Progressive Corp

NYSE:PGR

Earnings Call Transcript 2019-Q4

[Operator]

Welcome to The Progressive Corporation's Fourth Quarter Investor Event. The Company will not make detailed comments related to quarterly results in addition to those provided in its annual report on Form 10-K and the letter to shareholders, which have been posted to the Company's website. And we'll use this event to respond to questions after a prepared presentation by the Company.

The event is available via a moderated conference call line and a live webcast with a brief delay. Webcast participants will be able to view the presentation slides live or download them from the webcast site. Participants on the phone can access the slides from the Event page at investors.progressive.com.

In the event, we encounter any technical difficulties with the webcast transmission, webcast participants can connect through the conference call line. The dial-in information and passcode are available on the Events page at investors.progressive.com.

Acting as moderator for the event will be Julia Hornack. At this time, I will turn the event over to Ms. Hornack.

[Julia Hornack, Investor Relations]

Thank you, Jason, and good morning. Today, we will begin with a presentation about Progressive Home business. Our presentation will be followed by Q&A with our CEO, Tricia Griffith; and our CFO, John Sauerland. Our Chief Investment Officer, Jonathan Bauer will also join us for Q&A by phone.

This event is scheduled to last 90 minutes. As always, discussions in this event may include forward-looking statements. These statements are based on management's current expectations and are subject to many risks and uncertainties that could cause actual events and results to differ materially from those discussed during the event.

Additional information concerning those risks and uncertainties is available on our 2018 annual report on Form 10-K, where you will find discussions of the risk factors affecting our businesses, safe harbor statements related to forward-looking statements and other discussions of the challenges we face. These documents can be found via the Investors page of our website, investors.progressive.com.

It is now my pleasure to introduce our CEO, Tricia Griffith.

[Tricia Griffith, Chief Executive Officer]

Good morning and welcome to Progressive's fourth quarter webcast. We wrapped up 2019 with another banner quarter and banner year. We're very excited to start 2020 and obviously you've seen in January's results. So, we continue to be really excited about our opportunities around growth and profitability.

As Julia said, today is about property. And so, we're very excited to tell our story both where we're come from and where we're going. Before I get into that about three quick items. The first one, we heard you. Many of you asked for us against the loss ratios associated with catastrophes.

And as you'll see the January earnings, we started to do that for each line coverage, so hopefully that will be more transparent for all of you to understand the effect of our underlying loss ratios on any given month with any given catastrophe, especially in the more volatile lines hover just like properties.

Second, as you likely read in the 10-K, Progressive and minority stakeholders an ARX decided to conclude the acquisition a year early. So we're spending 242 million to acquire the remaining shares of ARX. And we will close that, if all things go well, which we expect that to happen in 2020, April of 2020 versus 2021.

I was talking to Jay Pratt right before this, and he said, he had so many e-mails from people at Progressive Home saying didn't this already happen. So, this is really something where we've been dating forever. People assumed we're married let's just get it done early and we're really excited to move forward and really execute on our plans.

And then the third item, which I'm sad about, but happy for her and happy for Progressive is Julia Hornack has decided to take her talents down to St. Pete with Progressive Home. All of you gotten to know her very well over the years. She is really our Investor Relations Guru and she's filled a lot of your questions over the years, and we're going to miss her.

But we're excited for her in her next stage of her career. She's been a controller. She's been a product manager. And now she's moving on to work on specialty products. Vendor management and some process management. Again, we're sorry to lose her from here, but so excited for Progressive. Congratulations, Julia.

[Julia Hornack, Investor Relations]

Thanks, Tricia. Thanks a lot. And to all of our shareholders, portfolio managers and analysts, it's really been a pleasure getting to know you. And to do my best to represent Progressive in this and the facts that we provide in all of our public disclosures. It's been a pleasure serving our executive team. It's truly extraordinary and a wonderful partner, our wonderful partners.

And I'm really excited to take my talent to St. Pete. Hopefully, I'm travelling back to Cleveland quite a bit to see my friends here, but I look forward to making friends with all my extraordinary colleagues founded on in St. Petersburg. So thank you.

[Tricia Griffith, Chief Executive Officer]

I imagine you will be very diligent when you come to Cleveland versus what you say and in Saint Pete.

[Julia Hornack, Investor Relations]

Yes, same thing.

[Tricia Griffith, Chief Executive Officer]

So I'll visit you in the winter.

[Julia Hornack, Investor Relations]

Exactly, exactly. Yes, great.

[Tricia Griffith, Chief Executive Officer]

Let's get started. So, we changed the vision statement last year, and usually when you change the statement two words doesn't really make a difference. This really did make a difference. And as we started to think about a new vision statement, we started to think about how many bundle customers we had and so home fit right in there.

But as we stepped back and thought about being consumer's number one choice, we really thought about why don't we have the word agents in there and this actually came from Heather Day because our collective consumers go into agencies and we want our agents to think of us first in each of their agencies.

In fact, 60% of our business when you look at commercial lines and personal lines come from the agency channel. I'm the agency customer myself, I wrote in one of the quarterly letters last year about, how important this channel has been for us, and especially going forward. So for us, this key door is one change is really significant for our growth. In fact, recently I have the opportunity to do a fireside chat at the Big "I" with the CEO, Bob Rusbuldt.

The Big "I" is national alliance of about a 0.25 million businesses to sell auto insurance products or insurance products, I should say. And I talked with his board, which have representatives for each day. And really, I told them about how important they are to us and really wanted to solidify our relationship and know that we want to get inside the hearts and minds of all of our agents and invest in them, and think about the future of our collective customer. So that word is very important.

The Home word made sense because we believe in a dual channel strategy one of our pillars is to have broad covers. So, we want to be where when and how customers want to shop for home insurance as well as auto insurance and others. So whether it's any agency channel through our Progressive advantage agency or HQX, we want to be there. So, the vision statement changes two words that pretty significant.

I shared this chart with you last quarter really to talk about the return on equity, and we looked at a 5, 10 and 20 year time frame with Progressive compared to the S&P 500 and the S&P P&C index. And we outpaced in all of those years, both of those industries, and we're really proud of that fact. What I also said was that under leveraged capital, we would return to shareholders, either in stock purchases or dividends, and 2019 was no different.

This was the first year of our new dividend policy, and our board declared a variable dividend of $2.25 per common share which equated over $1.3 billion returning to shareholders. In fact, if you add in the four of quarterly $0.10 per common share fixed dividends equated to over $1.5 billion, we're returning to shareholders. And although we don't have comparisons, I'm pretty proud, very proud to say that our return on equity for 2019 was over 31% that is phenomenal. I'll obviously update you once we have a more than comparison. So, we're very proud of this.

So the question I would ask if I were an analyst or an investor would be, if given the recent struggle with profitability. Are you still glad that you had the ARX transaction? A couple of words very easily, yes, absolutely, unequivocally, all those things. I'm going to give you a couple of data points and then Heather Day will really talk about our plans. So, we're really excited about that.

So first of all, over the inception to-date period, we've grown 11% at a 96 combined ratio. So we've made money and we've grown. Do we want to grow more and have wider margins? Absolutely, but the key part of this acquisition was for us to have access to those preferred customers and the agency channel.

In 2019, we believe that 715 million of our auto premium and the agency channel we would not have had, but for having the partner home products to have that bundle preferred customer. We equate that to the nearly 5 billion in life time earn premium, a level low our 95 combined ratio. So, those are few data points to say absolutely this was meant to be.

On the more softer side which I think sometimes is lost when you have an acquisition is the culture and the people and being able to really run as fast as we can collectively together to gain market share.

As you know I want to give credit to John Auer, the former CEO of ASI -- or ARX I should say, and Glenn Renwick, the former CEO of Progressive, really starting that relationship. We have fits and starts along the way of buy, build, partner and nothing quite words. And that relationship started, we started with a 5% interest. And right away, we saw that these companies were alive.

