-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, DYgOY14mASSKjNMXwp6CNW77Y/PW+ZanM5oT2Mp17RUkI0giUKAuQ/cUcjwz1qY5 643sNA2o/hcNcQwt3IxSvQ== 0000950152-96-001017.txt : 19960318 0000950152-96-001017.hdr.sgml : 19960318 ACCESSION NUMBER: 0000950152-96-001017 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 19951231 FILED AS OF DATE: 19960315 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: PROGRESSIVE CORP/OH/ CENTRAL INDEX KEY: 0000080661 STANDARD INDUSTRIAL CLASSIFICATION: FIRE, MARINE & CASUALTY INSURANCE [6331] IRS NUMBER: 340963169 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: 1934 Act SEC FILE NUMBER: 001-09518 FILM NUMBER: 96535370 BUSINESS ADDRESS: STREET 1: 6300 WILSON MILLS RD CITY: MAYFIELD VILLAGE STATE: OH ZIP: 44143 BUSINESS PHONE: 2164615000 MAIL ADDRESS: STREET 1: 6300 WILSON MILLS RD CITY: MAYFIELD VILLAGE STATE: OH ZIP: 44143 10-K405 1 PROGRESSIVE CORP 10-K405 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (Mark One) [ x ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [Fee Required] For the fiscal year ended December 31, 1995 or [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [No Fee Required] For the transition period from ______________________ to ______________________ Commission file number 1-9518 THE PROGRESSIVE CORPORATION (Exact name of registrant as specified in its charter) Ohio 34-0963169 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 6300 Wilson Mills Road, Mayfield Village, Ohio 44143 (Address of principal executive offices) (Zip Code) (216) 461-5000 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: Name of each exchange on Title of each class which registered Common Shares, $1.00 Par Value New York Stock Exchange 9 3/8% Serial Preferred Shares, Series A (Cumulative, Liquidation Preference $25.00 per share) New York Stock Exchange Securities registered pursuant to Section 12(g) of the Act: None (Title of class) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [ x ] Yes [ ] No Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ x ] The aggregate market value of the voting stock held by non-affiliates of the registrant at February 9, 1996: $2,903,056,560.00 The number of the registrant's Common Shares, $1.00 par value, outstanding as of February 29, 1996: 72,179,817 DOCUMENTS INCORPORATED BY REFERENCE Portions of the registrant's Annual Report to Shareholders for the year ended December 31, 1995 are incorporated by reference in Parts I, II and IV hereof. Portions of the registrant's Proxy Statement dated March 14, 1996, for the Annual Meeting of Shareholders to be held on April 26, 1996, are incorporated by reference in Part III hereof. 2 INTRODUCTION The Progressive Corporation and subsidiaries' (collectively, the "Company") 1995 Annual Report to Shareholders (the "Annual Report") contains portions of the information required to be included in this Form 10-K, which are incorporated herein by reference. Cross references to relevant sections of the Annual Report are included under the appropriate items of this Form 10-K. Portions of the information included in The Progressive Corporation's Proxy Statement dated March 14, 1996, for the Annual Meeting of Shareholders to be held on April 26, 1996 (the "Proxy Statement") have also been incorporated by reference herein and are identified under the appropriate items in this Form 10-K. PART I ITEM 1. BUSINESS (a) General Development of Business The Progressive Corporation, an insurance holding company formed in 1965, has 64 operating subsidiaries and one mutual insurance company affiliate. The Progressive Corporation's insurance subsidiaries and its affiliate (collectively, the "Insurance Group") provide personal automobile insurance and other specialty property-casualty insurance and related services throughout the United States and in Canada. The Company's property-casualty insurance products protect its customers against collision and physical damage to their motor vehicles and liability to others for personal injury or property damage arising out of the use of those vehicles. Of the approximately 250 United States insurance company groups writing private passenger auto insurance, the Company estimates that it ranks seventh in size for 1995. Except as otherwise noted, all industry data and Progressive's market share or ranking in the industry were derived either directly from data reported by A.M. Best Company Inc. ("A.M. Best") or were estimated using A.M. Best data as the primary source. For 1995, the estimated industry premiums written, which include personal auto insurance in the United States and Ontario, Canada, as well as insurance for commercial vehicles, were $122 billion, and Progressive's share of this market was approximately 2.3%. (b) Financial Information About Industry Segments Incorporated by reference from Note 11, Segment Information, on page 46 of the Company's Annual Report. (c) Narrative Description of Business INSURANCE SEGMENT The Insurance Group offers a number of personal and commercial property-casualty insurance products primarily related to motor vehicles. Net premiums written were $2,912.8 million in 1995, compared to $2,457.2 million and $1,819.2 million in 1994 and 1993, respectively. The underwriting profit margin was 5.7% in 1995, compared to 8.3% (excluding the elimination of the "supplemental reserve." See Management's Discussion and Analysis of Financial Condition and Results of Operations beginning on page 14 for further discussion) in 1994 and 10.7% in 1993, respectively. The Insurance Group's core business writes insurance for private passenger automobiles, recreational vehicles and small fleets of commercial vehicles. This business frequently has more than one program in a single state, with each targeted to a specific market segment. The core business accounted for 97% of the Company's 1995 total net premiums written. 2 3 The bulk of the Insurance Group's core business consists of nonstandard automobile insurance products for people cancelled or rejected by other insurers. The size of the nonstandard automobile insurance market changes with the insurance environment. Volume potential is influenced by the actions of direct competitors, writers of standard and preferred automobile insurance and state-mandated involuntary plans. The total direct premiums written in the nonstandard automobile insurance market were about $21 billion in 1995, $20 billion in 1994 and $18 billion in 1993. Approximately 280 nonstandard insurance companies, many of which are part of an affiliated group, wrote an estimated $17 billion of nonstandard auto premiums in 1995. In 1994, the Insurance Group ranked second in direct premiums written in this market and near the top in underwriting performance. Although final data has not been published, the Company estimates that its 1995 ranking and underwriting performance will be consistent with 1994. The core business also writes standard and preferred automobile risks in many states. These products accounted for between 5% and 10% of the Company's total private passenger auto premiums in 1995. The strategy is to build towards becoming a low-cost provider of a full line of auto insurance and related services, distributed through whichever channel the customer prefers. The Insurance Group's goal is to compete successfully in the standard and preferred market, which comprises 80% of the personal automobile insurance market. The Insurance Group's principal specialty personal lines product is motorcycle insurance. Other products offered include recreational vehicle, mobile home and boat insurance. The Insurance Group's competitors are specialty companies and large multi-line insurance carriers. Although industry figures are not available, based on the Company's analysis of this market, the Company believes that it is a significant participant in the specialty personal lines market. Nonstandard commercial vehicle insurance covers commercial vehicle risks that are rejected or cancelled by other insurance companies. Based on the Company's analysis of this market, approximately 40 companies compete for this business on a nationwide basis. State assigned risk plans also provide this coverage. The core business insurance products are marketed by thirteen divisions headquartered in or near the markets served: the Florida and Southeast divisions in Tampa, Florida; the Northeast, New York, Central States, Ohio, Commercial Vehicle and National Accounts divisions in Cleveland, Ohio; the South Central division in Austin, Texas; the Mountain division in Colorado Springs, Colorado; the Mid-Atlantic division in Richmond, Virginia; the Canada division in Ontario, Canada; and the West division in Sacramento, California. Each division is responsible for its own marketing, sales, processing and claims. In an effort to better manage growth and improve customer service, the Company is moving profit and growth responsibility for high potential communities from state-focused division presidents to community managers. In 1995, eleven metropolitan areas were served by community managers. In 1995, over 90% of the net premiums written by the core business were written through a network of more than 30,000 independent insurance agents located throughout the United States and in Canada. Subject to compliance with certain Company-mandated procedures, these independent insurance agents have the authority to bind the Company to specified insurance coverages within prescribed underwriting guidelines. These guidelines prescribe the kinds and amounts of coverage that may be written and the premium rates that may be charged for specified categories of risk. The agents do not have authority on behalf of the Company to settle or adjust claims, establish underwriting guidelines, develop rates or enter into other transactions or commitments. The Company also markets its products through intermediaries such as employers, other insurance companies and national brokerage agencies, and direct to customers through employed sales people and owned insurance agencies. The core business currently markets personal automobile insurance directly to the public by direct mail, television and radio advertising, primarily throughout Florida and in Ohio and Texas. 3 4 The Insurance Group's diversified businesses - the United Financial Casualty Company (UFCC), Professional Liability Group (PLG) and Motor Carrier division - accounted for 3% of total volume in 1995. These businesses, which are organized by customer group, are headquartered in Cleveland, Ohio. The choice of distribution channel is driven by each customer group's buying preference and service needs. Distribution channels include financial institutions and vehicle dealers. Distribution arrangements are individually negotiated between such intermediaries and the Company and are tailored to the specific needs of the customer group and the nature of the related financial or purchase transactions. The diversified businesses also market their products directly to their customers through company-employed sales forces. UFCC provides physical damage insurance and related tracking services to protect the commercial or retail lender's interest in collateral which is not otherwise insured against these risks. The principal product is collateral protection for automobile lenders, which is sold to financial institutions and/or their customers. Commercial banks are UFCC's largest customer group for these services. This business also serves savings and loans, finance companies and credit unions. According to the Company's analysis of this market, numerous companies offer these products and none of them has a dominant market share. PLG's principal customers are community banks. Its principal products are liability insurance for directors and officers and employee dishonesty insurance. Progressive shares the risk and premium on these coverages with a small mutual reinsurer controlled by its bank customers. The program is sponsored by the American Bankers Association. This program represented less than one half of one percent of the Company's total 1995 net premiums written. The Motor Carrier division primarily manages involuntary Commercial Auto Insurance Procedures. See Service Operations on page 7 for further discussion. COMPETITIVE FACTORS The automobile insurance and other property-casualty markets in which the Company operates are highly competitive. Property-casualty insurers generally compete on the basis of price, consumer recognition, coverages offered, claim handling, financial stability, customer service and geographic coverage. Vigorous competition is provided by large, well-capitalized national companies, some of which have broad distribution networks of employed or captive agents, and by smaller regional insurers. While the Company relies heavily on technology and extensive data gathering and analysis to segment and price markets according to risk potential, some competitors merely price their coverage at rates set lower than the Company's published rates. By avoiding extensive data gathering and analysis, these competitors incur lower underwriting costs. The Company has remained competitive by closely managing expenses and achieving operating efficiencies, and by refining its risk measurement and price segmentation skills. In addition, the Company offers prices for a wide spectrum of risks and seeks to offer a wider array of payment plans, limits of liability and deductibles than its competitors. Superior customer service and claim adjustment are also important factors in the Company's competitive strategy. LICENSES The Insurance Group operates under licenses issued by various state or provincial insurance authorities. Such licenses may be of perpetual duration or renewable periodically, provided the holder continues to meet applicable regulatory requirements. The licenses govern the kind of insurance coverages which may be written in the issuing state. Such licenses are normally issued only after the filing of an appropriate application and the satisfaction of prescribed criteria. All licenses which are material to the Company's business are in good standing. 4 5 INSURANCE REGULATION The insurance subsidiaries are generally subject to regulation and supervision by insurance departments of the jurisdictions in which they are domiciled or licensed to transact business. At least one of the subsidiaries is licensed and subject to regulation in each of the 50 states and certain U.S. possessions, in one Canadian province and by Canadian federal authorities. The nature and extent of such regulation and supervision varies from jurisdiction to jurisdiction. Generally, an insurance company is subject to a higher degree of regulation and supervision in its state of domicile. The Company's principal insurance subsidiaries are domiciled in the states of Florida, Mississippi, Missouri, New York, Ohio, Pennsylvania, Texas, Washington and Wisconsin. State insurance departments have broad administrative power relating to licensing insurers and agents, regulating premium rates and policy forms, establishing reserve requirements, prescribing accounting methods and the form and content of statutory financial reports and regulating the type and amount of investments permitted. Rate regulation varies from "file and use" to prior approval to mandated rates. Most jurisdictions prohibit rates that are "excessive, inadequate or unfairly discriminatory." Insurance departments are charged with the responsibility to ensure that insurance companies maintain adequate capital and surplus and comply with a variety of operational standards. Insurance companies are generally required to file detailed annual and other reports with the insurance department of each jurisdiction in which they conduct business. Insurance departments are authorized to make periodic and other examinations of regulated insurers' financial condition, adherence to statutory accounting principles and compliance with state insurance laws and regulations. Insurance holding company laws enacted in many jurisdictions grant to insurance authorities the power to regulate acquisitions of insurers and certain other transactions involving insurers and to require periodic disclosure of certain information. These laws impose prior approval requirements for certain transactions between regulated insurers and their affiliates and generally regulate dividend and other distributions, including loans and cash advances, between regulated insurers and their affiliates. See the "Dividends" discussion in Item 5(c) for further information on such dividend limitations. Under state insolvency and guaranty laws, regulated insurers can be assessed, or required to contribute to state guaranty funds to cover policyholder losses resulting from insurer insolvencies. Insurers are also required by many states to provide coverage to certain risks as a condition of doing business in the state. Such programs generally specify the types of insurance and the level of coverage which must be offered to such involuntary risks, as well as the allowable premium. Insurance companies are generally required by insurance regulators to maintain sufficient surplus to support their writings. Although the ratio of writings to surplus that the regulators will allow is a function of a number of factors, including the type of business being written, the adequacy of the insurer's reserves, the quality of the insurer's assets, and the identity of the regulator, as a general rule, the regulators prefer that annual net written premium be not more than three times the insurer's total policyholders' surplus. Thus, the amount of an insurer's surplus may, in certain cases, limit its ability to grow its business. Many states have laws and regulations that limit an insurer's ability to exit a market. For example, certain states limit an automobile insurer's ability to cancel and non-renew policies. Furthermore, certain states prohibit an insurer from withdrawing one or more lines of business from the state, except pursuant to a plan that is approved by the state insurance department. The state insurance department may disapprove a plan that may lead to market disruption. Laws and regulations that limit cancellation and non-renewal and that subject program withdrawals to prior approval requirements may restrict an insurer's ability to exit unprofitable markets. Regulation of insurance constantly changes as real or perceived issues and developments arise. Some changes may be due to technical factors, such as changes in investment laws made to recognize new investment vehicles; other changes result from such general pressures as consumer resistance to price increases and concerns relating to insurer solvency. In recent years, legislation and voter initiatives have been introduced which deal with insurance rate development, rate determination and the ability of insurers to cancel or renew insurance policies, reflecting concerns about availability, prices and alleged discriminatory pricing. 