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Progressive's 2016 expansion driven by agency auto resurgence

Total personal auto policies in force at Progressive Corp. expanded at their fastest annual rate in six years in 2016 as the steady growth in policy count in the agency channel complemented characteristically strong, albeit slightly lower, direct auto volumes.

Agency auto policies in force increased 6.5% year over year to nearly 5.05 million in December 2016, marking the strongest rate of growth in that metric in the final month of a calendar year since 2004. The year-over-year growth rate in direct auto policies in force slipped to 8.8% in December 2016 from 9.1% in December 2015. All told, Progressive had 10.39 million personal auto policies in force in December 2016, up 7.7% from the year-earlier month.

The company's total personal auto policy count had increased 5% or less in each of the previous five Decembers. The year-over-year growth of 7.9% in December 2010 represented the only other time in the past decade that Progressive achieved growth in personal auto policies in force of 5.5% or more year over year in the final month of a year.

The fastest rate of growth in agency auto policies in force in the final month of a calendar year between 2006 and 2015 had been 4.2% in December 2010. Within that 10-year period, agency auto December policy counts had declined year over year on four occasions.

Progressive's agency channel expansion remained a highlight of the company's monthly results throughout 2016. Then-CEO Glenn Renwick observed in his letter to shareholders in the 2015 annual report that the business had "found a higher gear" during the second half of that year after he had lamented that its 2014 results had been "flat-out disappointing."

Policy count in that channel increased on a sequential basis during all 12 months of 2016. The 6.5% year-over-year growth rate in December 2016, in addition to its favorable comparison to the previous 11 Decembers, represented the fastest expansion the company's agency auto policy count experienced in any month since August 2005.

The direct auto business faced a tougher comparison, as the December 2015 growth rate remains the highest Progressive achieved through that channel in the last month of a calendar year since 2010. But the 8.8% year-over-year growth rate was the slowest the direct auto business had experienced in any month since September 2015 as policy counts declined sequentially two times in the past four months, including 0.2% in December 2016. Direct auto policy counts had increased sequentially for 24 consecutive months through August 2016.

Progressive also achieved historically noteworthy levels of expansion in the auto business in terms of written premium.

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Total personal vehicle net premiums written of $19.82 billion in 2016 marked an increase of nearly 12% from 2015. A review of trailing-12-month total personal vehicle net premiums written from July 2011 through the present finds that the measure of business volume had not expanded at a double-digit pace on a percentage basis during that stretch prior to December 2016.

Growth rates on a quarterly basis accelerated throughout the year, rising to nearly 15.8% in the the fourth quarter of 2016 from 9.9% in the first quarter of 2016. From the first quarter of 2011 through the third quarter of 2016, the year-over-year growth rate in total personal vehicle net premiums written had topped out at 13.5% in the fourth quarter of 2014.

Not only did Progressive achieve historically strong expansion, it did so while hitting its goal to grow as fast as possible while maintaining a combined ratio of 96% or better. The full-year combined ratio for the agency and direct vehicle businesses of 95% and 95.6%, respectively, represented increases from 92.2% and 95.1% in 2015, but stayed below 96% with room to spare. On a companywide basis, including the commercial lines and property businesses, Progressive's 2016 combined ratio was 95.1%, up from 92.5% in 2015.

Progressive's ability to attain its targeted underwriting margins attracted heightened scrutiny through 2016 as Tricia Griffith succeeded Renwick as CEO at midyear and several of its segments posted monthly combined ratios above 96%.

The agency business reported combined ratios in excess of 96% for five of the 12 months in 2016 after it last did so in a single month in June 2014. The direct channel began 2016 by posting combined ratios north of 96% in seven of the first eight months. The commercial lines business raised eyebrows by reporting monthly combined ratios in excess of 102% in June 2016 and August 2016 after its combined ratio only topped 90% during a single month of 2015.

Although Progressive's companywide combined ratio increased year over year during the fourth quarter of 2016 to 92.7% from 92%, its ability to achieve underwriting margins in the three major auto businesses (direct, agency and commercial lines) that were well within the 96% target in both November and December 2016 may serve to allay any concerns that might have arisen in the aftermath of the struggles the agency auto business of Travelers Cos. Inc. experienced to close out the year.