In fact, I always smile when I got on the same team because in their first year of business, they had a plaque on their wall that said, we want to be the Progressive of homeowners insurance. And to me that just meant something was almost a foreshadowing. In addition, we knew that we wanted with this preferred customer base to be able to lengthen our auto PLEs and that has worked.

We have comparison products we both built Umbrella as an example, where we would say, Eric, this process is superior to ours. So we'll merge those together and have even a better product. I think, more importantly, and as in January, Dave Pratt started reporting into Pat Callahan, we're really starting to share resources R&D pricing to get that depth of segmentation in property like we have an auto.

I do want to thank John Sauerland for getting us to the final acquisition because he really was working on that for the last couple of years, and we're so excited to be able to wrap that up in April. But again, the values the people and the ability to really search for the great customers that we want and be able to achieve our ultimate vision is really exciting to us.

I'm going to end by just talking about something that's probably the softer side as well. But I think it's key to our culture and as a formula that I talked about in my annual letter to shareholders. The first part of the formula is, question everything. I think when you have a high tenure company like Progressive, especially at the senior levels. Sometimes you can be just surgically focused in growing. And my goodness, we could -- we've been doing that incredibly.

But partly you have to sit back and say, why do we do this? Why do we invest in this? And question things that you said we may never do. And great example is to create a homeowner's company. After we, for lack of a better word fail to do that. A decade ago, we said we would never be in the homeowners business. Well never say never because things around us changed. And we knew we wanted to evolve as a preferred company and we needed to do that. And so this is perfect.

So what I asked really everyone for about some to do, with my team does all the time is we always question and have really incredible debates to make sure that we're always thinking as this environment changes so rapidly.

The second part of the formula is to always grow mindset. And I talk about this being sort of a double entendre. For me is everyone can share about their personal growth? I actually had an interview take place last week, and the woman said to me, what do you do when you get bored? And I said, if I get bored, shame on me because there's so much out there to read to listen to podcast to do look at TED Talks to get an outside event.

And we really want all 14,000 plus Progressive people to continue to be curious and things differently because a lot of the best ideas come from the grassroots efforts. We think if we always grow ensuring the Company will grow and that said double entendre. So question everything, always grow mindset equals an enduring business.

And for us, this is going to be our legacy for all of our senior leaders for the people who come after us. And that is our job to make sure we have an enduring business for decades and decades and decades to come.

Speaking of always growth mindset, let's talk about property, both growth and profitability. So two guests today, both of whom I think you've met, Dave Pratt, who is our Property GM down in St. Pete, has been here for quite a while. His undergraduate degree from Duke is in electrical engineering and has a Harvard MBA. He came to Progressive in 1991 as the Product Manager for New York.

I can't go over to his whole resume, but he's ran marketing, product development and many, many products along the way. And we asked him to take over as a Property GM right after Hurricane Irma in 2017. And he's been down there since doing a fantastic job. He has a great story to tell.

Before that, I'd like to introduce you Heather Day. Heather has her bachelor's degree in economics from Miami. Her master's in international relations from USC. And if that wasn't enough for the always growth mindset, she got her MBA from Wharton. She also has an extensive resume started as a product manager, has worked in recreational lines.

She was our marketing leader for snapshots and most recently our preferred marketing leader rolling out our Platinum for agents, which we'll talk about a lot today. Most recently, a couple of years ago, she was part of that swap that we arranged and she is the Head of Agency and Sales Distribution.

So Heather, why don't you tell us what you've been working on?

[Heather Day, Head of Agency and Sales Distribution]

Thanks, Tricia. So I will echo Tricia and reinforce that Progressive continues to invest in the independent agent channel. We recognized the value that agents provide to consumers that are looking for both products depth, and local professional advice. So our commitment to working with independent agents has been long standing, but it lines up well with recent market research and trends.

The graph that you see on the left is from J.D. Power, and shows that over the last 5 years, independent agents have made steady gains in purchase satisfaction compared to captive agents, or exclusive agencies J.D. Power would call them. The satisfaction levels today are 20 points higher and what they found when they were digging deeper it was the preference for flexible product offers that really drove the largest performance gap amongst these channels. And this area of successful product offers is a place where independent agents thrive based on their ability to place clients among several different brands, compared to a captivate agents that simply lacks that flexibility.

So this change in purchase satisfaction correlates to market trends. There was a parallel shift in market share beginning in 2015, 2016. A time when most major carriers were taking rate increases. Consumers started purchasing more in the independent agent and captive channels where price comparisons could be made most easily. Direct carriers may gain in personalized market share, independent agents carriers held steady while captive carriers gave up share.

Now Progressive has steadily grown our own share in the independent agent channel. And that's accelerating in recent years as we have had the home to the lineup. And if we look back at our recent growth, we were clearly well positioned heading into a hard market. And our overall agency results were boosted by our product segmentation and pricing. Progressive was steady. We were profitable and competitive during the period where many other carriers were taking larger rate increases.

So this provided an excellent opportunity to make headway on those auto and home bundles. The compelling auto position maybe overall bundle more competitive, and the demonstrated commitment to property with the purchase of ARX in 2015 and then the subsequent launch of our Platinum program really gave our agents a reason to believe that they could partner with Progressive as a preferred bundle carrier. And indeed as a sure of our new business, bundles have grown fivefold over this period.

Looking at our independent agent share across these two products. In private passenger auto, we have gained two market points each year in 2016, 2017 and 2018, which could afford a 20 point share in 2018. And then on the home side Progressive has moved into the number 6 spot with 3.5% of the market in 2018. Now despite the strong market position, we continue to see upside and the whole product is key to that. Expansion of our addressable markets was really core to the destination era strategy. And I want to reinforce how critical that expansion is for our platinum agency.

The table you see breaks down auto and home market premiums across channels by our market segments. So for a quick refresher on these market segments, you've got Sam's looking for auto insurance as needed, very price sensitive, they tend to be more nonstandard. Your Dianes come to us with prior insurance, more financially responsible, but not homeowners. Wright, these are homeowners that purchase home or auto insurance from us, but they do not bundle and then finally we have the Robinsons. These are typically the most preferred customers, they bundle home and auto and they tend to look to agents for ease and confidence.

So not surprisingly, due to our legacy isn't bottom line auto carrier, we tend to over index on the Sam, the Diane, and the Wrights. And despite our steady growth and bundles, we still have just about 2% of the independent agent Robinson market. So this is lots of room to grow in a $59 billion market, and disruption in the captive market is putting more of that 97 billion of captive bundle in play as well.

And while there is still lots of upside and work ahead of us, we are pleased with our results today. We have continued our momentum in writing bundles with agents with 27% growth in 2019. A part of that growth comes from the expansion of our platinum program, which at year-end 2019 was at 3,700 agents. However, platinum will continue to be exclusive going forward. It is available only to those agents that have strong potential to write preferred bundles, and strong commitment to writing those bundles with Progressive.

So scarcity will remain part of the platinum appeal. And we currently have less than 10% of Progressive agents that are platinum. So we're going to manage that number carefully as we go forward with continued emphasis on profitable growth as key to an appointment. And we also see platinum working as it drives consideration of the home and auto bundle and our preferred auto more generally.

So I'm going to reprise the graph that we share during prior Investor Relations calls updated year through 2019. This graph compares two cohorts of agents, one group and both of these agents -- both of these groups of agents had Progressive Home back in 2015. One group was selected for platinum and the other remained in the more general Progressive Home programs.

Of course, if we go back to the start of 2015, the more productive agents were ultimately invited to join platinum. So there is that initial Delta that we see. However, after the launch of platinum, that gap starts to widen. The momentum was initially slow as we integrated the sales teams. And we looked for Platinum program infrastructure to get built out.

But what we're now seeing is that in that multiplier effect of various initiatives that are starting to come together. So maintaining that original cohort of agents, so that we can actually compare the same-store sales, what we see with the solid orange line for platinum, versus the solid blue line for those non-platinum property agents, is that platinum agents are now 4.5 times more likely to bundle their home and auto.