5 6 In some states, the automobile insurance industry has been under pressure in recent years from regulators, legislators or special interest groups to reduce, freeze or set rates to or at levels that are not necessarily related to underlying costs, including initiatives to roll back automobile and other personal lines rates. This kind of activity has adversely affected, and may in the future adversely affect, the profitability and growth of the subsidiaries' automobile insurance business in those jurisdictions, and may limit the subsidiaries' ability to increase rates to compensate for increases in costs. Adverse legislative and regulatory activity limiting the subsidiaries' ability to adequately price automobile insurance may occur in the future. The impact of these regulatory changes on the subsidiaries' businesses cannot be predicted. The state insurance regulatory framework has come under increased federal scrutiny, and certain state legislatures have considered or enacted laws that alter and, in many cases, expand state authority to regulate insurance companies and insurance holding company systems. Further, the National Association of Insurance Commissioners (NAIC) and state insurance regulators are re-examining existing laws and regulations, specifically focusing on insurance company investments, issues relating to the solvency of insurance companies and further limitations on the ability of regulated insurers to pay dividends. The NAIC also developed a risk-based capital (RBC) program to enable regulators to take appropriate and timely regulatory actions relating to insurers that show signs of weak or deteriorating financial conditions. RBC is a series of dynamic surplus-related formulas which contain a variety of factors that are applied to financial balances based on a degree of certain risks, such as asset, credit and underwriting risks. In addition, from time to time, the United States Congress and certain federal agencies investigate the current condition of the insurance industry to determine whether federal regulation is necessary. STATUTORY ACCOUNTING PRINCIPLES The Insurance Group's results are reported in accordance with generally accepted accounting principles (GAAP), which differ from amounts reported under statutory accounting principles (SAP) prescribed by insurance regulatory authorities. Specifically, under GAAP: 1. Commissions, premium taxes and other costs incurred in connection with writing new and renewal business are capitalized and amortized on a pro rata basis over the period in which the related premiums are earned, rather than expensed as incurred, as required by SAP. 2. Certain assets are included in the consolidated balance sheets, which for SAP are charged directly against statutory surplus. These assets consist primarily of premium receivables over 90 days, furniture and equipment and prepaid expenses. 3. Amounts related to ceded reinsurance are shown gross as prepaid reinsurance premiums and reinsurance recoverables, rather than netted against unearned premium reserves and loss and loss adjustment expense reserves, respectively, as required by SAP. 4. Fixed maturities securities, which are classified as available-for-sale, are reported at market values, rather than at amortized cost, or the lower of amortized cost or market depending on the specific type of security as required by SAP. Equity securities are reported at quoted market values which may differ from the NAIC market values as required by SAP. The differing treatment of income and expense items results in a corresponding difference in Federal income tax expense. During 1994, the insurance subsidiaries began to reduce loss reserves for anticipated salvage and subrogation recoveries. Previously, salvage and subrogation was not reflected in the statutory financial statements until actually recovered. 6 7 SERVICE OPERATIONS The service operations of the diversified businesses consist primarily of processing business for involuntary plans and providing claim services to fleet owners and other insurance companies. Service revenues were $38.9 million in 1995, compared to $41.9 million in 1994 and $43.7 million in 1993. Pretax operating profits were $8.7 million in 1995, compared to $10.0 million and $6.8 million in 1994 and 1993, respectively. The Motor Carrier division currently processes business for the Commercial Auto Insurance Procedures (CAIP) in 29 states, the Florida Joint Underwriters Association (FAJUA) and the New York Public Automobile Pool (NYPAP), which are all part of the involuntary residual market. As a CAIP servicing carrier, the division processes about one third of the premiums in the involuntary residual market, without assuming the indemnity risk. It competes with approximately 17 other providers nationwide. In 1995, the division began processing business for the FAJUA and competes with five other carriers in the state. Beginning in March 1996, the Company began processing business for the NYPAP and was granted a one-third share of new business with a three-year phase-in period. INVESTMENTS The Company's approach to investing is consistent with its need to maintain capital adequate to support the insurance premiums written and its commitment to risk adverse investment policies. The Company's portfolio is invested primarily in short-term and intermediate-term, investment-grade fixed-income securities. The Company's investment portfolio, at market value, was $3,768.0 million at December 31, 1995, compared to $3,186.3 million at December 31, 1994. Investment income is affected by shifts in the types of investments in the portfolio, changes in interest rates and other factors. Investment income, including net realized gains on security sales, before expenses and taxes, was $245.8 million in 1995, compared to $182.3 million in 1994 and $242.4 million in 1993. See Management's Discussion and Analysis of Financial Condition and Results of Operations, beginning on page 14 herein for additional discussion. EMPLOYEES The number of employees, excluding temporary employees, at December 31, 1995, was 8,025. LIABILITY FOR PROPERTY-CASUALTY LOSSES AND LOSS ADJUSTMENT EXPENSES The consolidated financial statements include the estimated liability for unpaid losses and loss adjustment expenses ("LAE") of the Company's insurance subsidiaries. Total loss reserves are established at a level that is intended to represent the midpoint of the reasonable range of loss reserves. The liabilities for losses and LAE are determined using actuarial and statistical procedures and represent undiscounted estimates of the ultimate net cost of all unpaid losses and LAE incurred through December 31 of each year. These estimates are subject to the effect of future trends on claim settlement. These estimates are continually reviewed and adjusted as experience develops and new information becomes known. Such adjustments, if any, are reflected in the current results of operations. During 1994, based on a review of the adequacy of its total loss reserves, the Company eliminated its $71.0 million "supplemental reserve." See Management's Discussion and Analysis of Financial Condition and Results of Operations beginning on page 14 for further discussion. The elimination of the supplemental reserve is reflected in the Reconciliation of Net Reserves for Losses and Loss Adjustment Expenses table on page 8 and the Analysis of Loss and Loss Adjustment Expenses Development table on page 9. The accompanying tables present an analysis of property-casualty losses and LAE. The following table: (1) provides a reconciliation of beginning and ending estimated liability balances for 1995, 1994 and 1993, and (2) shows the difference between the estimated liability in accordance with GAAP and that reported in accordance with SAP. 7 8 RECONCILIATION OF NET RESERVES FOR LOSSES AND LOSS ADJUSTMENT EXPENSES
(millions) 1995 1994 1993 ----------------------------------------------------- Balance, January 1 $1,098.7 $1,012.4 $ 956.4 Incurred losses and LAE: Current accident year 2,002.1 1,539.8 1,126.7 Prior accident years (56.6) (142.5) (98.5) ----------------------------------------------------- 1,945.5 1,397.3 1,028.2 ----------------------------------------------------- Paid losses and LAE: Current accident year 1,204.5 894.0 605.4 Prior accident years 525.3 417.0 366.8 ----------------------------------------------------- 1,729.8 1,311.0 972.2 ----------------------------------------------------- Balance, December 31 1,314.4 1,098.7 1,012.4 Add: Reinsurance recoverable on unpaid losses and LAE(1) 296.1 334.2 334.8 ----------------------------------------------------- Balance, December 31, GAAP 1,610.5 1,432.9 1,347.2 Adjust: Reinsurance recoverable on unpaid losses and LAE(1) (296.1) (334.2) (334.8) Net salvage and subrogation(2) -- -- 39.9 ----------------------------------------------------- Balance, December 31, SAP $1,314.4 $1,098.7 $1,052.3 =====================================================
(1)In 1993, the Company adopted Statement of Financial Accounting Standards (SFAS) 113, "Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts." (2)During 1994, the Company changed its method of accounting for salvage and subrogation. See Statutory Accounting Principles on page 6 for further discussion. The reconciliation above shows a $56.6 million redundancy, which emerged during 1995, in the 1995 liability and a $142.5 million redundancy in the 1994 liability, based on information known as of December 31, 1995 and December 31, 1994, respectively. In addition, the incurred losses in the table above are on a SAP basis, which differ slightly from the GAAP incurred losses due to the reclassification of losses on the Company's self-insurance program to expenses for GAAP reporting. The anticipated effect of inflation is explicitly considered when estimating liabilities for losses and LAE. While anticipated increases due to inflation are considered in estimating the ultimate claim costs, the increase in average severities of claims is caused by a number of factors that vary with the individual type of policy written. Future average severities are projected based on historical trends adjusted for anticipated changes in underwriting standards, inflation, policy provisions and general economic trends. These anticipated trends are monitored based on actual development and are modified if necessary. The Company has not entered into any loss reserve transfers or similar transactions having a material effect on earnings or reserves. 8 9 ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSES DEVELOPMENT (millions)
YEAR ENDED 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 LIABILITY FOR UNPAID - -------------------- LOSSES AND LAE $215.3 $323.8 $471.0 $651.0 $748.6 $791.6 $861.5 $956.4 $1,012.4 $1,098.7 $1,314.4 - -------------- PAID (CUMULATIVE) AS OF: - ------------------------ One year later 104.7 142.7 195.0 283.1 293.1 322.4 353.4 366.8 417.0 525.3 Two years later 151.9 204.4 294.9 393.7 446.8 490.8 518.8 520.0 589.8 -- Three years later 175.4 238.9 339.5 465.0 539.8 570.4 583.2 598.2 -- -- Four years later 187.2 255.7 369.9 514.0 588.2 600.0 617.6 -- -- -- Five years later 194.1 264.3 383.5 540.7 603.1 613.6 -- -- -- -- Six years later 197.7 268.7 389.1 545.1 608.1 -- -- -- -- -- Seven years later 200.7 270.1 381.9 545.5 -- -- -- -- -- -- Eight years later 201.3 261.3 384.2 -- -- -- -- -- -- -- Nine years later 191.6 263.2 -- -- -- -- -- -- -- -- Ten years later 193.1 -- -- -- -- -- -- -- -- -- LIABILITY RE-ESTIMATED - ---------------------- AS OF: - ------ One year later 218.7 300.6 446.6 610.3 685.4 748.8 810.0 857.9 869.9 1,042.1 Two years later 213.6 293.6 422.2 573.4 677.9 726.5 771.9 765.5 837.8 -- Three years later 205.3 282.8 402.4 581.3 668.6 712.7 718.7 737.4 -- -- Four years later 203.4 274.1 403.9 575.1 667.1 683.7 700.1 -- -- -- Five years later 200.9 275.6 399.6 578.4 654.7 666.3 -- -- -- -- Six years later 204.4 275.8 400.2 582.2 647.1 -- -- -- -- -- Seven years later 205.2 277.5 408.5 574.3 -- -- -- -- -- -- Eight years later 206.7 285.7 408.1 -- -- -- -- -- -- -- Nine years later 215.3 286.7 -- -- -- -- -- -- -- -- Ten years later 216.3 -- -- -- -- -- -- -- -- -- CUMULATIVE REDUNDANCY - --------------------- (DEFICIENCY) $(1.0) $37.1 $62.9 $76.7 $101.5 $125.3 $161.4 $219.0 $174.6 $56.6 - ------------ PERCENTAGE(1) (.5) 11.5 13.4 11.8 13.6 15.8 18.7 22.9 17.2 5.2
(1)Cumulative redundancy/(deficiency) liability for unpaid losses and LAE. The above table presents the development of balance sheet liabilities for 1985 through 1994. The top line of the table shows the estimated liability for unpaid losses and LAE recorded at the balance sheet date for each of the indicated years for the property-casualty insurance subsidiaries only. Similar reserves for the life insurance subsidiary, which are immaterial, are excluded. This liability represents the estimated amount of losses and LAE for claims arising in all prior years that are unpaid at the balance sheet date, including losses that had been incurred but not reported. 9 10 The upper section of the table shows the cumulative amount paid with respect to the previously recorded liability as of the end of each succeeding year. The lower portion of the table shows the re-estimated amount of the previously recorded liability based on experience as of the end of each succeeding year. The estimate is increased or decreased as more information becomes known about the frequency and severity of claims for individual years. For example, as of December 31, 1995 the companies had paid $263.2 million of the currently estimated $286.7 million of losses and LAE that had been incurred through the end of 1986; thus an estimated $23.5 million of losses incurred through 1986 remain unpaid as of the current financial statement date. The "Cumulative Redundancy (Deficiency)" represents the aggregate change in the estimates over all prior years. For example, the 1985 liability has developed a $1.0 million deficiency over ten years. That amount has been reflected in income over the ten years and did not have a significant effect on the income of any one year. The effects on income during the past three years due to changes in estimates of the liabilities for losses and LAE is shown in the reconciliation table on page 8 as the "prior years" provision for incurred losses and LAE. In evaluating this information, note that each cumulative redundancy (deficiency) amount includes the effects of all changes in amounts during the current year for prior periods. For example, the amount of the redundancy related to losses settled in 1988, but incurred in 1985, will be included in the cumulative deficiency or redundancy amount for years 1985, 1986 and 1987. Conditions and trends that have affected development of the liability in the past may not necessarily occur in the future. Accordingly, it may not be appropriate to extrapolate future redundancies or deficiencies based on this table. The Analysis of Loss and Loss Adjustment Expenses Development table on page 9 is constructed from Schedule P, Part-1, from the 1990 through 1995 Consolidated Annual Statements, as filed with the state insurance departments, and Schedules O and P filed for years prior to 1989. This development table differs from the development displayed in Schedule P, Part-2 due to the fact Schedule P, Part-2 excludes unallocated loss adjustment expenses and reflects the change in the method of accounting for salvage and subrogation for 1994 and prior. (d) Financial Information about Foreign and Domestic Operations The Company operates throughout the United States and in Canada. The amount of Canadian revenues and assets are approximately two percent of the Company's consolidated revenues and assets. The amount of operating income (loss) generated by its Canadian operations is immaterial with respect to the Company's consolidated operating income. 10 11 ITEM 2. PROPERTIES OWNED PROPERTIES In 1994, the Company completed its new corporate office complex on a 42-acre parcel in Mayfield Village, Ohio, owned by a subsidiary. The new facility consists of 517,800 square feet of space and replaces office space held under leases in a number of locations in the Cleveland, Ohio area. The project's cost of $75.5 million was funded through operating cash flows. The Company's central data processing facility occupies a modern, three-story brick, building containing approximately 107,000 square feet of office space, on this same parcel. The Company owns two adjacent two-story brick buildings in Highland Heights, Ohio, which contain an aggregate of 233,000 square feet of office and warehouse space. The property was purchased in August 1994 for approximately $6.7 million. The buildings are currently being renovated to accommodate the Company's operations. The Company owns a modern three-story building containing approximately 96,700 square feet of office space in Mayfield Heights, Ohio. The property was purchased in December 1993 for approximately $6.5 million, and is occupied by the Company's Northeast Division. The Company's Florida Division is headquartered in a modern, two-story building containing approximately 60,000 square feet of office space in Tampa, Florida. The property was financed with, and is owned subject to a mortgage granted in connection with, industrial development revenue bonds bearing interest equal to 79.45% of a specified prime commercial lending rate. The remaining annual principal amounts payable are $368,000 in 1996 and 1997 and $92,000 in 1998. The Company owns a modern 26,400 square foot building in Tampa, Florida, used for post-processing document assembly and mailing. The property was purchased on March 31, 1995, for approximately $1.4 million. The Company owns a modern, two-story building containing approximately 39,000 square feet of office space in Tampa, Florida; this building is leased to a non-affiliated tenant. The Company also owns a one-story brick building containing approximately 92,000 square feet of training facilities, office and warehouse space in Mayfield Village, Ohio. LEASED PROPERTIES The Company leases approximately 590,000 square feet of modern office space at various locations throughout the United States for its other business units and staff functions. In addition, the Company leases approximately 288 processing and claim offices at various locations throughout the United States. Two offices are leased in Canada. These leases are generally short-term to medium-term leases of standard commercial office space. ITEM 3. LEGAL PROCEEDINGS Incorporated by reference from Note 4, Litigation, on page 41 of the Company's Annual Report. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. EXECUTIVE OFFICERS OF THE REGISTRANT Incorporated by reference from information with respect to executive officers of The Progressive Corporation and its subsidiaries set forth in Item 10 of this Annual Report on Form 10-K. 11 12 PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS (a) Market Information The Company's Common Shares are traded on the New York Stock Exchange under the symbol PGR. The high and low prices set forth below are as reported on the consolidated transaction reporting system.
