combined ratio fell to 87.3% from 88.7% in the year-earlier period.

That result suggests further room for expansion at a time in which pandemic-related behavioral shifts appear unlikely to change materially in the near term.