And then if I had preferred auto growth, these are the dashed lines that are now on the graph. You'll notice that both sets of agents have increased their preferred auto volume overtime. However, once again, those Platinum agents are again producing about four times more volume per agency. So the gap between these platinum and non-Platinum lines is really that time difference. And what we see when we're looking back from 2019, is that this list has held over time.

And the platinum program itself is really about a comprehensive approach. So I'll speak a little bit more about partnering with agents both in terms of enhanced compensation, as well as making it easy for them to write bundles, and to leverage a strong brand. And then I'll hand off to Dave, who will share how we are positioning property for long-term success with a stable competitive offering. All of this comes together and builds our agents' confidence in our ability to serve your customers.

So on the compensation front, we recognize that we would have to think differently, and increase compensation in order to offer a compelling alternative to preferred carriers in this space. We laid out what we call past a partnership. It allows us to compensate agents for their increased commitment while maintaining our overall low-cost position.

So as an example of how this works, I'd like to share the story of G&G Independent Insurance. This is an agency with a smart leadership team that I had the opportunity to get to know last year. G&G joined Progressive in 2014. This was the same year that this agency opened their office in Fayetteville, Arkansas, and in the beginning, they wrote mostly non-standard auto with Progressive and when we rolled out our national commission schedule as part of past the partnership, they started off in the growth tier.

A tier that we provide agents with an opportunity to getting started to really start growing your books with Progressive. However G&G's is overall agency strategy was more bundle focus, and they had a lot of preferred customers. So they were able to earn higher commissions as they wrote more preferred auto with us. Our Progressive sales representative Ben Burleson developed a strong relationship with a team at G&G. Ben recognized that this agency had a larger bundle opportunity and was a good fit for the platinum program.

They moved to platinum by May of 2018, making them one of the first 12 platinum agents that we had in Arkansas. With this new level of partnership G&G was at the investment tier, earning higher personal auto Commission's especially for that more preferred auto, unlocking the opportunity to earn some of our highest commissions available in the bundle say write, and they also gained access to annual policies and other marketing benefits. And because they had moved on to the Platinum path, they were also eligible to earn a performance bonus that rewards profitable growth in bundles, as well as on their entire personalized book.

G&G quickly moved up a level with platinum, earning higher renewal commission on their bundles and a cash reward. And then by 2019 G&G was had Progressive as their number two carrier within their offices, gaining share quickly. So the agency see qualified for that Platinum Blue level, which earned it yet another cash award for reaching that goal in less than three years. And this May we will celebrate G&G's Platinum blue level achievement with a VIP trip. And they now have their sights set on becoming one of our Platinum 25 agents.

So G&G moved from being a largely non-standard book with Progressive to becoming a platinum blue level partner with a pervert book, a bundle business and written premium that has grown tenfold. With this story highlights is an outstanding agency. But the scenes here play out again and again across our agents. It really underscores the power of providing different levels of partnership with compensation that reflects their commitment, as well as transparent and clear goals.

So these programs that we have in place now allow us to maintain our cost advantage as a broad distribution carrier, while still using targeted compensation to ensure that we encourage and that we recognize increase consideration with partner agents. So in other part of the Platinum promises ease of use which is really part of our core value proposition for agents. We have carried that over to the preferred bundle space to our portfolio quoting platform. Portfolio allows agents to select multiple products to quote whether simultaneously or to add product during the interview.

There's prefilled available for customer, vehicle and property information across the products that are being quoted. In the portfolio summary page provides agents in their customers with an overview of their premium, their bundled savings and applied discounts. So agents can add or remove a product with the click, really speeding up that sales process. Portfolio is also a win for us internally, as it was an early example of strong teamwork and deepening integration across our auto and property businesses.

We launched portfolio in September of 2018 and at the end of last year, we were live in 27 states representing 73% of quote volume, as well as almost 120,000 users. We are seeing the expected list in our auto conversion. The list in our properties conversion actually surpassing expectations, which seems to be a result of both better representation at discounts, as well as easier access to the property products through this new interface.

And what I personally find most encouraging is that the upgrades to the underlying architecture of the platform really allow us to better test and learn our way to continuous improvements as we respond to our agents evolving needs and their feedback. Now, being a brand with a national presence that customers want or ask for is cited in our internal research as a top reason that agents look to Progressive to help grow their business.

So we want to ensure that agents can leverage that brand for both our home and their bundle offerings. We know the power of the Progressive brand extensor homeowners. Research confirms readiness to consider purchasing for Progressive Homeowners product, especially amongst those younger homeowners. And we find that featuring home is the message performs well. Our media has shifted to a greater emphasis on home as part of the overall message mix. That in turn drives increased consumer awareness of the Progressive Home product, which makes the brand and even more powerful tool for our agents.

So we're leveraging that Progressive brand and our Platinum agent marketing collateral, making it easier for them to showcase both Brexit product with our co-branded materials across print, digital as well as mass media. And when we look at the overall program, Platinum is emerging as a driver for future commitment. So in a blind survey that was administered by a third-party agents indicated that Progressive is one of the companies where they placed their best customers 72% of the time, but when we put that data to focus in on agents that have access to our home product, that response jumped by 10 points.

Now, we have room to improve. We are still coming up short against two of the largest long standing preferred carriers in the market. But when we look at this from another angle, and we asked agents where they are planning to increase business, Progressive outperforms, even when compared to those long standing preferred carriers. And once again, there is a stronger result with agents that have our home product coming in at almost 80% intent to increase placement.

So, we feel good about things early years out, but we continue to learn and to look for opportunities to improve. Listening to our agents to understand their expectations and their customer's needs is critical. We do so through our agency council and an ongoing conversation with partner agents across the country. Guidance from our agents has also informed this deepening conversation across the home and the auto product teams as we evolved the bundle offering and our property product.

And I'll hand off to Dave to share more on that front.

[Dave Pratt, General Manager, Home]

Good morning. I'll begin with a very brief overview of our financial results, and then dive into some of the details. Our growth is meeting our expectations. You see, last year, our direct written premium and property grew to just over $2 billion. And we're leveraging not only the Platinum agency program that Heather just described, but Progressive brand and marketing strength in the directional.

The combined ratio improved by about four points last year, but it's still not meeting our goals and we'll talk in a lot more detail about that. So, I start with growth. I'm showing here growth in our new business deals over the last three years. The blue bar at the bottom is sales from local independent agents, and all of the growth that you see there is coming from bundles from auto and home bundles that we're writing largely through the Platinum program.

The orange bar is our direct to consumer business. That's pretty new to ARX until we're seeing very high percentage growth in the direct channel. We've almost completed the conversion from the ASI brand to Progressive Home. So those of you who ensure your home was Progressive on your most recent deck page, you saw the Progressive Home logo.

We've made investments in the quoting channels. So the portfolio program for agents that Heather described is now in 29 states. On the direct side, we're part of the home called explorer quoting platform. And we've actually built the capability to go all the way from quote to buy the policy without having to talk to an agent in 14 states as of the end of the year. And we'll continue to roll out both of those platforms in 2020.

And then the light blue bar at the top, mostly in 2018 was a fairly large book role. So one of Progressive partners in the Progressive news agency decided to opt out of that program, we worked with them to roll that book over to Progressive Home. So when you combine all of those sources of growth, we had 61% growth in 2018. Looking at 2019 without that book role in the denominator, it looks like our new sales are pretty flat. But we continue to have strong underlying growth in both agency and the direct to consumer channel.

Now as we grow outside of ASI's original things, the mix of our businesses shifting. So ASI was founded as a Florida property insurer expanded fairly quickly into the other Gulf States. So if you go back to 2006, here, Florida was about 80% of ASI's business and Texas and Louisiana made up the rest. And the light blue part of this graph is all other states. So we've -- the expansion into the rest of the country has come to the point where Florida now only accounts for about 20% of our exposures. And those expansion states now are more than half.

Now, that expansion also means that we are now exposed in a bigger way to new perils, especially winds and hail. If you look at the components of our loss ratio over the last few years, the orange part of these bars is wind and hail. The great part of the top is hurricane losses. And then the blue part at the bottom is all other perils with the property policy coverage.