Dividends Year Quarter High Low Per Share - ------------------------------------------------------------------------------ 1995 1 $42 1/8 $34 3/4 $.055 2 41 7/8 37 1/8 .055 3 48 37 3/4 .055 4 49 1/2 41 1/2 .055 --------------------------------------------------- $49 1/2 $34 3/4 $.220 =================================================== 1994 1 $40 1/2 $27 3/4 $.050 2 35 5/8 28 1/2 .050 3 38 7/8 33 1/4 .055 4 38 3/8 32 1/4 .055 --------------------------------------------------- $40 1/2 $27 3/4 $.210 ===================================================
The closing price of the Company's Common Shares on February 29, 1996 was $46.00. (b) Holders There were 4,770 shareholders of record on February 29, 1996. (c) Dividends Statutory policyholders' surplus was $1,055.1 million and $945.1 million at December 31, 1995 and 1994, respectively. Generally, under state insurance laws, the net admitted assets of insurance subsidiaries available for transfer to a corporate parent are limited to those net admitted assets, as determined in accordance with SAP, which exceed minimum statutory capital requirements. At December 31, 1995, $121.5 million of statutory policyholders' surplus represents net admitted assets of the insurance subsidiaries that are required to meet minimum statutory surplus requirements in the subsidiaries' states of domicile. Furthermore, state insurance laws limit the amount that can be paid as a dividend or other distribution in any given year without prior regulatory approval and adequate policyholders' surplus must be maintained to support premiums written. Based on the dividend laws currently in effect, the insurance subsidiaries may pay aggregate dividends of $179.2 million in 1996 out of statutory policyholders' surplus, without prior approval by regulatory authorities. 12 13 ITEM 6. SELECTED FINANCIAL DATA (millions - except per share amounts)
For the years ended December 31, 1995 1994 1993 1992 1991 --------------------------------------------------------------------------------- Total revenues(1) $3,011.9 $2,415.3 $1,954.8 $1,738.9 $1,493.1 Operating income 220.1 212.7 197.3 129.8 85.1 Net income(2),(3) 250.5 274.3 267.3 153.8 32.9 Per share: Operating income(4) 2.84 2.76 2.61 1.72 1.19 Net income(2),(3),(4) 3.24 3.59 3.58 2.05 .41 Dividends .220 .210 .200 .191 .172 Total assets(3),(5) 5,352.5 4,675.1 4,011.3 3,440.9 3,317.2 Funded debt outstanding 675.9 675.6 477.1 568.5 644.0
All per share amounts have been adjusted for the December 8, 1992 3-for-1 stock split. (1)Total revenues for 1992 include $106.0 million ($70.0 million after taxes), or $.97 per share, for the Company's California Proposition 103 reserve reduction. (2)During 1994, based on a review of the adequacy of its total loss reserves, the Company eliminated its $71.0 million "supplemental reserve" ($46.2 million after tax), resulting in a one-time increase in earnings of $.62 per share. See Management Discussion and Analysis of Financial Condition and Results of Operations set forth in Item 7 of this Annual Report on Form 10-K for further discussion. (3)Effective January 1, 1992, the Company adopted SFAS 109 and is able to demonstrate that the benefit of deferred tax assets is fully realizable. The cumulative effect of adopting SFAS 109 increased net income $14.2 million, or $.20 per share. In 1991, the deferred tax asset writedown, as required under SFAS 96, was included in the Federal income tax provision. (4)Presented on a fully diluted basis. (5)Pursuant to SFAS 113, amounts for 1992 and 1991 were restated. 13 14 ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FINANCIAL CONDITION The Progressive Corporation is a holding company and does not have any revenue producing operations of its own. It receives cash through borrowings, equity sales, subsidiary dividends and other transactions, and may use the proceeds to contribute to the capital of its insurance subsidiaries in order to support premium growth, to repurchase its Common Shares and other outstanding securities, to redeem its outstanding securities and for other business purposes. During 1995, the Company repurchased .1 million of its 9 3/8% Serial Preferred Shares, Series A, at a cost of $2.3 million. During the three-year period ended December 31, 1995, the Company sold 4,950,000 Common Shares for net proceeds of $177.0 million and repurchased 1.2 million Common Shares at a total cost of $36.4 million (average cost of $31.92 per share) and .6 million of its 9 3/8% Serial Preferred Shares, Series A, at a total cost of $14.4 million (average cost $27.08 per share). The Company also sold $350.0 million of notes, repaid $170.0 million borrowed under its credit facilities, and redeemed the entire $70.0 million of its 8 3/4% Debentures. During the same period, The Progressive Corporation received $254.3 million from its insurance subsidiaries, net of capital contributions made to these subsidiaries. The regulatory restrictions on subsidiary dividends are described in Item 5(c) on page 12 herein. The Company has substantial capital resources and is unaware of any trends, events or circumstances that are reasonably likely to affect its capital resources in a material way. The Company also has available a $20.0 million revolving credit agreement. Given its 31% debt to equity ratio, the Company believes it has sufficient borrowing capacity and other capital resources to support current and anticipated growth. The Company's insurance operations create liquidity by collecting and investing premiums from new and renewal business in advance of paying claims. For the three years ended December 31, 1995, operations generated a positive cash flow of $1,305.4 million, and cash flow is expected to be positive in both the short-term and reasonably foreseeable future. The Company's substantial investment portfolio is highly liquid, consisting almost entirely of readily marketable securities. On or after May 31, 1996, the Company's 9 3/8% Serial Preferred Shares, Series A, are redeemable at the Company's option at the price of $25 per share plus accrued dividends to the redemption date. If the Company elects to redeem these securities, the redemption could be funded through operating cash flows or, if market conditions warrant, funds could be raised externally on the debt or equity markets. The Company does not expect any material changes in its cash requirements and is not aware of any trends, events or uncertainties that are reasonably likely to have a material effect on its liquidity. Total capital expenditures for the three years ended December 31, 1995, aggregated $156.5 million. In 1994, the Company completed its new corporate office complex in Mayfield Village, Ohio. The cost of the project was $75.5 million and was funded through operating cash flows. INVESTMENTS The Company invests in fixed-maturity, equity and short-term securities. The Company's investment strategy recognizes its need to maintain capital adequate to support its insurance operations and commitment to risk adverse investment policies. Therefore, the Company evaluates the risk/reward trade-offs of investment opportunities, measuring their effects on stability, diversity, overall quality and liquidity of the investment portfolio. The majority of the portfolio is invested in high-grade, fixed-income securities, of which short- and intermediate-term securities represented $2,876.2 million, or 76.4%, in 1995 and $2,319.4 million, or 72.9%, in 1994. Long-term securities were $191.9 million, or 5.1%, in 1995 and $245.0 million, or 7.7%, in 1994. The duration of the fixed-income portfolio was 2.2 years at December 31, 1995. Early in 1995, the Company eliminated a substantial portion of its municipal securities with maturities longer than 5 years in response to the proposal of a "flat tax," which would effectively eliminate the tax advantage of these securities. 14 15 A relatively small portion of the investment portfolio was invested in marketable equity securities providing risk/reward balance and diversification. Common stocks represented $310.0 million, or 8.2%, in 1995 and $106.2 million, or 3.4%, in 1994. The increase in common stocks reflects the Company's objective to increase its position in common stock investments to 15% of the entire portfolio and to optimize value and further diversify the portfolio through foreign equity investments. The foreign equity portfolio, which may utilize stock index futures and foreign currency forwards, comprised $52.6 million of the common stock portfolio at December 31, 1995. The remainder of the equity portfolio of $382.3 million, or 10.1%, in 1995 and $370.1 million, or 11.6%, in 1994, was comprised of over 90% of fixed-rate preferred stocks with mechanisms that may provide an opportunity to liquidate at par. Consistent with the Company's objective to increase its common stock investments, the Company liquidated its high-yield portfolio, reducing it to .2% of the portfolio at December 31, 1995, from 4.4% at December 31, 1994, resulting in a net gain of $6.6 million. In conjunction with guidance issued by the FASB, the Company reclassified $248.4 million of its held-to-maturity securities to available-for-sale, recognizing $10.4 million in gross unrealized gains. The Company had no held-to-maturity securities at December 31, 1995. As of December 31, 1995, the Company's portfolio had $78.7 million in unrealized gains, compared to $41.1 million in unrealized losses in 1994. This increase in value was the result of falling interest rates and rising prices in the bond and stock market. The weighted average fully taxable equivalent book yield of the portfolio was 6.9%, 6.7% and 6.8% for the years ended December 31, 1995, 1994 and 1993, respectively. The quality distribution of the fixed-income portfolio is as follows:
Percentage at Percentage at Rating December 31, 1995 December 31, 1994 ------ ----------------- ----------------- AAA 63.9% 58.4% AA 17.6 20.9 A 13.6 11.8 BBB 4.5 3.7 Non Rated/Other .4 5.2 ----- ----- 100.0% 100.0 %
Investments in the Company's portfolio have varying degrees of risk. Equity securities generally have greater risks than the non-equity portion of the portfolio since these securities are subordinate to rights of debt holders and other creditors of the issuer. Financial instruments with off-balance-sheet risk are used to manage the risks and enhance the yields of the available-for-sale portfolio. This is accomplished by modifying the basis, duration, interest rate or foreign currency characteristics of the portfolio or hedged securities. Net cash requirements are limited to changes in market values which may vary based upon changes in interest rates and other factors. Exposure to credit risk is limited to the carrying value; unless otherwise noted, collateral is not required to support the credit risk. During 1995, the Company added a government bond trading portfolio to benefit from short-term market rate opportunities. The Company has stringent restrictions on the amount of open positions in the trading portfolio limiting its exposure to acceptable levels. At December 31, 1995, there were no trading securities or off-balance-sheet trading positions. As of December 31, 1995, the Company held $729.1 million of asset-backed securities which represented 19.3% of the total investment portfolio. The portfolio included collateralized mortgage obligations (CMOs) and commercial mortgage-backed obligations (CMBs) totaling $335.2 million and $117.2 million, respectively. As of December 31, 1995, the CMO portfolio included sequential bonds representing 65.9% of the CMO portfolio ($221.0 million) with an average life of 3.1 years, and planned amortization class bonds representing 34.1% of the CMO portfolio ($114.2 million) with an average life of 1.6 years. One hundred percent of the CMOs held by the Company are rated AAA by Moody's or Standard & Poor's. At December 31, 1995, the CMB portfolio had an average life of 7.4 years and a weighted average Moody's or Standard & Poor's rating of A. At December 31, 1995, the CMO and CMB portfolios had unrealized gains of $3.9 million and $1.1 million, respectively. The single largest unrealized loss in any CMO security was $.1 million, or .5% of such position, and there were no unrealized losses in any CMB security at December 31, 1995. Both the CMO and CMB portfolios are highly liquid with readily available quotes and contain no residual interests. The remainder of the asset-backed portfolio is invested primarily in auto loan and credit card-backed securities. 15 16 The Company regularly reviews the individual holdings in its portfolio for evidence of impairment. Changes in market value are evaluated to determine the extent to which such changes are attributable to: (i) interest rates, (ii) market-related factors other than interest rates and (iii) financial conditions, business prospects and other fundamental factors specific to the issuer. Declines attributable to issuer fundamentals are reviewed in further detail. Available evidence is considered to estimate the realizable value of the investment. When a security in the Company's investment portfolio has a decline in market value which is other than temporary, the Company is required by GAAP to reduce the carrying value of such security to its net realizable value. It is the Company's general policy to dispose of securities when the Company determines that the issuer is unable to reverse its deteriorating financial condition and the prospects for its business within a reasonable period of time. In less severe circumstances, the Company may decide to dispose of a portion of its holdings in a specific issuer when the risk profile of the investment becomes greater than its tolerance for such risk. RESULTS OF OPERATIONS Operating income, which excludes net realized gains and losses from security sales and one-time items, was $220.1 million, or $2.84 per share, in 1995, $212.7 million, or $2.76 per share, in 1994 and $197.3 million, or $2.61 per share, in 1993. The GAAP combined ratio was 94.3 in 1995, 91.7 (88.5 including the elimination of the "supplemental reserve" discussed below) in 1994 and 89.3 in 1993. Direct premiums written increased 16% to $3,068.9 million in 1995, compared to $2,645.1 million in 1994 and $1,966.4 million in 1993. Net premiums written increased 19% to $2,912.8 million, compared to $2,457.2 million in 1994 and $1,819.2 million in 1993. The difference between direct and net premiums written is largely attributable to premiums written under state-mandated involuntary Commercial Auto Insurance Procedures (CAIP), for which the Company retains no indemnity risk, of $105.4 million in 1995, $115.4 million in 1994 and $98.0 million in 1993. During the three years ended December 31, 1995, the Company provided policy and claim processing services to 28 state CAIPs. Premiums earned, which are a function of the amount of premiums written in the current and prior periods, increased 24% in 1995, compared to 31% in 1994 and 17% in 1993. The Company's Core divisions' net premiums written grew 21%, 38% and 25% for 1995, 1994 and 1993, respectively, primarily driven by an increase in unit sales. In 1995, the Company raised rates an average of 6.5%, compared to no rate changes in 1994 and a rate decrease of .8% in 1993. The Company continues to write standard and preferred auto risks which represented between 5% and 10% of total Core business volume. The Company anticipates continued growth in its Core business in 1996, which could result from the number of states in which the Company seeks to insure all auto risks, from working with independent agents dedicated to regaining market share and from integrating other buying options. The Core divisions generated underwriting profit margins of 5% in 1995, 7% in 1994 and 10% in 1993; the Company's strategy is to achieve a 4% underwriting margin. Claim costs, the Company's most significant expense, represent actual payments made and changes in estimated future payments to be made to or on behalf of its policyholders, including expenses required to settle claims and losses. These costs include a loss estimate for future assignments and assessments, based on current business, under state-mandated involuntary automobile programs. Claims costs are influenced by inflation and loss severity and frequency, the impact of which is mitigated by adequate pricing. Increases in the rate of inflation increase loss payments, which are made after premiums are collected. Accordingly, anticipated rates of inflation are taken into account when the Company establishes premium rates and loss reserves. Claim costs, expressed as a percentage of premiums earned, were 71% in 1995, compared to 67% (excluding the elimination of the "supplemental reserve") in 1994 and 62% in 1993. The Company has allowed loss costs to rise at a faster pace than rates, reflecting the Company's intent to maintain rates at competitive levels. During 1994, based on a review of the adequacy of its total loss reserves, the Company eliminated its $71.0 million "supplemental reserve," resulting in a one-time increase in earnings of $.62 per share, a 3.2 point increase in the underwriting profit margin and a $46.2 million increase in capital. The Company historically established case and IBNR reserves by product with the objective of being accurate to within plus or minus 2%. Pricing has been based on these estimates of reserves by product. Because the Company desired a very high degree of comfort that aggregate reserves were adequate, aggregate reserves were established near the upper end of the reasonable range of reserves, and the difference between such aggregate reserves and the midpoint of the reasonable range of case and IBNR reserves was called the "supplemental reserve." The Company concluded, after examining its historical aggregate reserves, that the practice of setting aggregate reserves at the upper end of the range of reasonable reserves provided an unnecessarily high level of comfort. At December 31, 1994, even without the high level of comfort provided by the "supplemental reserve," the Company's reserves would have been redundant by approximately 2% to 4% over the previous 5 years. The Company believes that this change in the estimate of its reserves placed it more in line with the practices of other companies in the industry. 16 17 Because the Company is primarily an insurer of motor vehicles, it has limited exposure for environmental, product and general liability claims. The Company has established reserves for these exposures, in amounts which it believes to be adequate based on information currently known by it. The Company does not believe that these claims will have a material impact on the Company's liquidity, results of operation, cash flows or financial condition. During 1994, the Company settled the dispute, arising out of its 1985 acquisition of American Star Insurance Company (since renamed National Continental Insurance Company), over the seller's refusal to pay certain losses on pre-sale business written by American Star. Under the settlement, National Continental received $10.1 million from the seller and agreed to be solely responsible for the next $20 million of gross losses. The seller will thereafter be responsible for half the losses, net of reinsurance, if it achieves certain minimum net worth requirements. In addition to the $10.1 million, National Continental will be entitled to the proceeds of various treaty and facultative reinsurance policies that had been purchased by American Star. National Continental has established reserves for these exposures, which are mainly for product liability and environmental claims, in amounts it believes to be adequate based on information currently available to it, including a study by independent actuaries for the seller. Total reserves on this business are $27.9 million, of which $8.8 million is recoverable from reinsurers. The Company will continue to monitor these exposures, adjust the related reserves appropriately as additional information becomes known and disclose any material developments. Policy acquisition and other underwriting expenses as a percentage of premiums earned were 23% in 1995, compared to 25% in 1994 and 28% in 1993. The decrease primarily reflects process improvement initiatives and lower commission programs. Service businesses generated a pretax operating profit of $8.7 million in 1995, compared to $10.0 million in 1994 and $6.8 million in 1993. Recurring investment income (interest and dividends) increased 26% to $199.1 million in 1995, compared to $158.5 million in 1994 and $134.5 million in 1993, primarily due to an increase in the average investment portfolio and a mix shift in the portfolio to taxable securities. Net realized gains on security sales were $46.7 million in 1995, $23.8 million in 1994 and $107.9 million in 1993. A significant portion of the 1993 realized gains resulted from the sale of certain equity securities held in the Company's investment portfolio. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The Consolidated Financial Statements of the Company, along with the related notes, supplementary data and report of independent accountants, are incorporated by reference from the Company's 1995 Annual Report, pages 33 through 46 and pages 50 through 55. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. 17 18 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT A description of the directors, all of whom have been nominated for election as directors at the 1996 Annual Meeting of Shareholders of the Registrant, is incorporated herein by reference from the section entitled "Election of Directors" in the Proxy Statement, pages 2 and 3. A description of the executive officers of the Registrant and its subsidiaries follows. These descriptions reflect the Company's termination of its officership program and consequent elimination of many officer positions, effective December 31, 1993. Unless otherwise indicated, the executive officer has held the position(s) indicated for at least the last five years.
Offices Held and Name Age Last Five Years' Business Experience ---- --- ------------------------------------ Peter B. Lewis 62 Chairman since April 1993; President, Chief Executive Officer and a director of the Registrant and Progressive Casualty Insurance Company ("Progressive Casualty"), the principal subsidiary of the Registrant. Charles B. Chokel 42 Treasurer of the Registrant since December 15, 1994; Chief Financial Officer of the Registrant since April 1991; Senior Vice President - Finance of Progressive Casualty from April 1991 to December 1993; President of the California Division and Vice President of Progressive Casualty prior to April 1991. Allan W. Ditchfield 58 Chief Information Officer of the Registrant since March 1991; Senior Vice President - Information Services of Progressive Casualty from March 1991 to December 1993; Senior Vice President of Systems Engineering at MCI Telecommunications Corporation, Washington, D.C. (telecommunications) prior to March 1991. Bruce W. Marlow 47 Chief Operating Officer of the Registrant; Executive Vice President of Progressive Casualty prior to December 1993. David M. Schneider 58 Chief Legal Officer and Secretary of the Registrant; Senior Vice President of Progressive Casualty prior to December 1993. Tiona M. Thompson 45 Chief Human Resources Officer of the Registrant since December 1993; Vice President - Human Resources of Progressive Casualty from September 1991 to December 1993; Vice President of Progressive Casualty prior to September 1991.