So you see that all other peril section has been stable and predictable. We've been very close to our pricing expectations on the all other peril selection. Wind and hail though has gone from 10% to 15% of premium to more than 30% last year. So, really getting our hands around what our expectations would be for wind and hail costs and pricing appropriately is an important part of meeting our profit goals.

Now I'll talk in more detail later about a reinsurance program. Just sort of highlight here, how that results in differences between our direct and net results. So the lower line here shows the direct combined ratio for ASI in our Progressive Home over the years. The blue line at the top is the net result. So in the early years, ASI was seeding lot of premiums to our reinsurance partners.

We didn't have any hurricanes making landfall in those years, so we weren't seeding any losses. And so our net loss or net combined ratio was higher than the direct. In the last few years the reinsurance program has been working as intended. And in years where we've had some big hurricane losses with hurricanes Irma and Michael, the reinsurance has kept the combined ratio near 100.

Now, it's worth noting that even in these recent years where we haven't been satisfied with our results, we've been consistent with the industry. So the chart here the blue line shows our direct loss ratio each year. The gray line shows the industry but with the industry premium --state premium weighted based on the ASI and Progressive Home mix.

So, in the early years, there you see with mostly Florida premium and no hurricanes very little loss ratios, as we've expanded into other states, we should expect to see the loss ratio be higher than no storms here in Florida though it's still been, at or a little bit below the industry result.

So let me talk for a minute about what we did last year to improve profitability. And then we'll transition to our plans for this year and beyond. On the map here, the blue states as called the hail states. And so the chart on the right shows our rate increases last year. So in those hail states, we took rates up almost 9% compared to the 4% in the rest of the country. And then we also implemented some covers changes.

So the states that have the stars on them, we did two things. We started to require new customers to buy higher wind and hail deductibles and the issue there's the when fairly small hail falls on a new or well-maintained roof it really shouldn't do any damage. But that doesn't prevent roofers from aggressively marketing to our customers, suggesting that the roofer could help them get a free roof from their insurance company.

Now, it's clear that if our customer's roof is damaged, we want them to report that claim and we want to pay it as quickly as possible so we can help the customer get the repair made. But we have found that in cases where the customer's deductible is a little higher, they're less likely to submit a claim, when there's no visible damage in response to the marketing pitch from the roofer.

The other change we've made is it for roofs where the shingles are nearing the end of their useful life. We're requiring actual cash value covers for the roof. That seemed fairly small hail, if it hits a shingle that's been out in the sun for 15 or 20 years, is much more likely to crack this shingle and then that needs to be repaired or replaced. But it just doesn't make sense for us to offer full replacement cost coverage for a maintenance item on something that needs to be replaced.

And so it as the roof reaches sort of nears the end of its life, I asking people to have actual cash value coverage. And we see evidence that both of those changes will bring the loss ratio down and mitigate the need for further rate increases. Now, despite those actions in the blue states last year, we ran at 115 combined ratio compared to an 89.5 combined ratio in the rest of the country.

So, I think a natural question would be will, how can you feel confident that you have addressed this problem and you can make money consistently throughout the country? So let me talk a little bit about the tools that we use to price for these parallels. Because weather is very volatile, we can't use last year's experience as a good predictor for next year's claims, wouldn't make any sense to say, we haven't had a hurricane for 3 years, so we don't have to price anything for hurricane.

We have pretty good models for to help us understand what are likely hurricane losses will be, until recently, we only had 2 models available to predict severe convective storms. So those are the big thunderstorms that caused wind and hail. And I'm showing here the modeled prediction for what our annual average loss should be from wind and hail from those models over a 5-year period.

Here's what our actual losses look like. So, the model which is not doing a good job of helping us predicts what we should expect in terms of claims from wind and hail. Fortunately, there's a new model that has become available in the last couple of years. And as we back test at against our broker business, we feel much more comfortable with that models going to do a good job of helping us to predict what our future loss costs will be.

So model see here in the orange shows the models prediction of what our losses has been compared to that light blue bar, which is the actual that we paid. So we're now using that new model in our pricing decisions for wind and hail. So we feel much more comfortable that we will be priced accurately going forward. Now, we also want to continue to grow this business, while we work to improve the profitability. And so we are in the process of rolling out what we're calling the 4.0 version of our property product.

As we've grown outside of the gulf states, we're collecting a lot more data in the rest of the country. And we've been able to collaborate with progress this auto product R&D team and Cleveland to use their most sophisticated tools to help us get the price segmentation, where needs to be. Heather mentioned the feedback we've gotten from our Platinum agents, so that's been very helpful as well.

So, we've been able to expand eligibility in some cases, our underwriting appetite was much more restrictive than their other preferred markets. We've removed some exclusions from the contracts that were unusual in the market. And we've brought in coverage through endorsements, and so this gives me an excuse to put the picture of the German Shepherd puppy here because we used to have a fairly long list of dog breeds that were ineligible. And as we studied further, we were able to pay that back. So this little guy would now be eligible for insurance Progressive Home.

Let me talk for a minute about our reinsurance program. We maintain a very conservative reinsurance program and intend to continue that. On the catastrophe side, it's designed to provide coverage for three major hurricanes in the single year. So, on the far left, you see the coverage available for our first event in Florida.

So the way the program is structured today, we retain the first $16 million of losses from a single event. The gray part in the middle there is the Florida hurricane catastrophe fund, that's a state reinsurance farms that were required to participate in and do. And then the blue section is voluntary market reinsurance that we buy.

And then finally at the top, we have a catastrophe bonds so insurance links security. Altogether, we have coverage for an event of almost $1.8 billion in losses. Now, most of the blue section is reinstated, automatically. So if there's a big claim, we get a reinstatement. And so the middle bar there shows what our coverage look like after $1 billion event, we would still have about $1.34 billion in coverage.

And then we would even have this as a second $700 million event. As a second event, we would have remaining $640 million in coverage for a third event. And to put that in context, Hurricane Irma is the most expensive storm we've ever encountered. And our estimate of ultimate losses for Irma is less than $400 million.

So we feel good about the structure of the catastrophe program. As the business continues to grow, we expect to increase our retention at the bottom slowly, and we expect to buy even more limited at the top of the program. And we also have an aggregate reinsurance program. That's to cover the volatility in wind and hail that I described earlier. So no individual hailstorm is likely to reach that $60 million retention. But if we have a year with a lot of hailstorms, that could put pressure on our loss ratio.

In previous years, we had a program that was based on a loss ratio attachment so far loss ratio reached the attachment point we get ahead of recovery from the reinsurance. We switch that this year to an aggregate catastrophe excess of loss program. So in this year's program, we retain the first $375 million of catastrophe losses, and then we have coverage for up to $200 million above that. So if you have a really bad wind and hail year with lots of activity, that aggregate program would kick in and we have a recovery.

It's important to note that that change may result in a change to the monthly volatility that you see in our property results. So what we're showing here, the blue line shows the property combined ratio that Progressive reported each month in 2019. The orange line shows what we would have reported, if we didn't have that loss ratio based aggregate reinsurance. So you see in January, it was a very like weather month, the combined ratio was below 80. So there's no need for aggregate recovery.

In February was as a busier weather month. The combined ratio approached 120, but we hadn't yet hit that year-to-date the attachment point for the reinsurance. That changed in March. So March was, again, a busy weather month, but now we had a recovery on the reinsurance and so our reported combined ratio in March was about 100.

And then each month through the rest of the year, the recovery would go up or down based on the weather. So you see in April, relatively quiet. We actually reversed some of that recovery, but then in May and June busier months. So again, we -- recovery we had in the reinsurance increase, but our reported combined ratio was pretty stable.

With this year's program, we won't have a recovery on that aggregate unless we get to $375 million in total catastrophe losses. So in the early months of the years, we have a month where there's a lot of weather will report a higher combined ratio, but we expect the reinsurance to be available if needed the full year results are difficult.

So, looking in with just a very brief description of our priorities for the property business for the year, job number one is improving profitability. We've talked a lot about that. The second is a focus on our people and culture. Because of the fast growth in this business over the last three years, we've gone from less than 600 people working in the property business to more than 1200 people. So it's really important that we spent a lot of effort on coaching and career development so that those people are effective in their jobs, enjoy their jobs and want to stay with Progressive for a long time.

We have opportunities to improve processes as we grow to become more efficient and reduce cost per policy. I don't know if you noticed that on the first page, our expense ratio was down by more than 2 points in 2019. And we've seen some further opportunity for efficiency gains. We wouldn't continue to make it easy for agents and customers to quote and buy our policies and the investments in portfolio quoting and home quote explorer by or can be there.

And then finally, we want to work to improve the customer experience. And the focus here is on those bundled customers. So there are instances today where, for example, the billing experience is different on your auto policy compared to your home policy. And we want to align those experiences so that the bundled customer has the same experience across all of our products. And we think that'll result in even better customer retention will keep those bundled customers for a long time.

So with that, we will pause just briefly and we'll give Tricia and John an opportunity to come up for questions. Thank you.

[Julia Hornack, Investor Relations]

Thanks Dave. [Operator Instructions] And before I kick it over to Jason to take our first question from the conference call line, there's been a lot of discussion in the property casualty industry about the effects of this concept of social inflation. And so, Tricia and John, I thought you might want to start off by talking about how that concept of social inflation can affect, particularly bodily injury, severity and in PIP trends.

[Tricia Griffith, Chief Executive Officer]

It's a great. I'll take a stab at that on both the personal auto side and commercial line side, and then John, if you can weigh in on anything you forgot or anything that that's important to note. And then why don't I have Gary Traicoff, our Chief Actuary, let come up and talk about the reserve part of it, I think that's a really important part.

So, first and foremost, in the personal auto side, frequency is down about 3% and if you compare it to the last data point, we have for the competition, it sound lower because it's flattening out. It's was about zero for the competition in quarter three. That is the 12th consecutive quarter that our frequency has been down. Again, we talked about trying to attribute certain things to frequency, it's really difficult. And we would say that our mix shift to more preferred customers seems to be a part of it. But again, it's really hard to attribute any one particular thing we'll watch that very closely.

On the severity side, we're about a point different from the industry at this juncture. The typical reasons in collision and property damage component parts, actually labor rates have been increasing and total losses. We're having more frequent total loss. So those are continuing the trends we've talked about for several quarters. On the BI severity part, which we take more seriously because they have a slightly longer tails and I talked a lot internally about injuries are not like fine line, they do not to get better with age. So, we really tried to make sure we have the right file at the right rep at the right time.

So here's what I would say at this point. We see the BI trends, flattening out somewhat. At this point in time again, this is changing and if you're talking to some of our competition, I think we're all watching this very closely. So it is flattening out. But our BI trends are up and if you compare our incurred trends to the paid of industry, we're about a 0.5 difference, which we would assess to actuarial increases or reserve increases.

We're seeing the same aggressiveness. We think about the social installation, buzzword that Julie talked about. We're seeing aggressive attorneys. We're seeing aggressive attorneys early on in the files. And so that's really an important piece. We call it like day zero before or right after we get the claim reported. We see attorney evaporate up about 2% year-over-year in the personal auto side. And we're looking at different cohorts of coverage limits. And we're seeing about mid-single-digits in every cohort and they're slightly different depending on it. So think of 5,100, 2,550 et cetera.

And this is an anecdotal piece, but some of our CRM reps and said that they are getting calls from someone other than the names insured to assess what the limits are. And I remember being in a claims range for 15 years and getting those calls oftentimes they were from plaintiffs attorneys. Again, this is anecdotal, but am I going to take my more interested take a file that says 5,100, then in 2,555. So again, those are just some things are anecdotal.

A new piece of information that we have from a vendor that we work with shows that attorney media spend is up 10% and when you compare the fourth quarter of 2019 to the fourth quarter 2018. Again, I could have anecdotally told you that from my travels and you turn on the TV in any state you go to look at billboards. So we think that that's getting more aggressive. So we have to watch that really carefully. I assume that many of you will ask, because I referenced a handful of states a couple of quarters ago that we're watching closely.

So, there's about 5 states that we've been watching from BI severities trend. 4 out of 5 of those have shown a decline in severity in the fourth quarter compared to full year 2019. But again, 3 out of 5 of those states are still higher than countrywide. So we're watching closely right now and it appears to be flattening but again, that can change at any given time. We are very surgical in pricing each line coverage each day channel product, all those things will keep on top of that, clearly our margins we believe are really strong and we believe we're conservative from the reserving side.

So on the commercial side, we are down 4% from a frequency perspective, up about 19% from a severity perspective and about a couple of those points are reserving because it's actuarial strengthening. Here's what I would step back and say one thing. Every BMT in our commercial lines organization was at or below our targets. So very successful 2019 and into January, we were sub 90 combined ratio. So we are very strong on the commercial side.

We also are no stranger to being able to react a trend. So if you recall, in 2016, we bumped up against our 96 and we immediately when you part of that was commercial, we immediately increased rates, knowing it takes a little bit longer because the majority of those policies are annual, still continue to take rate in 2017 and 2018. 2019, we saw the competition was also taking rate during those time frames, but in the first half, that started to diminish a little bit, it's picked up at the latter half of 2019.

I would say for Progressive we took less than a point of 1.5% rate increase in 2019. We will likely be a little bit more aggressive in 2020 as we see specific things and last trends increase. And part of our, in terms of the 17% or 19% on BI trend. Part of that, too, we are having a mix shift to our four higher transportations, which are higher severity. So it's one of the keys.

I talked to John Barbagallo. He sees three states very specifically where we see loss trends accelerating. And so we either already have smiled or in slaves rate increases and in addition to that we have three states, those things three states, we have multiple variations of underwriting restrictions.

So as an example, we have a 9.6% rate increase going in May in California, we'll watch those closely. And again, when we think growth and profitability, if you have to make a choice which we never want to, it's always going to be profit. So want to show really, really great at our solid results in commercial, especially compared to the industry. We will get on anything we don't see quickly, and make sure that we meet our profit targets. Do you want to add anything?

[John Sauerland, Chief Financial Officer]

We're going to ask Gary to come on and talk about reserves. I'll fill in well he makes his way with two thoughts. So one, it's important to take a little step back when you're thinking about trends, frequency and severity, and look at the longer term trends. We think in aggregate our severity trends are normally very consistent with the industry and frequency trends, we actually have been enjoying bigger drops in frequency more recently over the past three years actually, than the competition.

Tricia mentioned some of that is due to writing more preferred mix of business. I would offer we also believe that is due to more robust underwriting we put in our upfront process in binding new business. We think that's had a lot of great outcomes in terms of avoiding risks whose intent is not to ensure but to prefer.

So longer term severity sort of where the industry is frequency better than the industry is it also offer where Tricia was mentioning on the commercial side matching price risk, we are also very agile in the personalized side and was certainly continue to make sure we are matching prices that we perceive should rise and at least on the liability side due to the trends with risk as fast we can.

[Julia Hornack, Investor Relations]

Okay. What are your thoughts?

[Gary Traicoff, Chief Actuary]

Well, I think this is Gary Traicoff, Chief Actuary. Hello, everybody. Tricia and John gave a great overview and description. With respect to reserves, as you know, we developed unfavorably last year, about $232 million, which was six tenths of a point on the combined ratio. And that development was primarily related to the increasing injury severity trends that we were seeing and led to unfavorable case development.

We recognized that early in 2019. And over the course of the last three quarters, we increased reserves from actuarial changes, roughly about $60 million. So we ended up going up about $186 million during 2019. And in addition to that, our claims adjusters continue to strengthen reserves, through natural movements as well. So when we look at overall, with some the changes that we took, we know in an accident year basis are up about 12% for commercial auto year-over-year , and 6%, or personal auto that would be lost and LAE for liability, which you probably noted in the annual report. Of course, LAE is a little bit flatter. So on an indemnity side, we're a little bit north of that.