18 19 ITEM 11. EXECUTIVE COMPENSATION Incorporated by reference from the section of the Proxy Statement entitled "Executive Compensation," pages 7 through 17. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Incorporated by reference from the section of the Proxy Statement entitled "Security Ownership of Certain Beneficial Owners and Management," pages 4 through 6. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None 19 20 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K. (a)(1) Listing of Financial Statements The following consolidated financial statements of the Registrant and its subsidiaries, included in the Registrant's Annual Report, are incorporated by reference in Item 8: Report of Independent Accountants Consolidated Statements of Income - December 31, 1995, 1994 and 1993 Consolidated Balance Sheets - December 31, 1995 and 1994 Consolidated Statements of Changes in Shareholders' Equity - December 31, 1995, 1994 and 1993 Consolidated Statements of Cash Flows - December 31, 1995, 1994 and 1993 Notes to Consolidated Financial Statements Supplemental Information* *Not covered by Report of Independent Accountants. (a)(2) Listing of Financial Statement Schedules The following financial statement schedules of the Registrant and its subsidiaries, Report of Independent Accountants and Consent of Independent Accountants are included in Item 14(d): Schedules Report of Independent Accountants Consent of Independent Accountants Schedule I - Summary of Investments - Other than Investments in Related Parties Schedule II - Condensed Financial Information of Registrant 20 21 Schedule III - Supplementary Insurance Information Schedule IV - Reinsurance Schedule VI - Supplemental Information Concerning Property-Casualty Insurance Operations No other schedules are required to be filed herewith pursuant to Article 7 of Regulation S-X. (a)(3) Listing of Exhibits See exhibit index contained herein at pages 36 through 39. Management contracts and compensatory plans and arrangements are identified in the Exhibit Index as Exhibit Nos. (10)(A) through (10)(J). (b) Reports on Form 8-K None. (c) Exhibits The exhibits in response to this portion of Item 14 are submitted concurrently with this report. (d) Financial Statement Schedules The response to this portion of Item 14 is located at pages 27 through 35. 21 22 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. THE PROGRESSIVE CORPORATION March 15, 1996 BY: /s/ Peter B. Lewis ------------------ Peter B. Lewis Chairman, President and Chief Executive Officer Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated. /s/ Peter B. Lewis Chairman, President, Chief Executive March 15, 1996 - ---------------------- Officer and a Director Peter B. Lewis /s/ Charles B. Chokel Treasurer and Chief Financial Officer March 15, 1996 - ---------------------- Charles B. Chokel /s/ Jeffrey W. Basch Chief Accounting Officer March 15, 1996 - ---------------------- Jeffrey W. Basch Milton N. Allen* Director March 15, 1996 - ---------------------- Milton N. Allen B. Charles Ames* Director March 15, 1996 - ---------------------- B. Charles Ames Stephen R. Hardis* Director March 15, 1996 - ---------------------- Stephen R. Hardis Janet Hill* Director March 15, 1996 - ---------------------- Janet Hill Norman S. Matthews* Director March 15, 1996 - ---------------------- Norman S. Matthews 22 23 Donald B. Shackelford* Director March 15, 1996 - ---------------------- Donald B. Shackelford Paul B. Sigler* Director March 15, 1996 - ---------------------- Paul B. Sigler * DAVID M. SCHNEIDER, by signing his name hereto, does sign this document on behalf of the persons indicated above pursuant to a power of attorney duly executed by such persons. By /s/ David M. Schneider March 15, 1996 ------------------------ David M. Schneider Attorney-in-fact 23 24 ANNUAL REPORT ON FORM 10-K ITEM 14(d) FINANCIAL STATEMENT SCHEDULES YEAR ENDED DECEMBER 31, 1995 THE PROGRESSIVE CORPORATION MAYFIELD VILLAGE, OHIO 24 25 REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders, The Progressive Corporation: Our report on the consolidated financial statements of The Progressive Corporation and subsidiaries has been incorporated by reference in this Form 10-K from page 33 of the 1995 Annual Report to Shareholders of The Progressive Corporation. In connection with our audits of such financial statements, we have also audited the related financial statement schedules listed in the index on pages 20 and 21 of this Form 10-K. In our opinion, the financial statement schedules referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information required to be included therein. COOPERS & LYBRAND L.L.P. Cleveland, Ohio January 24, 1996 25 26 CONSENT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders, The Progressive Corporation: We consent to the incorporation by reference in the Registration Statement of The Progressive Corporation on Form S-8 (File No. 33-57121) filed December 29, 1994, the Registration Statement on Form S-8 (File No. 33-64210) filed June 10, 1993, the Registration Statement on Form S-8 (File No. 33-51034) filed August 20, 1992, the Registration Statement on Form S-8 (File No. 33-46944) filed April 3, 1992, the Registration Statement on Form S-8 (File No. 33-38793) filed February 4, 1991, the Registration Statement on Form S-8 (File No. 33-38107) filed December 6, 1990, the Registration Statement on Form S-8 (File No. 33-37707) filed November 9, 1990, the Registration Statement on Form S-8 (File No. 33-33240) filed January 31, 1990, and the Registration Statement on Form S-8 (File No. 33-16509) filed August 14, 1987, of our reports dated January 24, 1996, on our audits of the consolidated financial statements and financial statement schedules of The Progressive Corporation and subsidiaries as of December 31, 1995 and 1994, and for each of the three years in the period ended December 31, 1995, which reports are included in this Annual Report on Form 10-K. COOPERS & LYBRAND L.L.P. Cleveland, Ohio March 14, 1996 26 27 SCHEDULE I -- SUMMARY OF INVESTMENTS -- OTHER THAN INVESTMENTS IN RELATED PARTIES THE PROGRESSIVE CORPORATION AND SUBSIDIARIES (millions)
December 31, 1995 ---------------------------------------------------------------- Amount At Which Shown In The Type of Investment Cost Market Value Balance Sheet ---------------------------------------------------------------- Fixed Maturities: Available-for-sale: United States Government and government agencies and authorities $ 676.7 $ 686.1 $ 686.1 States, municipalities and political subdivisions 1,186.9 1,211.6 1,211.6 Asset-backed securities 722.3 729.1 729.1 Foreign government obligations 33.9 34.9 34.9 Corporate and other debt securities 62.2 63.2 63.2 Redeemable preferred stock 47.5 48.0 48.0 ---------------------------------------------------------------- Total fixed maturities 2,729.5 2,772.9 2,772.9 ---------------------------------------------------------------- Equity securities: Common stocks 277.6 310.0 310.0 Preferred stocks 379.4 382.3 382.3 ---------------------------------------------------------------- Total equity securities 657.0 692.3 692.3 ---------------------------------------------------------------- Short-term investments 302.8 302.8 302.8 ---------------------------------------------------------------- Total investments $3,689.3 $3,768.0 $3,768.0 ================================================================
The Company did not have any securities of one issuer with an aggregate cost or market value exceeding 10% of total shareholders' equity at December 31, 1995. 27 28 SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT CONDENSED STATEMENTS OF INCOME THE PROGRESSIVE CORPORATION (PARENT COMPANY) (millions)
Years Ended December 31, 1995 1994 1993 -------------------------------------------- Revenues Dividends from subsidiaries* $120.8 $ 53.0 $131.3 Intercompany investment income* 37.2 29.8 6.8 -------------------------------------------- 158.0 82.8 138.1 -------------------------------------------- Expenses Interest expense 57.1 56.7 42.3 Other operating costs and expenses 3.6 3.8 3.2 Non-recurring item (1) -- -- 4.0 Loss on disposition of subsidiary* -- 5.3 -- -------------------------------------------- 60.7 65.8 49.5 -------------------------------------------- Operating income and income before income taxes and other items below 97.3 17.0 88.6 Income tax benefit (7.3) (12.2) (20.9) -------------------------------------------- Income before equity in undistributed earnings of subsidiaries 104.6 29.2 109.5 Equity in undistributed net income of consolidated subsidiaries* 145.9 245.1 157.8 -------------------------------------------- Net income $250.5 $274.3 $267.3 ============================================
*Eliminated in consolidation. (1) Represents a $4.0 million charge on extinguishment of the 8 3/4% Debentures due 2017. See notes to condensed financial statements. 28 29 SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued) CONDENSED BALANCE SHEETS THE PROGRESSIVE CORPORATION (PARENT COMPANY) (millions)
December 31, 1995 1994 ------------------------------------------ ASSETS Investment in non-consolidated affiliates $ .4 $ .4 Investment in subsidiaries* 1,456.7 1,187.4 Receivable from subsidiary* 660.8 599.4 Intercompany receivable* 25.6 26.7 Income taxes 26.1 30.5 Other assets 1.6 .9 ------------------------------------------ TOTAL ASSETS $2,171.2 $1,845.3 ========================================== LIABILITIES AND SHAREHOLDERS' EQUITY Accounts payable and accrued expenses $ 20.3 $ 19.0 Funded debt 675.1 674.4 ------------------------------------------ Total liabilities 695.4 693.4 ------------------------------------------ Shareholders' equity: Preferred Shares, no par value (authorized 20.0 serial Preferred Shares and 5.0 Voting Preference Shares) 9 3/8% Serial Preferred Shares, Series A (cumulative, liquidation preference of $25 per share, issued and outstanding 3.4 and 3.5 shares) 83.6 85.8 Common Shares, $1.00 par value, authorized 200.0 shares, issued 83.1 and 82.4, including treasury shares of 11.0 and 11.2 72.1 71.2 Paid-in capital 374.8 357.1 Net unrealized appreciation (depreciation) of investment in equity securities of consolidated subsidiaries 51.1 (30.7) Retained earnings 894.2 668.5 ------------------------------------------ Total shareholders' equity 1,475.8 1,151.9 ------------------------------------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $2,171.2 $1,845.3 ==========================================
*Eliminated in consolidation. See notes to condensed financial statements. 29 30 SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued) CONDENSED STATEMENTS OF CASH FLOWS THE PROGRESSIVE CORPORATION (PARENT COMPANY) (millions)
Years Ended December 31, 1995 1994 1993 ------------------------------------------ CASH FLOWS FROM OPERATING ACTIVITIES: Net income $ 250.5 $ 274.3 $ 267.3 Adjustments to reconcile net income to net cash used in operating activities: Equity in income of consolidated subsidiaries (266.7) (298.1) (289.1) Amortization -- 1.5 0.1 Changes in: Intercompany receivable or payable 1.6 (61.1) (7.2) Accounts payable and accrued expenses 1.3 12.9 (5.3) Income taxes 3.9 24.3 2.8 Other, net (.1) 1.0 3.8 ------------------------------------------ Net cash used in operating activities (9.5) (45.2) (27.6) CASH FLOWS FROM INVESTING ACTIVITIES: Additional investments in equity securities of consolidated subsidiaries (42.1) (56.9) (4.7) Return of capital from consolidated subsidiary -- 20.1 32.9 Dividends received from consolidated subsidiaries 120.8 53.0 131.3 ------------------------------------------ Net cash provided by investing activities 78.7 16.2 159.5 CASH FLOWS FROM FINANCING ACTIVITIES: Proceeds from exercise of stock options 10.1 3.6 .9 Tax benefits from the exercise of stock options 8.5 1.5 .9 Proceeds from issuance of stock -- -- 177.0 Proceeds from funded debt -- 198.4 148.2 Payments on funded debt -- -- (240.0) Receivable from subsidiary (61.4) (114.8) (183.6) Dividends paid to shareholders (24.1) (23.4) (23.1) Acquisition of treasury shares (2.3) (36.3) (12.2) ------------------------------------------ Net cash provided by (used in) financing activities (69.2) 29.0 (131.9) ------------------------------------------ Decrease in cash -- -- -- Cash, beginning of year -- -- -- ------------------------------------------ Cash, end of year $ -- $ -- $ -- ==========================================
See notes to condensed financial statements. 30 31 SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED) NOTES TO CONDENSED FINANCIAL STATEMENTS The accompanying condensed financial statements of The Progressive Corporation (the "Registrant") should be read in conjunction with the consolidated financial statements and notes thereto of The Progressive Corporation and subsidiaries included in the Registrant's 1995 Annual Report. STATEMENTS OF CASH FLOWS -- For the purpose of the Statements of Cash Flows, cash includes only bank demand deposits. The Registrant paid income taxes of $75.5 million, $89.8 million, and $91.0 million in 1995, 1994 and 1993, respectively. Total interest paid was $56.5 million for 1995, $49.8 million for 1994 and $40.9 million for 1993. DEBT -- Funded debt at December 31 consisted of:
(millions) 1995 1994 --------------------------- 6.60% Notes $198.7 $198.5 7% Notes 148.3 148.2 8 3/4% Notes 29.2 29.0 10% Notes 149.5 149.4 10 1/8% Subordinated Notes 149.4 149.3 --------------------------- $675.1 $674.4 ===========================
Funded debt is the amount the Registrant has borrowed and contributed to the capital of its insurance subsidiaries or borrowed for other long-term purposes. In May 1990, the Registrant entered into a revolving credit arrangement with National City Bank, which is reviewed by the bank annually. Under this agreement, the Registrant had the right to borrow up to $50.0 million. In February 1994, the Registrant reduced this revolving credit arrangement to $20.0 million. By selecting from available credit options, the Registrant may elect to pay interest at rates related to the London interbank offered rate, the bank's base rate or at a money market rate. A commitment fee is payable on any unused portion of the committed amount at the rate of .125% per annum. At December 31, 1995 and 1994, the Registrant had no borrowings under this arrangement. In January 1994, the Registrant sold $200.0 million of noncallable 6.60% Notes due 2004 with interest payable semiannually. The fair value of the Notes was $203.6 million and $174.2 million at December 31, 1995 and 1994, respectively. In October 1993, the Registrant sold $150.0 million of noncallable 7% Notes due 2013 with interest payable semiannually. The fair value of these Notes was $156.6 million and $124.6 million at December 31, 1995 and 1994, respectively. In May 1989, the Registrant issued $30.0 million of 8 3/4% Notes due 1999 in exchange for $30.0 million of the 8 3/4% Debentures due 2017. These Notes are noncallable and interest is payable semiannually. The fair value of these Notes was $32.7 million and $30.3 million at December 31, 1995 and 1994, respectively. 31 32 SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued) NOTES TO CONDENSED FINANCIAL STATEMENTS In December 1988, the Registrant sold $150.0 million of 10% Notes due 2000 and $150.0 million of 10 1/8% Subordinated Notes due 2000. All such Notes are noncallable with interest payable semiannually on both issues. The fair value of the 10% Notes and 10 1/8% Subordinated Notes were $175.9 million and $176.1 million, respectively, at December 31, 1995, and $159.8 million and $159.7 million, respectively, at December 31, 1994. In February 1987, the Registrant sold $100.0 million ($70.0 million after the May 1989 debt exchange) of 8 3/4% Debentures due 2017 with interest payable semiannually. In December 1993, the Registrant redeemed the entire $70.0 million principal amount of these Debentures. The Registrant redeemed the Debentures at 105.425% of the principal amount, plus accrued interest, with the proceeds of the sale of certain securities in its investment portfolios. A $4.0 million charge on debt extinguishment was recorded as a "non-recurring item." As of December 31, 1995, the Registrant was in compliance with its debt covenants. Aggregate principal payments on funded debt outstanding at December 31, 1995 are $0 for 1996 through 1998, $30.0 million for 1999 and $300.0 million for 2000 and $350.0 million thereafter. INCOME TAXES -- The Registrant files a consolidated Federal income tax return with all subsidiaries. The Federal income taxes in the accompanying Condensed Balance Sheets represent amounts recoverable from the Internal Revenue Service by the Registrant as agent for the consolidated tax group. The Registrant and its subsidiaries have adopted, pursuant to a written agreement, a method of allocating consolidated Federal income taxes. Amounts allocated to the subsidiaries under the written agreement are included in Intercompany Receivable from Subsidiaries in the accompanying Condensed Balance Sheets. INVESTMENTS IN CONSOLIDATED SUBSIDIARIES -- The Registrant, through its investment in consolidated subsidiaries, recognizes the changes in unrealized gains (losses) on equity securities of the subsidiaries. These amounts were:
(millions) 1995 1994 1993 ---------------------------------------- Unrealized gains (losses): Available-for-sale: fixed maturities $ 86.1 $(73.4) $ 1.6 equity securities 40.0 (25.4) (67.6) Deferred income taxes (44.3) 34.6 22.0 ---------------------------------------- $ 81.8 $(64.2) $(44.0) ========================================
OTHER MATTERS -- The information relating to incentive compensation plans is incorporated by reference from Note 8, Employee Benefit Plans, "Incentive Compensation Plans" on page 45 of the Registrant's 1995 Annual Report. 32 33 SCHEDULE III -- SUPPLEMENTARY INSURANCE INFORMATION THE PROGRESSIVE CORPORATION AND SUBSIDIARIES
Future policy Other benefits, policy Deferred losses, claims policy claims and and acquisition loss Unearned benefits Premium Segment costs expenses(2) premiums payable revenue -------------------------------------------------------- Year ended December 31, 1995: Insurance Lines $181.9 $1,610.5 $1,209.6 $ -- $2,727.2 ======================================================== Year ended December 31, 1994: Insurance Lines $161.6 $1,434.4 $1,036.7 $ -- $2,191.1 ======================================================== Year ended December 31, 1993: Insurance Lines $124.6 $1,348.6 $772.0 $ -- $1,668.7 ========================================================
Benefits, Amortization claims, of deferred losses and policy Other Net Investment settlement acquisition operating premiums Segment income(1) expenses(2) costs expenses written ---------------------------------------------------------- Year ended December 31, 1995: Insurance Lines $245.8 $1,943.8 $459.6 $167.2 $2,912.8 ========================================================== Year ended December 31, 1994: Insurance Lines $182.3 $1,397.3 $391.5 $150.8 $2,457.2 ========================================================== Year ended December 31, 1993: Insurance Lines $242.4 $1,028.0 $311.6 $151.3 $1,819.2 ==========================================================
(1)Excluding investment expenses of $8.1 million in 1995, $8.7 million in 1994, and $10.2 million in 1993. (2)During 1994, based on a review of the adequacy of its total loss reserves, the Company eliminated its $71.0 million "supplemental reserve." See Management's Discussion and Analysis of Financial Condition and Results of Operations beginning on page 14 for further discussion. 33 34 SCHEDULE IV -- REINSURANCE THE PROGRESSIVE CORPORATION AND SUBSIDIARIES (millions)
Assumed Percentage Year Ended Ceded to From of Amount - ---------- Gross Other Other Assumed December 31, 1995 Amount Companies Companies Net Amount to Net - ----------------- -------------------------------------------------------------------- Life Insurance in force $ .4 $ .1 $ -- $ .3 -- ==================================================================== Premiums earned: Accident and health $ -- $ -- $ -- $ -- -- % Property and liability 2,895.9 168.8 .1 2,727.2 -- Life -- -- -- -- -- ------------------------------------------------------- Total premiums earned $ 2,895.9 $ 168.8 $ .1 $ 2,727.2 -- ======================================================= December 31, 1994 - ----------------- Life Insurance in force $ .7 $ .2 $ -- $ .5 -- ==================================================================== Premiums earned: Accident and health $ -- $ -- $ -- $ -- -- % Property and liability 2,378.4 192.2 4.9 2,191.1 .2 Life -- -- -- -- -- ------------------------------------------------------- Total premiums earned $ 2,378.4 $ 192.2 $ 4.9 $ 2,191.1 ======================================================= December 31, 1993 - ----------------- Life Insurance in force $ 1.4 $ .3 $ -- $ 1.1 -- ==================================================================== Premiums earned: Accident and health $ -- $ -- $ -- $ -- -- % Property and liability 1,808.8 149.8 9.7 1,668.7 .6 Life -- -- -- -- -- ------------------------------------------------------- Total premiums earned $ 1,808.8 $ 149.8 $ 9.7 $ 1,668.7 =======================================================
34 35 SCHEDULE VI -SUPPLEMENTAL INFORMATION CONCERNING PROPERTY - CASUALTY INSURANCE OPERATIONS THE PROGRESSIVE CORPORATION AND SUBSIDIARIES (millions)
Paid Losses and Losses and Loss Adjustment Expenses Loss Adjustment Incurred Related to Expenses -------------------------------------- --------------- Current Prior Year Ended Year Years - ---------- ------------------ --------------- December 31, 1995 $2,002.1 $ (56.6) $1,729.8 ================== =============== ============== December 31, 1994(1) $1,539.8 $(142.5) $1,311.0 ================== =============== ============== December 31, 1993 $1,126.7 $ (98.5) $ 972.2 ================== =============== ==============
Pursuant to Rule 12-18 of Regulation S-X. See Schedule III, page 33, for the additional information required in Schedule VI. (1)During 1994, based on a review of the adequacy of its total loss reserves, the Company eliminated its $71.0 million "supplemental reserve." See Management's Discussion and Analysis of Financial Condition and Results of Operations beginning on page 14 for further discussion. 35 36 EXHIBIT INDEX
Exhibit No. Under Reg. Form 10-K If Incorporated by Reference, Documents with S-K, Item 601 Exhibit No. Description of Exhibit Which Exhibit was Previously Filed with SEC - ------------------------------------------------------------------------------------------------------------------------------------ (3)(i) 3(A) Amended Articles of Incorporation of The Progressive Quarterly Report on Form 10-Q Corporation ("Progressive"), as amended (Filed with SEC on April 23, 1993; see Exhibit 3 therein) (3)(ii) 3(B) Code of Regulations of Progressive Quarterly Report on Form 10-Q (Filed with SEC on May 6, 1991; see Exhibit 3(B) therein) (4) 4(A) $4,000,000 Hillsborough County Industrial Development Annual Report on Form 10-K (Filed with Authority Industrial Development Revenue Bonds, Series SEC on March 28, 1995; see Exhibit 4(A) 1982 (dated December 16, 1982); Loan and Debt Obligation therein) Agreement; Indenture of Trust; Mortgage and Security Agreement; Unconditional Guaranty (4) 4(B) Indenture dated as of November 15, 1988 between Annual Report on Form 10-K (Filed with SEC on Progressive and State Street Bank and Trust March 29, 1994; see Exhibit 4(B) therein) Company (successor in interest to Rhode Island Hospital Trust National Bank), as Trustee ("Subordinated Indenture") (including Table of Contents and cross-reference sheet) (4) 4(C) Form of 10 1/8% Subordinated Notes due 2000 issued in Annual Report on Form 10-K (Filed with SEC on the aggregate principal amount of $150,000,000 under March 29, 1994; see Exhibit 4(C) therein) the Subordinated Indenture (4) 4(D) Indenture dated as of November 15, 1988 between Annual Report on Form 10-K (Filed with SEC on Progressive and State Street Bank and Trust Company March 29, 1994; see Exhibit 4(D) therein) (successor in interest to The First National Bank of Boston), as Trustee ("1988 Senior Indenture") (including Table of Contents and cross-reference sheet)
36 37 EXHIBIT INDEX
Exhibit No. Under Reg. Form 10-K If Incorporated by Reference, Documents with S-K, Item 601 Exhibit No. Description of Exhibit Which Exhibit was Previously Filed with SEC - ------------------------------------------------------------------------------------------------------------------------------------ (4) 4(E) Form of 10% Notes due 2000 issued in the aggregate Annual Report on Form 10-K (Filed with SEC on principal amount of $150,000,000 under the 1988 March 29, 1994; see Exhibit 4(E) therein) Senior Indenture (4) 4(F) Form of 8 3/4% Notes due 1999 issued in the Annual Report on Form 10-K (Filed with SEC on aggregate principal amount of $30,000,000 under the March 28, 1995; see Exhibit 4(F) therein) 1988 Senior Indenture (4) 4(G) $20,000,000 Unsecured Line of Credit with National Annual Report on Form 10-K (Filed with SEC on City Bank (dated May 23, 1990; renewed May 20, 1992, March 29, 1994; See Exhibit 4(I) therein) and amended February 1, 1994) (4) 4(H) Indenture dated as of September 15, 1993 between Quarterly Report on Form 10-Q (Filed with SEC Progressive and State Street Bank and Trust Company on November 5, 1993; see Exhibit 4(A) therein) (successor in interest to The First National Bank of Boston), as Trustee ("1993 Senior Indenture") (including Table of Contents and cross-reference sheet) (4) 4(I) Form of 7% Notes due 2013 issued in the aggregate Quarterly Report on Form 10-Q (Filed with SEC principal amount of $150,000,000 under the 1993 on November 5, 1993; see Exhibit 4(B) therein) Senior Indenture (4) 4(J) Form of 6.60% Notes due 2004 issued in the aggregate Annual Report on Form 10-K (Filed with SEC on principal amount of $200,000,000 under the 1993 March 29, 1994; see Exhibit 4(L) therein) Senior Indenture (4) 4(K) Supplemental Indenture dated March 15, 1996 between Contained in Exhibit Binder the Registrant and State Street Bank and Trust Company, evidencing the designation of State Street Bank and Trust Company, as successor Trustee under the 1993 Senior Indenture
37 38 EXHIBIT INDEX
Exhibit No. Under Reg. Form 10-K If Incorporated by Reference, Documents with S-K, Item 601 Exhibit No. Description of Exhibit Which Exhibit was Previously Filed with SEC - ------------------------------------------------------------------------------------------------------------------------------------ (10)(ii) 10(A) Construction Contract dated March 2, 1993 between Annual Report on Form 10-K (Filed with SEC on Progressive Casualty Insurance Company and The March 30, 1993; see Exhibit 10(A) therein) Whiting-Turner Contracting Company (10)(iii) 10(B) The Progressive Corporation 1995 Gainsharing Plan, Contained in Exhibit Binder as amended on December 8, 1995 (10)(iii) 10(C) The Progressive Corporation 1995 Executive Bonus Contained in Exhibit Binder Plan, as amended on December 8, 1995 and as further amended on February 21, 1996 (10)(iii) 10(D) The Progressive Corporation Directors Deferral Plan Quarterly Report on Form 10-Q (Filed with SEC (Amendment and Restatement) on November 13, 1991; see Exhibit 10(B) therein) (10)(iii) 10(E) The Progressive Corporation 1989 Incentive Plan Annual Report on Form 10-K (Filed with SEC on (amended and restated as of April 24, 1992, as March 30, 1993; see Exhibit 10(G) therein) further amended on July 1, 1992 and February 5, 1993) (10)(iii) 10(F) Share Option Agreement dated March 17, 1989, between Annual Report on Form 10-K (Filed with SEC on Progressive and David M. Schneider March 28, 1995; see Exhibit 10(H) therein) (10)(iii) 10(G) The Progressive Corporation 1990 Directors' Stock Quarterly Report on Form 10-Q (Filed with SEC Option Plan (Amended and Restated as of April 24, on November 12, 1992; see Exhibit 10(A) 1992 as further amended on July 1, 1992) therein) (10)(iii) 10(H) Agreement dated March 11, 1996 with Bruce W. Marlow Contained in Exhibit Binder
38 39 EXHIBIT INDEX
Exhibit No. Under Reg. Form 10-K If Incorporated by Reference, Documents with S-K, Item 601 Exhibit No. Description of Exhibit Which Exhibit was Previously Filed with SEC - ------------------------------------------------------------------------------------------------------------------------------------ (10)(iii) 10(I) The Progressive Corporation 1995 Incentive Plan Annual Report on Form 10-K (Filed with SEC on March 28, 1995; see Exhibit 10(L) therein) (10)(iii) 10(J) The Progressive Corporation Executive Deferred Annual Report on Form 10-K (Filed with SEC Compensation Plan on March 28, 1995; see Exhibit 10(M) therein (11) 11 Computation of Earnings Per Share Contained in Exhibit Binder (13) 13 The Progressive Corporation 1995 Annual Report Contained in Exhibit Binder (21) 21 Subsidiaries of The Progressive Corporation Contained in Exhibit Binder (23) 23 Consent of Independent Accountants Incorporated herein by reference to page 26 of this Annual Report on Form 10-K (24) 24 Powers of Attorney Contained in Exhibit Binder (27) 27 Financial Data Schedule This exhibit is contained in the EDGAR filing of the Annual Report on Form 10-K for the year ended December 31, 1995 only (28) 28 Schedule P as Filed with State Regulatory Authorities Contained in Exhibit Binder
No other exhibits are required to be filed herewith pursuant to Item 601 of Regulation S-K. 39 EX-4.K 2 EXHIBIT 4(K) 1 Exhibit 4(K) THE PROGRESSIVE CORPORATION AND STATE STREET BANK AND TRUST COMPANY, as Successor Trustee FIRST SUPPLEMENTAL INDENTURE Dated as of March 15, 1996 2 THIS FIRST SUPPLEMENTAL INDENTURE, dated as of March 15, 1996 (this "Supplemental Indenture") by and between THE PROGRESSIVE CORPORATION, an Ohio corporation (the "Issuer") and STATE STREET BANK AND TRUST COMPANY, a Massachusetts trust company ("SSB"), in its capacity as Successor Trustee (in such capacity, the "Successor Trustee"). WITNESSETH: WHEREAS, the Issuer entered into an Indenture, dated as of September 15, 1993 (the "Indenture"), with The First National Bank of Boston ("FNBB"), in its capacity as Trustee (in such capacity, the "Original Trustee"), pursuant to which the Issuer may from time to time issue its unsecured debentures, notes and other evidences of indebtedness in one or more series; and WHEREAS, SSB has acquired substantially all of the corporate trust business of FNBB; and WHEREAS, the parties hereto wish to confirm the succession of SSB as trustee under the Indenture. NOW, THEREFORE, in consideration of the premises and other good and valuable consideration, the parties hereto mutually covenant and agree as follows: 1. Pursuant to Section 6.11 of the Indenture, SSB, by virtue of its succession to the corporate trust business of FNBB, is the Successor Trustee under the Indenture. 2. SSB represents and warrants that (a) to the best of its knowledge, it is qualified under Section 310(b) of the Trust Indenture Act of 1939 and (b) it is eligible to serve as Successor Trustee under the provisions of Section 6.8 of the Indenture. SSB hereby accepts its appointment as Successor Trustee. 3. The Issuer hereby confirms the removal of the Original Trustee and the appointment of SSB as the Successor Trustee, and further confirms that all rights and powers of the trustee under the Indenture have vested in the Successor Trustee. 4. The definition of "Corporate Trust Office" in Section 1.1 of the Indenture shall be deleted and the following shall be added in its place: 3 "Corporate Trust Office" means the office of the Trustee at which the corporate trust business of the Trustee shall, at any particular time, be principally administered, which office is currently located at Two International Place, Boston, Massachusetts 02110, Attn.: Corporate Trust Administration. 5. In all other ways the Indenture is hereby ratified and confirmed. THE PROGRESSIVE CORPORATION By /s/ Charles B. Chokel -------------------------------- Charles B. Chokel Treasurer [Corporate Seal] Attest: By /s/ David M. Schneider ------------------------- David M. Schneider Secretary STATE STREET BANK AND TRUST COMPANY By /s/ Ruth A. Smith ------------------------------- Ruth A. Smith Assistant Vice President [Corporate Seal] Attest: By /s/ Debra J. Gauthier ------------------------- Debra J. Gauthier Senior Account Administrator 4 STATE OF OHIO ) ) ss.: COUNTY OF CUYAHOGA ) On this 14th day of March, 1996, before me personally came Charles B. Chokel, to me personally known, who, being by me duly sworn, did depose and say that he is a resident of Cuyahoga County, Ohio; that he is an officer of THE PROGRESSIVE CORPORATION, one of the corporations described in and which executed the above instrument; that he knows the corporate seal of said corporation; that the seal affixed to said instrument is such corporate seal; that it was so affixed by authority of the Board of Directors of said corporation, and that he signed his name thereto by like authority. /s/ Cynthia E. Barth --------------------------------- Notary Public My commission expires: [Notarial Seal] STATE OF MASSACHUSETTS ) ) ss.: COUNTY OF SUFFOLK ) On this 15th day of March, 1996, before me personally came Ruth A. Smith, to me personally known, who, being by me duly sworn, did depose and say that she is a resident of Norfolk County, Massachusetts; that she is an authorized officer of STATE STREET BANK AND TRUST COMPANY, one of the corporations described in and which executed the above instrument; that she knows the corporate seal of said corporation; that the seal affixed to said instrument is such corporate seal; that it was so affixed by authority of the Board of Directors of said corporation, and that she signed her name thereto by like authority. /s/ Cecil Gilbert ---------------------------------- Notary Public My commission expires: [Notarial Seal] EX-10.B 3 EXHIBIT 10(B) 1 EXHIBIT 10(B) THE PROGRESSIVE CORPORATION 1995 GAINSHARING PLAN --------------------- 1. The Progressive Corporation and its subsidiaries ("Progressive" or the "Company") have adopted The Progressive Corporation 1995 Gainsharing Plan (the "Plan") as part of their overall compensation program. The objective of the compensation program is to pay competitive base salaries and for gainsharing to bring total cash compensation to the top of the market when Core Business and Division performance meets expectations. Participants will have the opportunity to earn cash compensation in excess of the top of the market when Core Business and Division performance exceeds expectations. 2. Plan participants for each Plan year shall be selected by the Executive Compensation Committee (the "Committee") of the Board of Directors of The Progressive Corporation from those officers and regular employees of Progressive who are assigned primarily to the Core Business or a corporate support function as of December 1 of that Plan year. The gainsharing opportunity, if any, for those executive officers who participate in The Progressive Corporation 1995 Executive Bonus Plan will be provided by and be a component of that plan. The Plan shall be administered by or under the direction of the Committee. 3. Annual Gainsharing Payments under the Plan will be determined by application of the following formula: Annual Gainsharing Payment = Paid Earnings x Target Percentage x Performance Factor 4. Paid Earnings for any Plan year means the following items paid to a participant during the Plan year: (a) regular, vacation, sick, holiday, funeral and overtime pay, (b) lump sum merit adjustments based on performance and (c) retroactive payments of any of the foregoing items relating to the same Plan year. For purposes of the Plan, Paid Earnings shall not include any short-term or long-term disability payments made to the participant or the earnings replacement component of any worker's compensation award. 5. Target Percentages vary by position. Target Percentages for Plan participants typically are as follows:
POSITION TARGET % Division Presidents, Product Leaders and Corporate Support Team Members 60% Community Managers 50% Senior Product Managers (PM's) and Senior Division Claims Managers 35% Division DRG Members, Function Heads and PM's 25%
2
POSITION TARGET % Regional Claims Managers, Finance Managers, and Group Managers 13% Senior Professionals and Managers 10% Professionals and Supervisors (e.g. CSR's, Claims Reps, etc.) 8%
Target Percentages may be changed with the approval of the Chief Operating Officer, Chief Human Resources Officer and the relevant process leader or product leader. Target Percentages also may be changed from year to year. 6. The Performance Factor ---------------------- A. General ------- The Performance Factor shall consist of a Profitability and Growth Component and a Cost Structure Improvement Component, as described below (the "Performance Components"). The Performance Components will be weighted to reflect the nature of the individual participant's assigned responsibilities. The weighting factors may differ among participants and may be changed from year to year by or under the direction of the Committee. B. Profitability and Growth Component ---------------------------------- The Profitability and Growth Component measures overall operating performance of Progressive's core personal and commercial automobile insurance business ("Core Business"), as a whole, and the assigned Division or Product (if applicable), for the Plan year in respect of which an annual Gainsharing Payment is to be made. For purposes of computing a score for this Component, operating performance results are measured by the Gainsharing Matrix, as established by or under the direction of the Committee for the Plan year, which assigns a Profitability and Growth Score to various combinations of profitability (as measured by the GAAP combined ratio) and growth (based on year-to-year change in market share) outcomes. Market share is determined in terms of direct written premium. For the Core Business as a whole, the market means all personal auto premium and all commercial auto premium in the United States, plus personal auto premium in Ontario, Canada. For Personal Lines Divisions, the market means personal auto premium in active states. All market information shall be as published by A.M. Best Company, Inc., or other sources selected by the Committee. 2 3 C. Cost Structure Improvement Component ------------------------------------- The Cost Structure Improvement Component measures success in achieving cost structure improvement for the Core Business, as a whole, and for the assigned Division, if any. Results are reflected in a Cost Structure Improvement Score. For purposes of computing the Cost Structure Improvement Score, cost structure improvement is measured by comparing the sum of the GAAP Underwriting Expense Ratio ("Underwriting Expense Ratio") and Loss Adjustment Expense Ratio ("LAE Ratio") achieved for the Plan year (collectively, "Actual Expense Ratio") against defined expense objectives for that year, as established by or under the direction of the Committee ("Target Expense Ratio"). The Target Expense Ratio, including its individual components, may vary by Division and/or for the Core Business as a whole, and may be changed from year to year. For 1995, and for each Plan year thereafter until otherwise determined by the Committee, the Target Expense Ratio for the Core Business, as a whole, shall be 33, including a target LAE Ratio of 10 and a target Underwriting Expense Ratio of 23. The Cost Structure Improvement Score will be computed in accordance with the following formula: Cost Structure Improvement = 1+ [Target Expense Ratio-Actual Expense Ratio] Score ------------------------------------------- 4 D. Component Weighting ------------------- Performance Components are weighted by Core Business and Division or Product, as applicable. The weighting factors may differ among participants and may be changed from year to year. For participants in the Core Business, the typical weighting shall be as follows:
------------------------------------------- Weighting ------------------------------------------------------------------- Performance Profitability Cost Factor and Growth Structure Total ------------------------------------------------------------------- Core Business 35% 15% 50% Results ------------------------------------------------------------------- Division Results 35% 15% 50% ------------------------------------------------------------------- Total 70% 30% 100% -------------------------------------------------------------------