And when we think about how development is occurring recently, last year, over the last two quarters, we did develop slightly unfavorably about $20 million, of that $230 million that we saw come through two tenth of it was in the first half of the year, and a much smaller amount during the second half of the year. In January, we ended up developing unfavorably about $78 million, which was a little over two points on a combined ratio. In January, though the development was really related to some other areas.

We primarily developed unfavorably due to December claims that were reported in January. When we look at our injury case reserved development between personal and commercial auto combined, we actually developed slightly favorably in January. Now that's just one month. So it's hard to say that how the future will go. And I definitely can predict how we see development and for the year of the changes that we take during the year. But as you know, as the year plays out, primarily, the development we see on the injury case reserves are a main driver of what we end up seeing.

[Julia Hornack, Investor Relations]

Great, thanks, Gary.

[Gary Traicoff, Chief Actuary]

Okay. Thank you.

[Julia Hornack, Investor Relations]

So, Jason, now, can you please take the first question from the conference call line?

[Operator]

Certainly, your first question comes from the line of Mike Zaremski from Credit Suisse. Your line is open.

[Mike Zaremski, Credit Suisse]

Hey, thank you for all the details. My first question is on any potential impact from the current situation with a coronavirus. The New York Times has come out and said that they're seeing just recently ad spend fall fairly materially across the brand with [indiscernible]. Curious if you think Progressive should in the near term is or is this at this part of that? And also, are you seeing any impact maybe from your [indiscernible] drivers on lower frequencies, if people are maybe working from home? Thanks.

[Tricia Griffith, Chief Executive Officer]

Mike, that's a great question. So I'll start with ad spent. Right now, we're going to continue to spend -- this as a prime time of the year when people are buying insurance we're getting into that season. So, we'll continue to spend. That we have some flexibility in. But again, whether you drive a little bit or a lot, you still are required to have auto insurance. And so, our intentions will be to spend as long as we feel sufficient.

So again, we'll have to be nimble because all of this, as you know, is ever changing. The great question on the UBI, so with the recent death in Washington, we asked the UBI team just to take a look at UBI, vehicle miles driven or traveled by week in January and February this year, compared to the prior 2 years. We are not quite seeing a difference. And again, there's very little data, but that tells us we haven't seen it yet.

Again, now then we'll look at it weekly, we can start to see that we'll look at it across the country where we can. So we'll be able to understand pretty quickly. If you go back to something like the financial crisis, I was running planes to time and we saw frequency need drop really quickly. And so we'll have some good insight, we get our frequency data on a daily basis. So we'll under very quickly where we're at.

From a vendor perspective, we always think of the concerns around auto parts that are possibly made in China. So we got our property process team talked to all of our vendors, the percentage of always that we use on our vehicles, the percentage they get from China, et cetera. For the most part with the exception of one OE, we feel like there's low risk at this time. And even with that partner, they have inventory.

I guarantee it's always so it's like first and second order effects. So it could be that more cars are told, because you can get parts and then there's used car parts. So if we're going to keep watching that. From an internal perspective, we already have over 25% of our people working from home. We have had many team meetings. We're having a table top pandemic exercise tomorrow, I believe and then our Chief HR leader, Lori Niederst had a meeting yesterday with our Chief Medical Officer talking about the same things that most companies are talking about in terms of non essential travel and what to do if you're coming from a country that's been affected.

So, right now, we aren't seeing any effect. But again, this is such a moving target that we have a lot of data points that we're going to be looking at literally on a daily basis to understand how will it affect possibly our frequency?

[Mike Zaremski, Credit Suisse]

And lastly, just a follow-up to the actuarial comments at the end of the prepared remarks. I believe, you said that January's reserved problem was worse than I expected, it was fairly material. And are you saying that, that was mostly due to December flames? And maybe people just to make due to the holidays. And then you said in January exit was actually favorable, and for that just implies that just last year's loss ratio was worse and then forward-looking basis things looks a little bit better?

[Tricia Griffith, Chief Executive Officer]

Gary, talking about that, but partly was the December loss is like reported.

[Gary Traicoff, Chief Actuary]

Sure, sure, great question. So in January, we were about up to 78 million pretty much all of that really related to December claims that were reported in January. And we look at it throughout the year. So when we look at January claims, they come in February claims that come into March, et cetera. Some months were high, some months were low. It's really noticeable in the first month, because it's prior year coming in.

If we exclude that those late reports that came through, our development pretty much was rated right at zero. In addition to that, if we looked at just injury case reserves, which was the primary driver of the unfavorable development last year, we actually were slightly very close, but slightly favorable in January. So those claims as they paid out came in a little bit below the initial reserves we had. Again, that an indicator that that's how the year-ends up, but that's what we had in January.

[Tricia Griffith, Chief Executive Officer]

Well, Gary, over the years you've shown us that that one data point in January, and how it evolves is very different, in every year you show us a comparison of three years or four years, and so what I would say Mike is, one data point strengthen it we have sort of -- oftentimes the December late reports, but I would say we are all over this and feel good about where we're at, of course we'll react quickly or should we need to strengthen.

[John Barbagallo]

I can put it in perhaps simpler terms in combined ratio points. So, simply because we're turning the page what Gary was saying, we're going to see some losses we categorized as prior year every January. We are 2.2 points of prior year losses in January this year, last year we started out the year with 4.8 points, that was a lot higher than we normally see but as Trisha was mentioning generally speaking in January you're going to see some prior year development and the 2.2 doesn't concern us at all.

[Mike Zaremski, Credit Suisse]

Thank you.

[Tricia Griffith, Chief Executive Officer]

Okay, great. So, again maybe possibly.

[Julia Hornack, Investor Relations]

Jason, we'll take the next caller from the conference call line, please.

[Operator]

Certainly, your Next question comes from the line of Elyse Greenspan from Wells Fargo. Your line is open.

[Elyse Greenspan, Wells Fargo Securities]

Hi, yes. I was hoping, Tricia, you could provide a little bit more info on your outlook on the personal auto reading environment. It sounds like from some introductory comments that you continue having to expect on pretty modest rate movements I guess throughout the majority of your book for 2020. But has anything changed or maybe in some specific states where you're taking a little bit more rate?

[Tricia Griffith, Chief Executive Officer]

Great question, Elyse, we'll continue to look at that as it evolves. It's really hard to kind of have that crystal ball. So, we last year and most of the industry knows, some took some overarching rate decreases. People were taking a little bit of decreases. People want to start to grow a little bit. We're seeing less of that the industry is getting closer to 1% at this juncture.

We are very surgical in each stage, like we study each channel, each product, and we'll react to that as necessary. We feel really good where we're at in terms of our profit margin. But I talked to Pat Callahan, our Personal Lines leader all the time on specific states and what we need to do to strengthen it.

Again, we don't want to get behind. It's really important for us to have stable rates for our consumers. And so, we're going to take that 1% or 2% to make sure we reach our target margins. But we feel really good specifically on the direct side of the new business coming in, we have new business targets as well, and we feel really good about it at this juncture.

Again, I feel like we are really nimble when we need to be, should we need rate. But we feel good at this point and again point here point there depending on what we're seeing in specific states.

[Elyse Greenspan, Wells Fargo Securities]

Okay. And then, my second question, could you just provide an update on the small commercial side of things, you guys were kind of a rolling out some products in one state and then the expectation was to maybe expand into more state. Can you just provide an update on where those initiatives stand today and then how that's -- how you're thinking about additional steps and rollouts throughout the rest of 2020?

[Tricia Griffith, Chief Executive Officer]

Absolutely. So, in mid-2019, we rolled out Ohio, like, literally small -- five agents, trying to figure out was the product ease of use, etc., got the thumbs up, got some feedback on pricing, rolled out to Ohio and three more states in 2019. Since then we've rolled out two additional states in January, two more in February. We expect to roll out two more in March. And so total for 2020 should be in 15 states. We've bought 2,000 agents selling small business, and we are really excited about the momentum.

And so, this was something, as we thought about the three horizons, think about investing before you need to, to make sure you have that enduring business -- we started thinking about this a couple of years ago, and we're really excited actually about small business, both in the agency side and through our BusinessQuote Explorer. And we'll have the Progressive product hopefully on the BusinessQuote Explorer some time in 2020. We have many different unaffiliated carriers, partners that we work with and we continue to be able to give the small business owners what they need.

So I would say the one word about small business would be momentum. I feel really good about where we are. And actually really good about where we are with a lot of the topics that John Barbagallo and Karen Bailo went over a couple of quarters ago. We rolled out our small fleet program to 49 states, and the conversion has increased fourfold. Obviously, our relationship with both Uber and Lyft in the TNC has increased.

So we're excited about that. Just like across the board, I feel great. Our Smart Haul program is showing great conversion -- great take rate, I should say. So that's our UBI. In commercial, and in fact on the agency side, where the customer is eligible, the take rate is 25%. So I would say commercials firing on all cylinders, small business and everywhere. Do you agree?

[John Barbagallo]

Yes, absolutely. And I share that excitement. Just for clarification, for all viewers, when we're talking about the rollout here, we're talking about business owners' policies in general liability. So, as Tricia mentioned, we got in the four states in 2019, we've elevated two year-to-date, and we expect to actually add about 15 states for this year, so ending the year maybe around a little over 20 states.

And again, this is intended to vastly broaden our addressable market for commercial lines. We've been number one in commercial auto for a number of years now, and this opens up a marketplace that is probably 2 times, perhaps even 3 times the size of commercial auto for us. So very excited about that growth, as well as the plethora of other great things we have going on in commercial lines.

[Tricia Griffith, Chief Executive Officer]

Yes. When you think about bundle customer with BOP NGL, and then you think across our channels as well, there are many small business owners that actually also have our auto and home. So as we think about that we really think about the household economics going forward. That's really what's exciting as well. Thanks, Elyse.

[Operator]

Your next question comes from the line of Michael Phillips from Morgan Stanley. Your line is open.

[Michael Phillips, Morgan Stanley]

Thank you. Good morning. I guess, as sort of a continuation from that last question in a different angle. A large part of your earlier comments on the slide presentation this morning was on the agency channel and that's where the Robinsons lived. So with the focus there because of that, can you talk about any maybe incremental help that that does more -- more focused on the agency channel that that helps you with your commercial lines offerings?

[Tricia Griffith, Chief Executive Officer]

Yes. So many commercial -- whether it's small business or commercial auto, actually go through the agency channel. So a little bit more of a complicated product, so that's actually a much higher percentage than would go on the direct side, although we believe at some point we want broad coverage -- or actually now we want broad coverage for everything.

So, I believe, as I talk to agents there are some agents that are only personal lines, some are more commercial. But there's many especially large agencies we work with that are both. And for them to have access to all the products they need for that customer whether they have a small business and they're auto and home is really a great umbrella for all of them to serve their customers.

And that's what they want to be able to do. And so I think it's really important in the agency channel because it is still a little bit more complicated. So if you think a person who is opening their first business, they want to make sure they're protected, they want to be educated, that is nicely done through the agents. So we're very bullish on that as well.

[Michael Phillips, Morgan Stanley]

Okay. Great. Thanks. And then I guess back to frequency on the personal auto side, how does that vary by, I guess, age of car and model year? And maybe the reason to think about that is, is there a continuation of continued frequency to the extent that it's maybe more of the recent car years versus the prior ones?

[Tricia Griffith, Chief Executive Officer]

We can't really assess that based on -- we look at it mostly based on customer. So from a preferred to a non-standard who are more likely to have accidents or we look at it in terms of the demographics of, are you a mature driver or are you just learning to drive, so that's how we look at frequency rather than types of car. And what I said is, it's really hard to attribute very specifically to frequency, but we do believe a piece of it is more of our preferred customer who likely have less accidents.

[John Barbagallo]

Yes. And as Tricia was saying, diagnosing exactly where the frequency is driven, meaning, by the driver of the vehicle, the environment, all that it is very difficult. That said, if you're focusing on model year vehicles, certainly newer model years are driven more miles than older vehicles, and we've been growing a lot and we've actually been increasing our share of those newer models as we write more and more preferred business. So the fact that our frequency is down in the same time period, the trends that I just described there, makes us pretty confident that we're writing the right preferred business.

[Operator]

Your next question comes from the line of Yaron Kinar from Goldman Sachs. Your line is open.

[Yaron Kinar, Goldman Sachs]

Good morning, everybody. My first question goes to the partnership with the ridesharing companies. Is it fair to think of the incentives as not necessarily fully aligned, namely, the ridesharing companies I would think are very focused on growth, would probably be interested in settling claims as quickly as possible, maybe not necessarily pushing back as much when you guys may think it is necessary. And if it is, if that line of thinking is correct, I guess how do you manage that risk for that misalignment of incentives?

[Tricia Griffith, Chief Executive Officer]

Yes. So we -- actually that hasn't been an issue. We fully handle the claims. They're completely done in-house. And the great part about Progressive that I've always felt, especially having my upbringing in claims is we really haven't ever even differentiated between an insured and claimant. Every customer is a -- every consumers, possible customer, etc., and so we settle fair and accurately. So we don't get pushed back from them. I haven't heard anything about that.

What they want is somebody out there getting their drivers car back on the road so they can make a living, and if there's injuries, making sure we're fair and settle those. So we haven't had that issue. I think they look for partners that have a world-renowned claims organization like we do.

We have feet on the street because we have local presence and so it's really worked for both Uber and Lyft. And all the feedback has been that we do a really great job in that. And that's how I see it in terms of -- they want to have the claims handled by somebody who has a history of doing the right thing from indemnity perspective and that are also cost conscious from an LAE perspective.

[John Barbagallo]

And from a financial perspective, I'll point out that in both of our ridesharing relationships, there's quota share agreement. So in both of those cases, those companies have captive reinsurers that are part of their organization, and we are ceding premiums losses. So they are sharing in the financial results that we are experiencing with the other drivers.

[Yaron Kinar, Goldman Sachs]

Okay. And then my second question just goes to bodily injury severity, maybe broader terms. So can you maybe talk about what accident years you saw the increase in bodily severity coming from both in personal lines and in commercial?

[Tricia Griffith, Chief Executive Officer]

Oh, you probably have to help me on this. I would say if I need to guess, well, he is looking it up or you can't -- more like 2017, '18, where we're starting to see it develop. I can't say for certain without looking that up. But again, those trends do develop a little bit more over time. And I know -- off the top of my head, that's what I would say.

[John Barbagallo]

Of the $232 million of prior year development, approximately $131 million was from 2018, $73 million from 2017 and the remainder from 2016 and prior. We detail all of that in our annual report.

[Tricia Griffith, Chief Executive Officer]

Like I guessed, that's what I guessed and luckily I was right. Great.

[Yaron Kinar, Goldman Sachs]

Okay. And those ratios are relatively -- distribution between those accident years is similar in commercial lines and personal lines?

[John Barbagallo]

I think it's safe to assume that. Actually, don't have those numbers to quote for you. But generally speaking, older accident years have already developed previously, and by a large part, they have settled. So we also provide in the Annual Report loss triangles where you can see where we picked, if you will, the loss reserves at the end of the respective year and how that develops over time.

You can also see the percent of those claims that have been paid, and obviously on physical damage claims, those get paid very quickly in a bodily injury. You can see that development. But especially on the personal side, those bodily injury claims will certainly take longer to settle than fixing a car, they developed fairly rapidly. Commercial lines a little longer. But you can see all that in the annual report. It is safe to assume that prior year development is predominantly from the most recent year.

[Operator]

Your next question comes from the line of Gary Ransom from Dowling & Partners. Your line is open.

[Gary Ransom, Dowling & Partners]

Yes. Good morning. You mentioned briefly during the presentation about the direct side of the homeowners business. Can you talk a little bit more about why that's growing more rapidly, what kind of customers, whether it's bundled customers that are coming in on that side as well, or any other comments you might have on the direct growth?