There will typically be no Division Component for participants assigned to a corporate support function (such as Finance, Human Resources, Law and Information Services) and others who are not assigned primarily to a Division. Individualized programs may be developed if and to the extent 3 4 deemed appropriate by the Company's Chief Executive Officer ("CEO") or Chief Operating Officer ("COO"). The Performance Score for each Performance Component is multiplied by the assigned weighting factor to produce a Weighted Performance Score. The sum of the Weighted Performance Scores equals the Performance Factor. The final Performance Factor can vary from 0 to 2.0, based on actual performance versus pre-established objectives. In some cases, the performance score for a Performance Component may be above 2.0 or below 0. The individual scores (positive and negative, above 2.0 and below 0) are not adjusted, but go directly into the calculation of the Performance Factor, which is capped at 0 and 2.0. 7.A. Subject to Paragraph 8 below, no later than December 31 of each Plan year, each participant with a Target Percentage of 8% or 10% will receive an initial payment in respect of his or her Gainsharing Payment for such Plan year equal to 80% of an amount calculated on the basis of Paid Earnings for the first 11 months of the Plan year, performance data through such 11 month period (estimated, if necessary) and one month of forecasted operating results. No later than February 15 of the following year, each such participant shall receive the balance of his or her Gainsharing Payment, if any, for such Plan year, based on his or her Paid Earnings for the entire Plan year and performance data for the Plan year, including the Company's best estimate of Core Business market share growth. B. Subject to Paragraph 8 below, no later than February 15 of the year immediately following the Plan year for which a Gainsharing Payment is to be made, each participant with a Target Percentage of 13% or greater will receive a payment in respect of his or her Gainsharing Payment for such Plan year in an amount equal to 90% of his or her estimated Gainsharing Payment for such year ("Estimated Payment"), calculated on the basis of Paid Earnings for the entire Plan year and actual performance data for such Plan year, including the Company's best estimate of Core Business market share growth for the Plan year. The balance of the Gainsharing Payment for such Plan year, if any, will be made to each such participant no later than the following September 30 or, if later, within thirty (30) days following the Company's receipt of all market share information necessary to compute final Gainsharing Payment amounts for such Plan year. Each participant who is employed by the Company as of the date of the final Gainsharing Payment determination and who has a Target Percentage of 13% or greater is required to return to the Company no later than thirty (30) days following receipt of written notice from the Company the amount, if any, by which the Estimated Payment made to such participant for such Plan year exceeds the actual Gainsharing Payment to which such participant is entitled. If any such participant fails to return such excess payment when and as required, the Company shall have the right to setoff such obligation against any other sum then or thereafter owed by the Company to such participant, whether under this Plan or otherwise. 4 5 8. Unless otherwise determined by the Committee or as provided at Paragraph 10 hereof, in order to be entitled to receive any portion of an annual Gainsharing Payment for any Plan year, the participant must be employed by Progressive on the payment date for such portion of the annual Gainsharing Payment. Gainsharing Payments will be net of any legally required deductions for federal, state and local taxes and other items. 9. The right to any annual Gainsharing Payment hereunder shall not be transferred, assigned or encumbered by any participant. Nothing herein shall prevent any participant's interest hereunder from being subject to involuntary attachment, levy or other legal process. 10. The Plan shall be administered by or under the direction of the Committee. The Committee shall have the authority to adopt, alter and repeal such rules, guidelines, procedures and practices governing the Plan as it shall, from time to time, in its sole discretion, deem advisable. The Committee shall have full authority to determine the manner in which the Plan will operate, to interpret the provisions of the Plan and to make all determinations hereunder. All such interpretations and determinations shall be final and binding on Progressive, all Plan participants and all other parties. No such interpretation or determination shall be relied on as a precedent for any similar action or decision. All of the authority of the Committee hereunder (including, without limitation, the authority to administer the Plan, select the persons to participate herein, interpret the provisions thereof, waive any of the requirements specified herein and make determinations hereunder and to establish, change or modify Performance Components and their respective weighting factors, performance targets and Target Percentages) may be exercised by the CEO or the COO. 11. The Plan may be terminated, amended or revised, in whole or in part, at any time and from time to time by the Committee, in its sole discretion. 12. The Plan will be unfunded and all payments due under the Plan shall be made from Progressive's general assets. 13. Nothing in the Plan shall be construed as conferring upon any person the right to remain a participant in the Plan or to remain employed by Progressive, nor shall the Plan limit Progressive's right to discipline or discharge any of its officers or employees or change their job duties or compensation. 14. Progressive shall have the unrestricted right to set off against or recover out of any annual Gainsharing Payment or other sums owed to any participant under the Plan any amounts owed by such participant to Progressive. 15. This Plan supersedes all prior plans, agreements, understandings and arrangements regarding bonuses or other cash incentive compensation payable by or due from Progressive. Without limiting the generality of the foregoing, this 5 6 Plan supersedes and replaces The Progressive Corporation 1994 Gainsharing Plan, as heretofore in effect (the "Prior Plan"), which is and shall be deemed to be terminated as of December 31, 1994 (the "Termination Date"); provided, that any bonuses or other sums earned under the Prior Plan prior to the Termination Date shall be unaffected by such termination and shall be paid to the appropriate participants when and as provided thereunder. 16. This Plan is adopted, and is to be effective, as of January 1, 1995. This Plan shall be effective for 1995 and for each calendar year thereafter unless and until terminated by the Committee. 17. This Plan shall be interpreted and construed in accordance with the laws of the State of Ohio. 6 7 FIRST AMENDMENT TO THE PROGRESSIVE CORPORATION 1995 GAINSHARING PLAN WHEREAS, The Progressive Corporation 1995 Gainsharing Plan is maintained pursuant to a plan document that became effective January 1, 1995 ("Plan"); and WHEREAS, it is deemed desirable to amend the Plan to conform to existing practice; NOW, THEREFORE, the Plan is hereby amended as follows: 1. The following is hereby added at the end of Section 4 of the Plan: "Notwithstanding the foregoing, if the sum of the regular, holiday, vacation, sick and funeral pay received by a participant during a Plan year exceeds his/her salary range maximum for that Plan year, then his/her Paid Earnings for that Plan year shall equal his/her salary range maximum, plus any of the following items received by such participant during that Plan year: (i) overtime pay, (ii) retroactive payments of regular, holiday, vacation, sick, overtime and funeral pay and (iii) lump sum merit adjustments." 2. Except as expressly set forth in this Amendment, the Plan, as heretofore in effect, shall remain unchanged and continue in full force and effect. IN WITNESS WHEREOF, The Progressive Corporation has hereunto caused this Amendment to be executed by its duly authorized representative on this 8th day of December, 1995. THE PROGRESSIVE CORPORATION By: /s/ David M. Schneider ---------------------------------- David M. Schneider, Secretary EX-10.C 4 EXHIBIT 10(C) 1 EXHIBIT 10(C) THE PROGRESSIVE CORPORATION 1995 EXECUTIVE BONUS PLAN 1. The Progressive Corporation and its subsidiaries ("Progressive") have designed an executive compensation program consisting of three components: salary, annual bonus and equity-based incentives in the form of non-qualified stock options. These components have been structured to reflect the market for executive compensation and to promote both the achievement of corporate goals and performance that is in the long-term interests of shareholders. The annual bonus component is performance-based and focuses on current results. 2. The 1995 Executive Bonus Plan (the "Plan") shall be administered by or under the direction of the Executive Compensation Committee (the "Committee") of the Board of Directors. Executive officers of Progressive may be selected by the Committee to participate in the Plan for one or more Plan years. Plan years shall coincide with Progressive's fiscal years. 3. The following executive officers have initially been selected for participation in the Plan: Charles B. Chokel, Peter B. Lewis, Bruce W. Marlow, Michael C. Murr, David M. Schneider and Tiona M. Thompson (the "participants"). 4. Subject to the following sentence, the amount of the annual bonus earned by any participant under the Plan ("Annual Bonus") will be determined by application of the following formula: Annual Bonus = Paid Salary x Target Percentage x Performance Factor The Annual Bonus payable to any participant with respect to any Plan year may not exceed $2,000,000.00. 5. The salary rate of each Plan participant for any Plan year shall be as established by the Committee no later than ninety (90) days after commencement of such Plan year. For purposes of the Plan, "salary" and "Paid Salary" shall include regular, vacation, sick, holiday and funeral pay received by the participant for work or services performed by the participant as an officer or employee of Progressive and the earnings replacement component of any worker's compensation award, but shall not include any (a) short-term or long-term disability payments, (b) lump sum merit adjustments or (c) discretionary bonus payments made to the participant. 2 6. The Target Percentages for the participants in the Plan are as follows:
Participant Position Target Percentage ----------- -------- ----------------- Charles B. Chokel Chief Financial Officer 80% Peter B. Lewis Chief Executive Officer 100% Bruce W. Marlow Chief Operating Officer 100% Michael C. Murr Chief Investment Officer 167% David M. Schneider Chief Legal Officer 60% Tiona M. Thompson Chief Human Resources Officer 60%
Target Percentages may be changed from year to year by the Committee. 7. The Performance Factor --------------------- A. General ------- The Performance Factor shall be determined by the performance results achieved with respect to one or more of the following components: Core Business Gainsharing, Return on Average Equity ("ROE") and Investment Performance, as described below (the "Bonus Components"). An appropriate combination of Bonus Components will be designated for each participant, and the designated Bonus Components will be weighted, based on such participant's assigned responsibilities. The combination of Bonus Components designated for each of the participants, and the relative weighting of those Components, are as follows:
Core Business ROE Investment Participant Gainsharing Component Performance Component Component - -------------------------------------------------------------------------- Chokel 70% 30% 0% - -------------------------------------------------------------------------- Lewis 50% 30% 20% - -------------------------------------------------------------------------- Marlow 80% 20% 0% - -------------------------------------------------------------------------- Murr 0% 50% 50% - -------------------------------------------------------------------------- Schneider 70% 30% 0% - -------------------------------------------------------------------------- Thompson 80% 20% 0% - --------------------------------------------------------------------------
2 3 The relative weighting of the Bonus Components may vary among Plan participants and may be changed from year to year by the Committee. Actual performance results achieved for any Plan year, as used to calculate the performance score achieved for each of the applicable Bonus Components, shall be as certified by the Committee prior to payment of the Annual Bonus. For purposes of computing the amount of the Annual Bonus, the performance score achieved for each of the designated Bonus Components will be multiplied by the applicable weighting factor to produce a Weighted Component Score. The sum of the Weighted Component Scores equals the Performance Factor. The Performance Factor can vary from 0 to 2.0, based on actual performance versus the pre-established objectives. B. Core Business Gainsharing Component ----------------------------------- The Core Business Gainsharing Component consists of the following factors: (i) Profitability and Growth Factor ------------------------------- The Profitability and Growth Factor measures overall operating performance of Progressive's core personal and commercial automobile insurance business ("Core Business") for the Plan year in respect of which an Annual Bonus is to be paid. For purposes of computing a score for this Factor, results will be measured by the Gainsharing Matrix, as established by the Committee for the Plan year, which assigns a performance score to various combinations of profitability and growth outcomes. For this Factor, profitability is measured by the GAAP combined ratio and growth is measured by year-to-year change in market share. Change in market share is measured in terms of net written premium, based on industry data (which may be estimated), as reported by A.M. Best Company, Inc. in BEST WEEK, or any successor publication, upon conclusion of the Plan year for which the Annual Bonus is to be paid. The Profitability and Growth Factor is weighted 70% in computing the Core Business Gainsharing Score. 3 4 (ii) Cost Structure Improvement Factor --------------------------------- The Cost Structure Improvement Factor measures success in achieving cost structure improvement for the Core Business. Results are reflected in a Cost Structure Improvement Score. For purposes of computing the Cost Structure Improvement Score, cost structure improvement is measured by comparing the sum of the GAAP Underwriting Expense Ratio ("Underwriting Expense Ratio") and Loss Adjustment Expense Ratio ("LAE Ratio") achieved in the Core Business for the Plan year (collectively, "Actual Expense Ratio") against the defined expense objectives for that year, as established by the Committee ("Target Expense Ratio"). For 1995 and thereafter unless and until otherwise directed by the Committee, the Target Expense Ratio shall be 33, based on a target LAE Ratio of 10 and a target Underwriting Expense Ratio of 23. The Cost Structure Improvement Factor is weighted 30% in computing the Core Business Gainsharing Score. The Cost Structure Improvement Score will be computed in accordance with the following formula: Cost Structure Improvement=1+[Target Expense Ratio-Actual Expense Ratio] Score ------------------------------------------- 4 Expense targets and the relative weighting of the above Factors may be changed from year to year by the Committee. C. Return on Average Equity Component ---------------------------------- This Component is based on Progressive's Return on Average Equity ("ROE") for the Plan year. The ROE will be calculated for each month of the Plan year and such monthly results will be averaged to determine the ROE for the Plan year. For purposes of this Plan, ROE shall be calculated as follows: ROE = net income - Preferred Share dividends ------------------------------------------- average common shareholders' equity 4 5 In determining the ROE Performance Score, actual performance will be compared to a scale which excludes the effect of inflation, in accordance with the following scoring table:
ROE (excluding effect of ROE Performance inflation, as reflected in Score the CPI) 11% or lower 0.0 12% 0.3 13% 0.5 14% 0.7 15% 1.0 16% 1.1 17% 1.2 18% 1.3 19% 1.4 20% 1.5 21% 1.6 22% 1.7 23% 1.8 24% 1.9 25% or higher 2.0
To achieve a given ROE Performance Score for any Plan year, Progressive's ROE for that year must equal or exceed the required ROE level set forth in the above scoring table, without rounding, and ROE Performance Scores will not be derived from or subject to an interpolative or similar process. For purposes of this Plan, CPI shall mean the Consumer Price Index for all Urban Consumers (CPI-U) for the U.S. City Average for All Items (1982-1984 equals 100) or such other index as the Committee shall designate prior to the applicable Plan year. 5 6 D. Investment Performance Component -------------------------------- The Investment Performance Component compares investment performance against targets ("Benchmarks") established for the individual segments of Progressive's investment portfolio. Investments are marked to market in order to calculate total return, which is then compared against the designated Benchmarks to produce a Performance Score for each segment of the portfolio. The Performance Scores for the several segments are weighted, based on the actual amounts invested in each segment (valued monthly), and the weighted Performance Scores for the several segments are then combined to produce the Investment Performance Score. Investment expense is not included in determining investment performance vs. benchmark. The Portfolio Segments and Benchmark measures are as follows:
Portfolio Segment Investment Benchmark Equities S&P 500 including dividends High Yield Investments 70% of the average of Merrill Lynch High Yield Index and Merrill Lynch Bankruptcy Index Short Term Fixed Income 3 Year Treasury Securities + 75 basis points, tax equivalent basis
The scoring table for comparing Investment Performance against the designated Benchmarks is as follows:
Investment Performance Investment Performance Versus Benchmark Score (weighted) below 90% 0.00 90 - 94.99% 0.75 95 - 99.99% 0.90 100% and above 1.00
6 7 To achieve a given Investment Performance Score for any Plan year, Investment Performance results must equal or exceed the required performance level indicated in the above scoring table, without rounding, and Investment Performance Scores will not be derived from or subject to an interpolative or similar process. 8. The Annual Bonus for any Plan year shall be paid to participants in two installments. The first installment, in an amount equal to 90% of the Annual Bonus, determined in accordance with the formula set forth in Paragraph 4 above, will be paid as soon as practicable after the Committee has certified performance results for the Plan year, but no later than March 31 of the immediately following year. The second installment, in an amount equal to 10% of the Annual Bonus, will be paid to participants on the September 30 immediately following the end of the Plan year for which such Annual Bonus is to be paid. The provisions of this Paragraph shall be subject to Paragraph 9 hereof. Any Plan participant who is then eligible to participate in The Progressive Corporation Executive Deferred Compensation Plan ("Deferral Plan") may elect to defer all or a portion of the Annual Bonus otherwise payable under this Plan, subject to and in accordance with the terms of the Deferral Plan. 9. Unless otherwise determined by the Committee, in order to be entitled to receive any installment of the Annual Bonus for any Plan year, the participant must be employed by Progressive on the date designated for payment thereof. Annual Bonus payments made to participants will be net of any legally required deductions for federal, state and local taxes and other items. 10. The right to any of the Annual Bonuses hereunder shall not be transferred, assigned or encumbered by any participant. Nothing herein shall prevent any participant's interest hereunder from being subject to involuntary attachment, levy or other legal process. 11. The Plan shall be administered by or under the direction of the Committee. The Committee shall have the authority to adopt, alter and repeal such rules, guidelines, procedures and practices governing the Plan as it shall, from time to time, in its sole discretion deem advisable. The Committee shall have full authority to determine the manner in which the Plan will operate, to interpret the provisions of the Plan and to make all determinations thereunder. All such interpretations and determinations shall be final and binding on Progressive, all Plan participants and all other parties. No such interpretation or determination shall be relied on as a precedent for any similar action or decision. 7 8 The Plan shall be administered by the Committee in accordance with the requirements of Section 162(m) of the Internal Revenue Code, as amended, and the rules and regulations promulgated thereunder (the "Code"). 12. The Plan shall be subject to approval by the holders of Progressive's Common Shares, $1.00 par value ("shareholders") in accordance with the requirements of Section 162(m) of the Code. 13. The Plan may be terminated, amended or revised, in whole or in part, at any time and from time to time by the Committee, in its sole discretion; provided that the Committee may not increase the amount of compensation payable hereunder to any participant above the amount that would otherwise be payable upon attainment of the applicable performance goals, or accelerate the payment of any portion of the Annual Bonus due to any participant under the Plan without discounting the amount of such payment in accordance with Section 162(m) of the Code, and further provided that any amendment or revision of the Plan required to be approved by shareholders pursuant to Section 162(m) of the Code shall not be effective until approved by Progressive's shareholders in accordance with the requirements of Section 162(m). 14. The Plan will be unfunded and all payments due under the Plan shall be made from Progressive's general assets. 15. Nothing in the Plan shall be construed as conferring upon any person the right to remain a participant in the Plan or to remain employed by Progressive, nor shall the Plan limit Progressive's right to discipline or discharge any of its officers or employees or change their job duties or compensation. 16. Progressive shall have the unrestricted right to set off against or recover out of any bonuses or other sums owed to any participant under the Plan any amounts owed by such participant to Progressive. 