[Tricia Griffith, Chief Executive Officer]

And so we've grown -- I think I've talked previously -- and we're going to have one of the upcoming quarterly webcasts sort of a spotlight on our Progressive Advantage Agency. So in our Progressive Advantage Agency, we have Progressive Home, along with many other unaffiliated carriers. And that we were able to really have broad coverage for the customers that come in.

So maybe Progressive Home doesn't want that risk, but another company does. So we're able to really -- we have a very low D&Q rate in there. So we're able to bring that in-house. We've grown our Progressive Advantage Agency substantially in the last three or four years, and that is one way where customers want to come in.

In addition, we have HomeQuote Explorer that we developed a couple of years ago where you can go online, and we also have Progressive Home as well as several other unaffiliated carriers. And we have a buy button with that in 14 states. So when you're able to go on and actually purchase, I think it's really important, and we'll continue to roll out more and more states with that. So I think it really is customer preference, and that goes to our strategic pillar of broad coverage.

And if you feel comfortable -- and the great part about HomeQuote Explorer is that we're able to gather a lot of information from publicly available data to make the quote really easy, and especially if it's a pretty simple basic home with things that we are able to get, they can get it done really quickly, and some people don't necessarily want to go through an agent. So we've got both areas growing rapidly, but it's really great in the direct cycle because a lot of people want to go either on the phone or online.

[Gary Ransom, Dowling & Partners]

Can you just expand on that question on the -- moving it into commercial as well? On the commercial side, it also -- you're growing more rapidly on the direct side as it says in your K than in the Agency side. Is there any characteristics of the customers there that are bringing that growth stronger?

[Tricia Griffith, Chief Executive Officer]

Yes. It's also on the base. So BQX is fairly new as well. The customers are -- the similar type customers. It is more complicated. I wrote in my letter that I sat with a BQX rep and it gets really complicated when they start adding different coverages that they want. So we feel like right now that we can accommodate about 70% of the small businesses. And that's why we're going to continue to have more and more partners and then ultimately have the Progressive BOP GL in our BQX.

I would say BQX is less mature than HQX, HomeQuote Explorer, but they're doing similar things that we did several years ago in the personal auto side, and that is build in-house agency, utilize partners so we can cover many different types of small business owners with different products that we may or may not write on our paper. So I think that's a really important part. It's the similar thing. We want that bundle. So where we believe will have longer tenure commercial auto partners is if we have more of their commercial needs. Same thing on the personal line side.

[John Barbagallo]

Now, one thing I'd offer to add to that, Gary, when you're looking at the premium mix numbers, direct versus agency for commercial lines, you should be aware that we categorize the rideshare partners business as direct. So those obviously are pretty significant premium relationships, and as we add those in that states, you're going to see that growth.

[Operator]

Your next question comes from the line of Meyer Shields from KBW. Your line is open.

[Meyer Shields, KBW]

Great. I just want to start by thanking you for the enhanced catastrophe disclosure and maybe more importantly for the responsiveness. Tremendously welcome.

[Tricia Griffith, Chief Executive Officer]

Our pleasure.

[Meyer Shields, KBW]

This is a bit of a leading question for Gary. When I look at the triangles in the 10-K, the age-to-age factors for auto liability, agency, direct and commercial, they are all speeding up, and I was wondering what that actually reflects.

[Tricia Griffith, Chief Executive Officer]

Yes, sure. Gary would be up in a second, Meyer.

[Gary Traicoff, Chief Actuary]

Hi, Meyer. Now, when you are relating to that, are you looking at the paid or the incurred?

[Meyer Shields, KBW]

Paid.

[Gary Traicoff, Chief Actuary]

On the paid side? Yes, so on the paid side, there is a couple of things going on, right. There are definitely some states where we are seeing a speed-up in closure rates, particularly 30 days, 60 day, 90 days coming in as well. And then on the incurred side, you may noticed some changes.

What we have seen is our adjusters we feel are recognizing larger claims quicker and so they are recognizing those claims and we're seeing the numbers come up quicker, which would mean theoretically then we would see lower development factors on the paid and incurred later in the triangle, right. And so that's some of the subjectivity that's coming through now where we're seeing that speed up early. And then the question is, how much of that do we think will materialize later on where it backs off as it develops to ultimates.

[Meyer Shields, KBW]

Okay. No, that's very helpful. All right. Thanks. And then second question. This is completely unrelated. I want to understand the thought process of raising deductibles in the health space and changing the coverage instead of pricing for the specific option that the customer would want.

[Tricia Griffith, Chief Executive Officer]

Well, part of it is, if you have a 20-year-old roof, you couldn't have rates enough to cover that if someone has a hailstorm and we replace that fully. So we tried to create different coverages that put skin in the game. It's been really difficult with vendors out there. We'll go through the storm process and you can see it as they develop, they'll go through, and you're knocking on the door and you're making sure don't you need new roof, your insurance company should pay for that.

So we're trying to always pay fairly, always do the right thing for our insurers but have some skin in the game that you don't just replace your roof every single time there's a hailstorm when there isn't damage. Or when there is slight damage that isn't actually changing the structure of the roof product. So we'll see how it goes. To price to a health state would be no growth, I believe. So we're trying to be creative in our product development.

[Meyer Shields, KBW]

Okay. Great. Thank you so much.

[Tricia Griffith, Chief Executive Officer]

Thanks.

[Julia Hornack, Investor Relations]

Great. I'm actually going to take a question from the webcast. So it's about policy life expectancy, an important topic we haven't really talked about yet, and I got a couple of questions about it. So particularly in direct, what is causing the decline in policy life expectancy both on a 12 month and three month basis?

[Tricia Griffith, Chief Executive Officer]

Well, a couple of things. We had gone over a process that we changed a while back, and occasionally we have that happen. There is another one that we're doing that I don't want to talk about for competitive reasons that will actually negatively affect PLE but we think it's the right thing to do to have the right customers on the book that are actually we can make money on. And also, it's been very competitive.

So rates have been really stable and there's a lot of advertising out there, and it's really easy to change. And there is a lot of consumers that are just price sensitive, and they shop all the time. So they're going to shop the likelihood they can find a lower rate with us or some of our competition.

I will say -- and of course this is one data point, that -- and PLE has lagged. The December development has actually increased in both the trailing -- the appeal in the three month and the 12 month. Again, I don't want to say that that's the future. We look at that as a possibility. We look at PLE very specifically with nature, nurture and price. So nature is our mix of business, obviously we want more of the preferred business.

Nurture is how can we take care of our customers? We are investing a lot in the CRM organization around sort of N=1 personalization; how can we be there for you, you particular -- communicate with you in the way you want. And then of course price is the competitive landscape and the ease of going back and forth. So those three things we look at from PLE. We continue to have a team that works on PLE. I mean, the executive sponsor for that and we've -- we've changed leadership to make sure we look at all different angles.

And in the spirit of question everything, we look at PLE and we'll continue to look at that externally overall. But I think there are some cohorts that we believe that we can increase PLE more substantially than others. An example would be, there are some Sams that we call -- some, not all, that are just inconsistently insured, and we love them. That's how Progressive was born and as long as we can make our target margin, we're great.

But they might go. And will we ever really make that go from X to Y. But we'll always treat them nicely and occasionally they become Robinsons. But there are the other cohorts that we say what are other things -- why are you leaving, what are other things that you need from us on the nature, nurture or price. And so that's what we're working on. And internally looking at PLE from very different cohorts, so PLE ex Sam, PLE when you have auto home umbrella, all those things, and we're starting to really gain some traction on how we think about household PLE.

[Julia Hornack, Investor Relations]

Great, and unfortunately, we've run out of time today. So I'm going to kick it back to Jason for the closing scripts. Thanks for joining us.

[Operator]

That concludes the Progressive Corporation's Fourth Quarter Investor Event. Information about the replay of the event will be available on the Investor Relations section of Progressive's website for the next year. You may now disconnect.