17. This Plan supersedes all prior plans, agreements, understandings and arrangements regarding bonuses or other cash incentive compensation payable or due to any participant from Progressive. Without limiting the generality of the foregoing, this Plan supersedes and replaces The Progressive Corporation 1994 Executive Bonus Plan, as heretofore in effect (the "Prior Plan"), which is and shall be deemed to be terminated as of December 31, 1994 (the "Termination Date"); provided, that any bonuses or other sums earned under the Prior Plan prior to the Termination Date shall be unaffected by such termination and shall be paid to the appropriate participants when and as provided thereunder. 8 9 18. This Plan is adopted and, subject to the provisions of Paragraph 12 hereof, is to be effective, as of January 1, 1995. Subject to the provisions of Paragraph 12, this Plan shall be effective for 1995 and for each year thereafter unless and until terminated by the Committee. 19. This Plan shall be interpreted and construed in accordance with the laws of the State of Ohio. 9 10 FIRST AMENDMENT TO THE PROGRESSIVE CORPORATION 1995 EXECUTIVE BONUS PLAN WHEREAS, The Progressive Corporation 1995 Executive Bonus Plan is maintained pursuant to a plan document that became effective January 1, 1995 ("Plan"); and WHEREAS, it is deemed desirable to amend the Plan to conform to existing practice; NOW, THEREFORE, the Plan is hereby amended as follows: 1. Section 5 of the Plan is hereby amended and restated in its entirety to provide as follows: "The salary rate of each Plan participant for any Plan year shall be as established by the Committee no later than ninety (90) days after commencement of such Plan year. For purposes of the Plan, "salary" and "Paid Salary" shall include regular, vacation, sick, holiday and funeral pay received by the participant during the Plan year for work or services performed by the participant as an officer or employee of Progressive, but shall not include (a) short-term or long-term disability payments, (b) lump sum merit adjustments, (c) discretionary bonus payments or (d) the earnings replacement component of any worker's compensation award." 2. Except as expressly set forth in this Amendment, the Plan, as heretofore in effect, shall remain unchanged and continue in full force and effect. IN WITNESS WHEREOF, The Progressive Corporation has hereunto caused this Amendment to be executed by its duly authorized representative on this 8th day of December, 1995. THE PROGRESSIVE CORPORATION By: /s/ David M. Schneider ---------------------------- David M. Schneider, Secretary 11 SECOND AMENDMENT TO THE PROGRESSIVE CORPORATION 1995 EXECUTIVE BONUS PLAN WHEREAS, The Progressive Corporation 1995 Executive Bonus Plan is maintained pursuant to a plan document that became effective January 1, 1995 (which, as heretofore amended, is referred to herein as the "Plan"); and WHEREAS, the Executive Compensation Committee ("Committee") of the Board of Directors deems it advisable to further amend the Plan; NOW, THEREFORE, the Plan is hereby amended as follows: 1. The second last paragraph of Section 7C is hereby amended to read as follows: To achieve a given ROE Performance Score for any Plan year, Progressive's ROE for that year (rounded to the nearest whole number, with .5 or above rounded upward) must equal the required ROE level set forth in the above scoring table. 2. The second paragraph of Section 7D is hereby amended to read as follows: The Portfolio Segments and Benchmark measures are as follows: - --------------------------------------------------------------------------- Portfolio Segment Investment Benchmark - --------------------------------------------------------------------------- Equities (internally managed) S&P 500 including dividends - --------------------------------------------------------------------------- Equities (externally managed) S&P 500 including dividends - --------------------------------------------------------------------------- Short Term Fixed Income 70% of Lehman Brothers Intermediate Govt/Corp Index 30% of Merrill Lynch 1-3 yr. Treasury Index - --------------------------------------------------------------------------- 3. This Second Amendment shall be effective as of January 1, 1996 and shall apply to the 1996 Plan year and each Plan year thereafter until otherwise determined by the Committee. IN WITNESS WHEREOF, The Progressive Corporation has hereunto caused this Amendment to be executed by its duly authorized officer on this 21st day of February, 1996. THE PROGRESSIVE CORPORATION By: /s/ David M. Schneider -------------------------------- David M. Schneider, Secretary EX-10.H 5 EXHIBIT 10(H) 1 EXHIBIT 10(H) AGREEMENT THIS AGREEMENT is made on March 11, 1996, effective as of February 1, 1996, by and between THE PROGRESSIVE CORPORATION, an Ohio corporation (which, together with its direct and indirect subsidiaries, is referred to herein as "Company"), and BRUCE W. MARLOW ("Employee"). W I T N E S S E T H : WHEREAS, Employee is currently an employee and Chief Operating Officer of Company; and WHEREAS, Employee has been assigned the responsibility, among others, of developing a plan to reorganize the management structure of Company ("Reorganization Plan"); and WHEREAS, Company desires to provide Employee with assurances of financial security in connection with the development of the Reorganization Plan; and WHEREAS, the parties desire to set forth the terms and scope of such assurances; NOW, THEREFORE, in consideration of the premises and of the mutual covenants and agreements hereinafter set forth, which consideration both parties recognize as adequate and sufficient to support this agreement, the parties hereto agree as follows: 1. Financial Assurances. (a) If, at any time during the term of this Agreement, Employee's employment with Company ends, by decision of the Company or voluntary departure or resignation by the Employee, but only in the event the end of such employment is not due to Employee's death or total disability or a decision by the Company based on justifiable cause (as hereinafter defined), then, upon any such termination as qualified above (a "Covered Termination"): (i) Salary Factor. Beginning forty-five (45) days after the Termination Date (as hereinafter defined), Employee shall receive twelve (12) quarterly payments, each in an amount equal to 25% of Employee's annual salary three days before the Termination Date (but not less than $139,500 each); and (ii) Bonus Factor. Beginning six (6) months after the Termination Date, Employee shall receive three annual payments of $558,000 each; and 2 (iii)Stock Options. Company and Employee shall promptly amend all such stock option agreements in effect on the Termination Date between Company and Employee as shall be necessary so that all unvested stock options held by Employee on the Termination Date which, but for the Covered Termination, would have vested within three (3) years of the Termination Date, shall vest on the Termination Date and shall be exercisable, in whole or in part, by Employee at any time on or before the fifth anniversary thereof. b) Any notice of the termination of Employee's employment with Company given by either party shall be in writing and shall be effective two (2) business days after the date such notice is received by the other party (such effective date being herein referred to as the "Termination Date"). Notice to Employee shall be deemed received when received by Employee and notice to the Company shall be deemed received when received by the Company's Chief Executive Officer (provided such person is a person other than Employee), its Chief Human Resources Officer, its Chief Legal Officer or the respective persons holding equivalent positions if such titles are not in use at the time such delivery is made. (c) For purposes of this Agreement, "justifiable cause" means the commission of a felony, theft of or intentional significant damage to the property or business of Company, gross dereliction of duty, or fraud. 2. Reduction in Benefits. Notwithstanding anything herein to the contrary, the amounts to be paid to Employee pursuant to Sections 1(a)(i) and (ii) hereof, and the number of stock options held by Employee that will become subject to accelerated vesting as provided in Section 1(a)(iii), upon any Covered Termination will be reduced by one-half (1/2) if the Termination Date occurs at any time after January 31, 1999 and before the Expiration Date (as hereinafter defined). 3. Other Stock Options. Any stock options held by Employee which are vested and exercisable on the Termination Date other than by reason of Section 1(a)(iii) shall not be affected by this Agreement, but shall continue to be governed by and subject to the terms of the related incentive plan and stock option agreement(s). 3 4. Other Separation Benefits. Employee agrees that if a Covered Termination should occur, the payments and benefits provided for hereunder shall be accepted in lieu of any payments or benefits to which Employee might otherwise be entitled under Company's Separation Allowance Plan or any other plan or arrangement which provides for severance or separation payments or allowances ("Other Separation Benefits") and hereby waives, if a Covered Termination should occur, any and all rights and claims that he may now or hereafter have to any Other Separation Benefits; provided, however, that such waiver shall terminate on the Expiration Date without further action of the parties if Employee remains in the employ of the Company through such Expiration Date. This agreement shall not affect Employee's rights under COBRA or any of the Company's savings or retirement plans, to wit: its Pension Plan, Retirement Security Program and Executive Deferred Compensation Plan, and any successors thereto, to or in which Employee may be or become a party or participant. 5. Public Announcements. In the event of a Covered Termination, the text of any related public announcement or communication regarding such termination, and of any letter or letters of reference requested by Employee, shall be subject to the prior approval of both of the parties hereto, subject to all applicable legal requirements. The parties each agree to cooperate fully to complete all of such materials in an expeditious manner and to ensure the fairness and reasonableness of all statements contained therein. 6. Expiration. This Agreement shall commence as of February 1, 1996, and terminate and expire on January 31, 2000 (the "Expiration Date"). Neither of the parties hereto shall have any rights or obligations hereunder on or after the Expiration Date; except that if a Covered Termination occurs prior to the Expiration Date, Employee shall be entitled to the benefits provided for at Sections 1(a)(I)-(iii) hereof with respect to such Covered Termination and Company shall be entitled to the benefits provided for at Sections 7 and 8 hereof, to the extent therein provided. 4 7. Confidential Information. (a) Employee acknowledges that, as an employee and Chief Operating Officer of the Company, he owes the Company the duties of undivided loyalty and good faith. Accordingly, and in consideration of the commitments made to Employee hereunder, Employee agrees that he will not, directly or indirectly, at any time during the three year period (if any) beginning on the Termination Date (the "Designated Period"), reveal or disclose to any person or entity (other than Company) any Confidential Information (as defined below); nor, during such period, shall he use any Confidential Information for his own benefit or for the benefit of any other person or entity (other than the Company). (b) For purposes hereof, "Confidential Information" shall mean and include all information relating to Company, its business or operations, including, without limitation, customer and prospect lists, strategic plans and initiatives, rating methods, underwriting and marketing techniques and strategies, and similarly proprietary ideas, concepts, "know-how", and methods employed by Company in the conduct of its insurance business. Notwithstanding the foregoing, it is agreed and understood that Confidential Information shall not include information that: (i) is a matter of public knowledge or becomes publicly known or within the public domain other than as a result of any breach of this Agreement; (ii) has been or is subsequently disclosed to Employee by a third party who is not under an obligation to maintain its confidentiality; (iii)was known by Employee prior to the date of his employment by Company; or (iv) has been disclosed by Company to others on an unrestricted basis. 8. Non-Competition. In further consideration of the commitments made to Employee hereunder, Employee hereby covenants and agrees that, during the Designated Period, he will not, directly or indirectly, for himself or on behalf of any other person or entity (other than the Company), as employee, owner, partner, principal, stockholder, advisor, consultant or otherwise, 5 (a) compete with Company in the personal lines automobile insurance business, or in any other line of business in which Company is actively engaged to a financially significant extent as of the Termination Date, in any county or municipality anywhere within the continental United States in which Company is then engaged in such business, or (b) hire, solicit or entice away any of Company's officers or employees, without the Company's prior written consent. Notwithstanding the foregoing, Employee may own, of record or beneficially, up to two percent (2%) of the outstanding voting securities of any publicly traded corporation that competes with Company without being deemed to be in violation of this Section. 9. Remedies. (a) Any breach of this Agreement on the part of either party will entitle the other party to damages, injunctive relief and/or forfeiture of any remaining rights, payments and benefits under this Agreement, except that, with respect to any forfeiture asserted by either party, the party asserting that a forfeiture has occurred shall give the other party written notice of the nature of any alleged breach by such other party and if such other party fails to cure such alleged breach within seven (7) days after receipt of such notice, then the forfeiture shall occur. If such forfeiture shall have arisen due to a breach by Employee, then Employee shall not be entitled to receive any of the then unpaid amounts to be paid to Employee pursuant to Sections 1(a)(I) and (ii) hereof, and any stock options then held by Employee that became subject to accelerated vesting as provided in Section 1(a)(iii) shall immediately terminate as of the date of such breach. In the event Company gives Employee notice of any such alleged breach, as provided in this Section, then Employee's right to exercise those stock options that will be terminated if such alleged breach is not cured as provided above, shall be suspended for the aforesaid seven (7) day cure period. 6 (b) The parties hereto agree that, in the event there is any breach of the terms, covenants or conditions of this Agreement, injunctive relief shall lie for the enforcement of this Agreement, in addition to any and all other remedies that may be available in law or in equity, which other remedies shall be retained without waiver or release regardless of whether an injunction shall be issued. Each party waives, to the extent permitted by law, any claim or defense that there is an adequate remedy at law. The prevailing party in any action by a party hereto to compel compliance with this Agreement shall be entitled to recover its reasonable costs and attorney fees in such proceeding. 10. Savings Clause. If either party shall institute any action or proceeding to enforce any of the provisions of this Agreement, and if such provision is deemed unenforceable by the court or other tribunal having jurisdiction over such action or proceeding, the parties hereto agree that such provision shall be deemed to be restricted or modified to the extent necessary to render same enforceable by such court or other tribunal and, to that end, such court or tribunal is hereby authorized to "re-write" such provision in order to provide for the enforceability thereof to the maximum extent permissible under Ohio law and the parties hereto agree to abide by such court's determination. 11. Withholding. All payments to be made by Company under this Agreement are subject to applicable tax withholding and other legally required deductions. 12. Complete Agreement; Amendments. This Agreement contains the entire agreement and understanding of the parties hereto with respect to the subject matter hereof and no representations, undertakings or agreements in relation thereto exist except as herein expressly set forth. This Agreement may not be amended or modified orally, but only by an instrument in writing duly executed by or on behalf of both parties hereto. 13. Successors and Assigns. This Agreement shall be binding upon and inure to the benefit of the parties, and their respective heirs, legal representatives, successors and permitted assigns. Neither party may assign or transfer this Agreement, or any of its/his rights or obligations hereunder, without the prior written consent of the other party. Employee shall not have any right to pledge or encumber any amounts payable hereunder, and no amounts payable hereunder shall be assignable or transferable in anticipation of payment. 7 14. Choice of Law. This Agreement has been made in the State of Ohio and shall in all respects be interpreted in accordance with and governed by the laws of the State of Ohio. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the date first above written. THE PROGRESSIVE CORPORATION ("Company") By:_/s/__David M. Schneider____________ Title:_____Sec'y_______________________ BRUCE W. MARLOW ("Employee") ____/s/_Bruce W. Marlow_________________ EX-11 6 EXHIBIT 11 1 EXHIBIT 11 THE PROGRESSIVE CORPORATION COMPUTATION OF EARNINGS PER SHARE (millions - except per share amounts)
1995 1994 1993 ------------------------------------------------------------------------------ Per Per Per Amount Share Amount Share Amount Share ------------------------------------------------------------------------------ PRIMARY: Net income $250.5 $274.3 $267.3 Less: Preferred stock dividends (8.4) (8.6) (9.2) ------------------------------------------------------------------------------ $242.1 $3.26 $265.7 $3.59 $258.1 $3.59 ============================================================================== Average shares outstanding 71.8 71.6 69.3 Net effect of dilutive stock options 2.4 2.4 2.5 ------------------------------------------------------------------------------ Total 74.2 74.0 71.8 ============================================================================== FULLY DILUTED: Net income $250.5 $274.3 $267.3 Less: Preferred stock dividends (8.4) (8.6) (9.2) ------------------------------------------------------------------------------ $242.1 $3.24 $265.7 $3.59 $258.1 $3.58 ============================================================================== Average shares outstanding 71.8 71.6 69.3 Net effect of dilutive stock options 2.9 2.4 2.7 ------------------------------------------------------------------------------ Total 74.7 74.0 72.0 ==============================================================================
EX-13 7 EXHIBIT 13 1 Exhibit 13 The Progressive Corporation Annual Report 1995 2 Service, as redefined by Progressive, is not just about a day-in day-out reactive response to the customer. Rather, it is about the proactive research, change, flexibility and innovations required to transcend consumers' expectations, while providing a profitable partnership between the customer and the Company. From radical new ways of providing the consumer with rate comparisons, to claim services 24 hours a day, 7 days a week. Progressive is revolutionizing the customer experience. It is our commitment to the customer that led us to choose "service" as the theme for this year's annual report. We commissioned Dutch artist Teun Hocks to respond visually to this theme. Hocks is the inventor, painter, set designer producer and model of his photographic situations. Hocks' work will become part of Progressive's growing collection of contemporary art. 3 shooting for the mOon
1995 Financial Highlights 2 Vision, Core Values Letter to Shareholders 14 Financial Review 32 and Objectives 8
4 2 1995 Financial Highlights (millions-except per share amounts)
AVERAGE ANNUAL COMPOUNDED RATE OF INCREASE -------------------------- 5-YEAR 10-YEAR 1995 1994 % CHANGE 1991-1995 1986-1995 FOR THE YEAR Direct premiums written $ 3,068.9 $ 2,645.1 16% 18% 19% Net premiums written 2,912.8 2,457.2 19 19 19 Net premiums earned 2,727.2 2,191.1 24 18 20 Total revenues 3,011.9 2,415.3 25 17 20 Operating income 220.1 212.7 3 11 24 Net income 250.5 274.3 (9) 22 22 Per share: Operating income 2.84 2.76 3 13 23 Net income 3.24 3.59 (10) 22 20 Underwriting margin (1) 5.7% 11.5%(2) 6 5 AT YEAR-END Consolidated shareholders' equity $ 1,475.8 $ 1,151.9 28 29 29 Common Shares outstanding 72.1 71.2 1 1 1 Book value per Common Share $ 19.31 $ 14.97 29 27 27 Return on average common shareholders' equity (1) 19.6% 27.4% 25 24
1-YEAR 5-YEAR 10-YEAR STOCK PRICE APPRECIATION (3) Progressive 40.4% 24.3% 22.7% S&P 500 37.6% 16.6% 14.9% 1 The 5- and 10-year amounts represent averages for the period, not rate of increase. 2 The 1994 underwriting margin would be 8.3%, excluding the $71.0 million elimination of the supplemental loss reserve. 3 Assumes dividend reinvestment.
5 3 1995 PERFORMANCE HIGHLIGHTS 1 Operating income per share, which excludes net realized gains on security sales and one-time items, increased 3 percent to $2.84. 2 The Core business net premiums written grew 21 percent with a 5 percent underwriting profit margin. 3 The companywide underwriting profit margin was 5.7 percent, compared to the personal auto insurance market's estimated underwriting loss of 2.3 percent. 4 Market capitalization was $3.5 billion at December 31, 1995. 5 Over 1.3 million calls were received after normal business hours via our 24-hour, toll-free service lines. 6 4 growing up We seek to write all auto risks. We are no longer just a non-standard auto specialist. Our customer-driven approach is increasing our rate of growth and market share, which in turn lets us reduce the cost of doing business and become still more competitive. We are the 7th largest U.S. private passenger auto insurer with a 2.6% market share. 7 5 [ART] 8 6 ABOUT PROGRESSIVE The Progressive insurance organization began business in 1937. Progressive Casualty Insurance Company was founded in 1956. The Progressive Corporation, an insurance company formed in 1965, owns 63 operating subsidiaries and has one mutual insurance company affiliate. The companies provide personal automobile insurance and other specialty property-casualty insurance related services sold primarily through independent insurance agents in the United States and Canada. The 1995 estimated industry premiums, which include personal auto insurance in the U.S. and Ontario, Canada, as well as insurance for commercial vehicles, were $122 billion, and Progressive's share was 2.3 percent. being there Assistance after an accident or other loss is Progressive's most important service, so we implore our customers to call 1-800-274-4499 immediately after any incident. 24 hours a day, 7 days a week, a Progressive person is always there to help. 9 7 [ART] 10 8 VISION, CORE VALUES AND OBJECTIVES Communicating a clear picture of Progressive by stating what we try to achieve (Vision), what guides our behavior (Core Values), what our people expect to accomplish (Objectives), and how we evaluate performance (Measurements), per- mits all people associated with Progressive to understand their role and enjoy their contributions. VISION We seek to be an excellent, innovative, growing and enduring business by reducing the human trauma and economic costs of auto accidents in cost- effective and profitable ways that delight customers. We seek to earn a superior return on equity and to provide a positive environment to attract quality people and achieve ambitious growth plans. CORE VALUES Progressive's Core Values are pragmatic statements of what works best for us in the real world and they govern our decisions and behavior. We want them understood and embraced by all Progressive people. Growth and change provide new perspective and require regular refinement of Core Values. INTEGRITY We revere honesty. We adhere to high ethical standards, report completely, encourage disclosing bad news and welcome disagreement. GOLDEN RULE We respect all people, value the differences among them and deal with them in the way we want to be dealt with. This requires us to know ourselves and to try to understand others. OBJECTIVES We strive to be clear and open about Progressive's ambitious objectives and our people's personal and team objectives. We evaluate performance against all these objectives. EXCELLENCE We strive constantly to improve in order to meet and exceed the highest expectations of our customers, shareholders and people. "Quality" is Progressive's process for teaching and encouraging our people to improve performance and reduce the costs of what they do for customers. We base reward on results and promotion on ability. PROFIT The opportunity to earn a profit is how the competitive free- enterprise system motivates investment to enhance human health and happiness. Our increasing profits reflect auto owners' and operators' increasingly positive view of Progressive. We strive to find the most cost-effective ways to reduce the human trauma and economic costs of automobile accidents. Because our efforts are enhanced by social and economic well-being, we strive to give back to our communities. 11 9 ACHIEVEMENTS We are convinced that the best way to maximize shareholder value is to achieve these financial objectives consistently. A shareholder who purchased 100 shares of Progressive for $1,800 at our first public stock offering on April 15, 1971, owned 7,689 shares on December 31, 1995, with a market value of $375,800, for a 24.3 percent annual return, compared to the 7.6 percent return achieved by investors in the Standard & Poor's 500 during the same period. In addition, the shareholder received dividends which were $1,692 in 1995. In the ten years since December 31, 1985, Progressive shareholders have realized compound returns of 22.7 percent, compared to 14.9 percent for the S&P 500. In the five years since December 31, 1990, Progressive shareholders' returns were 24.3 percent, compared to 16.6 percent for the S&P 500. In 1995, the returns were 40.4 percent on Progressive shares and 37.6 percent on the S&P 500. The repurchase of Progressive stock is another way the Company increases shareholder value. Over the years, when we have adequate capital and Progressive's stock is attractively priced, we have repurchased our shares. Since 1971, we have spent $526.2 million, at an average cost of $6.49 per share. During 1995, we repurchased 3,691 Common Shares, which were used almost entirely to satisfy our obligations under The Progressive Corporation Executive Deferred Compensation Plan. FINANCIAL OBJECTIVES Consistent achievement of superior results requires that our people understand Progressive's objectives and their specific role, and that their personal objectives dovetail with Progressive's. Our objectives are ambitious yet realistic. We are committed to achieving financial objectives over rolling five-year periods. Experience always clarifies objectives and illuminates better strategies. We constantly evolve as we monitor the execution of our strategies and progress toward achieving our objectives. RETURN ON SHAREHOLDER'S EQUITY Our most important financial goal is to achieve an after-tax return on shareholders' equity over a five-year period that is at least 15 percentage points greater than the rate of inflation (measured by the Consumer Price Index which was 2.5 percent in 1995, averaged 2.8 percent over the past five years and 3.6 percent over the past ten years). Return on equity was 19.6 percent in 1995, averaged 25.1 percent over the past five years and 24.3 percent over the past ten years. PROFITABILITY Progressive is driven by the goal of producing a 4 percent underwriting profit. The Core business had an underwriting profit of 5.2 percent in 1995, an underwriting profit of 6.3 percent for the past five years and 6.7 percent for the past ten years. Estimated industry results for the personal auto insurance market for the same periods were underwriting losses of 2.3 percent, 2.3 percent and 4.7 percent. GROWTH We seek increases in net premium volume that are at least 15 percentage points greater than the rate of inflation. For the Core business, volume increased 20.7 percent in 1995, 23.7 percent compounded annually over the past five years and 20.1 percent over the past ten years. Net premiums written in the personal auto insurance market for the same periods grew 4.5 percent, 5.2 percent and 7.4 percent. 12 10 [ART] 13 11
1995 LAST 5 YEARS LAST 10 YEARS RETURN ON SHAREHOLDERS' EQUITY Goal 17.5% 17.8% 18.6% Companywide 19.6 25.1 24.3 UNDERWRITING PROFIT (LOSS) MARGIN Goal 4.0 4.0 4.0 Core Business 5.2 6.3 6.7 Industry-Personal Auto Insurance Market (2.3) (2.3) (4.7) GROWTH (ANNUALIZED) Goal 17.5 17.8 18.6 Core Business 20.7 23.7 20.1 Industry-Personal Auto Insurance Market 4.5 5.2 7.4
testing the waters On April 7, 1995, we established a presence on the World Wide Web with our Home Page. Progressive was the first major insurer to have such a presence. You can find Progressive's Home Page at http://www.auto-insurance.com. 14 12 leading the follower Progressive is leading a wave of change in the United States' system for dealing with auto accident injuries and property damage. We are reducing auto accident victims' trauma and costs, improving how consumers feel about auto insurance and being rewarded for our leadership. [ART] 15 13 [ART] 16 14 Letter to Shareholders Progressive--Auto Insurer for All People In 1995, we continued to make great strides toward positioning Progressive to offer automobile insurance to all U.S. licensed operators through independent insurance agents and other distribution methods. This customer-driven approach is increasing our rate of growth and market share, which, in turn, lets us reduce the costs of doing business and become still more competitive. We are building intrinsic value in the form of a growing customer base, and a broad array of products and services delivered when and how customers most want them. Progressive's people are responding superbly to the challenge of managing growth, reaffirming how good they are, as well as the strength of Progressive's Vision, Values and Strategy. We grew in 1995 by increasing our share of the approximately $20 billion nonstandard auto insurance market and by continuing to grow in the approximately $81 billion standard and preferred auto insurance market. We work hard and invest heavily in people and processes to reduce the human trauma and economic costs of auto accidents. Our results include the cost of these investments designed to make us more competitive for all auto insurance. Progressive shareholders are best served by executing meaningful, long-term strategies. Success requires translating premium growth into commensurate earnings growth, so our stock price reflects the intrinsic value we are now creating. From its beginnings, Progressive's most important competitive advantage has been having superior people, measured by their intelligence, work ethic, ambition, creativity and demonstrated performance. Many companies pay lip service to this idea. At Progressive, it is a way of life. Our people's teamwork and esprit is high. Our performance-based Gainsharing compensation lets them enjoy the benefits of competitive and productivity improvements so long as they continue to meet or exceed the Company's ambitious objectives. Spurred by consumer discontent with the insurance industry and increased competition in our nonstandard auto market niche, Progressive has evolved over the last seven years into a consumer-focused auto insurer offering all auto owners and operators better service at lower cost. But we cannot stop there. We must continue to identify opportunities to spend less 17 15 to run our operations while still working hard and creatively to enhance our customers' and agents' experience of doing business with Progressive. Future growth will come from adding to the number of states where we seek to insure all auto risks, from working with the independent agents dedicated to regaining market share and from creating a consumer-focused, brand experience in ways that attract customers and support the forward-looking agents who will succeed in the 21st century. With Progressive now seeking to write all auto insurance risks, we are no longer just a nonstandard auto insurance specialist. As the 7th largest U.S. private passenger auto insurer with a 2.6 percent market share, we are more appropriately compared to Allstate, GEICO, Safeco, State Farm Mutual, Farmers Group, USAA and Nationwide. [ART] sending signals We use a combination of television commercials, direct mail and other media to urge consumers to test our smart new way to shop for auto insurance by calling 1 800 AUTO PRO(R). 18 16 step ping up to the mark Consumer advertising and brand awareness require higher performance standards. We continually consider consumers' demands and appreciate their ability to make wise choices. In response, we are always looking for new and innovative ways to improve service at a lower cost, continuing to set new standards and endeavoring to meet or exceed our customers' expectations 19 17 [ART] 20 18 RESULTS Operating income, which excludes net realized gains on security sales and one-time items, is the best measure of how well we manage our insurance operations. Operating income increased to $220.1 million, or $2.84 per share, compared to $212.7 million, or $2.76 per share, in 1994. Operating income excludes $46.7 million of realized gains in 1995, compared to $23.8 million in 1994. The 1994 operating results also exclude $71.0 million, or $.62 per share, of income resulting from the elimination of the supplemental loss reserve. Net income was $250.5 million, or $3.24 per share, this year, compared to $274.3 million, or $3.59 per share, in 1994. Return on shareholders' equity was 19.6 percent, compared to 27.4 percent in 1994. Net premiums written increased 19 percent to $2,912.8 million, compared to $2,457.2 million in 1994. Progressive has posted an annual underwriting profit in 23 out of the last 29 years and bettered our 4 percent underwriting goal with a 5.7 percent margin in 1995. We reduced underwriting expenses by 1.7 percentage points in 1995, following a 3.0 point reduction in 1994. PROGRESSIVE'S CORE BUSINESS Ninety-seven percent of Progressive's net premiums written come from 13 Core divisions, which write insurance for private passenger automobiles, recreational vehicles and small fleets of commercial vehicles. Core business net premiums written grew 21 percent to $2,824.2 million, compared to $2,340.7 million in 1994. The underwriting profit margin was 5.2 percent, compared to 7.3 percent in 1994. Progressive's auto insurance and management strategies make us optimistic about meeting ambitious profit and growth objectives. Two years ago, we consolidated our new customer services into an emerging Progressive brand by expanding service in a number of states and testing ways to project the brand to potential customers. We began to focus our managers on empowering people and constantly improving the delivery of around-the-clock, immediate response, information-rich service, designed to delight customers. We use a combination of television commercials, direct mail and other media to urge consumers to test Progressive's smart new way to shop for auto insurance by calling 1 800 AUTO PRO(R) (1-800-288-6776). Callers spend about 15 minutes to obtain accurate auto insurance rate comparisons for their particular risk profile from Progressive and up to three leading auto insurers, including State Farm and Allstate, and to learn something about the following improvements Progressive provides: ASSISTANCE AFTER AN ACCIDENT OR OTHER LOSS, is Progressive's most important service, so we implore our customers to call 1-800-274-4499 immediately after any incident. 24 hours a day, 7 days a week, a Progressive person answers the phone, takes the information, authorizes emergency measures and almost always can have a Progressive claim representative face-to-face with the customer or claimant within a few hours. CONSUMERS ABHOR BEING REJECTED, so Progressive offers a price to every licensed driver. As we became more comfortable with the rates for the standard and preferred market, we allowed our volume in this market to grow to between five and ten percent of total 1995 premium volume. CONSUMERS PREFER DIFFERENT WAYS TO BUY, so we offer choices -- including over 30,000 independent insurance agencies (our most important method of distribution), joint marketing relationships with national accounts and via the 1 800 AUTO PRO(R) telephone service. As we expanded our personal 21 19 auto product line to include standard and preferred auto, agents have found more and better ways to match the product they offer with the needs of the consumer, spurring our growth and helping the Independent Agent channel regain lost market share. CONSUMERS WANT TO DO BUSINESS WHEN IT'S CONVENIENT FOR THEM, so we operate 24 hours a day, 7 days a week to provide new insurance quotes, handle endorsements and questions concerning current policies, and, most importantly, respond to accidents and other incidents. Our customers depend upon our service, so we instituted a real-time disaster management approach that continuously monitors performance of internal systems, threatening weather patterns and other natural events. This approach allows us to regularly reconfigure our network and place disaster response teams in motion as soon as we hear of an event. Progressive's unique approach to management continues to evolve along with its business strategy. Our management philosophy includes the following: TOTAL QUALITY MANAGEMENT dovetails with our Excellence Core Value--doing better than we did before--and empowers Progressive people to change how they function IF the change measurably improves customer service or reduces costs, and IF it does not disrupt others in the work chain. Because measurement is essential to TQM, we have dramatically improved our ability to measure performance and to control quality. TEAMWORK is the way we work. We continue to improve the ways in which we motivate, manage and reward teams. STEADY COST REDUCTION has been, and continues to be, critical to our strategy, and, along with profit and growth, is the basis for our people's Gainsharing awards. Underwriting expenses were 22 percent of premiums in 1995, compared to 24 percent in 1994 and 32 percent in 1990. PROCESS MANAGEMENT is a part of our senior line managers' profit and loss responsibilities, eliminating much staff-line friction, fostering cooperation among divisions and departments, and requiring people to be able to balance the delicate trade-off between local autonomy and collective effectiveness in implementing process improvements in all profit centers. THOROUGH TESTING of new ideas has replaced our former propensity to seize perceived opportunities and grow them as fast as possible. PERFORMACE-BASED COMPENSATION pays our people very well for exceptional performance, makes contingent pay significant to everyone and fosters the achievement of our demanding objectives. In 1995, 9.4 percent of total compensation resulted from our Gainsharing program. 22 20 jumping through hoops Consumers want to do business when its convenient for them, so we operate 24 hours a day, 7 days a week to provide new insurance quotes, handle endorsements and questions concerning current policies, and, most importantly, respond to accidents and other incidents. Our customers depend upon our service so we instituted a real-time disaster management approach that continuously monitors performance of internal systems, threatening weather patterns and other natural events. This approach allows us to regularly reconfigure our network and place disaster response teams in motion as soon as we hear of an event. 23 21 [ART] 24 22 PROGRESSIVE'S DIVERSIFIED BUSINESSES The United Financial Casualty Company, Professional Liability Group and Motor Carrier business units provide combinations of service and indemnity to businesses. Their primary products are collateral protection coverage for automobile lenders and loan tracking for financial institutions, directors and officers liability and fidelity coverage for American Bankers Association member community banks, and underwriting and claim servicing for state involuntary residual market commercial and personal auto programs and other commercial enterprises. Each unit is the largest provider of its specialty in the country, though the market size for each declined in 1995. Net premiums written and underwriting profit margins were $83.9 million and 23.3 percent, respectively, in 1995 compared to $114.9 million and 20.9 percent in 1994. The Diversified businesses produced service revenues and pretax profits of $38.9 million and $8.7 million, respectively, in 1995, compared to $41.9 million and $10.0 million in 1994. INVESTMENTS AND CAPITAL MANAGEMENT Progressive employs a conservative approach to investment and capital management intended to ensure that there is enough capital to support all the insurance premium that can be profitably written. Progressive's investment function remains in New York under the direction of David Young, who managed our fixed-income investments for seven years and was appointed Chief Investment Officer in July 1995. During the first half of 1995, we conducted a review of our investment policies and organization and reaffirmed our commitment to risk-averse investment practices. Although new benchmarks were adopted for measuring the performance of our investment professionals, the objectives continue to discourage the assumption of large amounts of interest rate risk. The quality of our portfolio remained exceptional, with high-grade, fixed-income debt and equity investments averaging about 91 percent of our portfolio with 64 percent invested in treasuries and other AAA securities. In addition, we reduced our non-investment-grade securities to .2 percent at December 31, 1995 from 4.4 percent in 1994. The duration of the fixed-income portfolio was 2.2 years at year-end, slightly higher than the duration of a two-year note. The investment review also included an examination of the historical behavior of several classes of fixed-income and common equity investments and simulations of the potential effects of different combinations of bonds and common stocks on Progressive's shareholders' equity. Our objective was to increase Progressive's exposure to the equity markets but, at the same time, avoid excessive market volatility which could reduce surplus and thus curtail growth. Based on the analysis, a higher limit, at about 15 percent of the portfolio, was established for common stock investments. On December 31, 1995, common stocks comprised 8.2 percent of the portfolio, up from 3.4 percent as of the prior year-end. This percentage will increase as investment opportunities are identified. Progressive generally pursues a "value" rather than a "growth" style of equity investing. From this perspective, the domestic stock markets look over-valued relative to some foreign markets. Consequently, we retained Sanford C. Bernstein & Co., a value-oriented firm, to manage a limited global equity portfolio. The 1995 taxable equivalent total return for the portfolio was 12.4 percent, compared to 3.7 percent last 25 23 year. As in prior years, the average maturity of our fixed-income portfolio remained near the low end of our normal range. In addition, the limited average maturity of Progressive's bond portfolio reflects the 1.75 years average life of our insurance liabilities. The total portfolio increased to $3,768.0 million at December 31, 1995, from $3,180.0 million at December 31, 1994. Investment income (interest, dividends and realized gains and losses) was $245.8 million before taxes and $186.6 million after taxes, compared to $182.3 million before taxes and $146.7 million after taxes in 1994. On December 31, 1995, our portfolio had $78.7 million in unrealized capital gains, compared to the $41.1 million in unrealized losses at the end of 1994. This increase in value was the result of falling interest rates and rising prices in the bond market and the extraordinary advance in stock prices that characterized most of the year. The three-year Treasury note yield dropped from 7.8 percent to 5.2 percent and the S&P 500 index rose from 459.3 to 615.9 from the beginning to the end of 1995. In December 1995, in conjunction with guidance issued by the Financial Accounting Standards Board, Progressive reassessed the classification of its investment portfolio. As a result, we elected to change accounting designation of all remaining "held-to-maturity" fixed-income investments and reclassified them to "available-for-sale." Thus, all of our investments are marked-to-market on the year-end balance sheet. Progressive's net premiums written grew 19 percent in 1995 without the need for additional debt or equity financing. Our net premiums written to statutory surplus ratio was 2.8 to 1 on December 31, 1995. The Company has sufficient funds to support anticipated growth in the operating companies. Progressive's debt to total capital ratio was 31 percent at year-end 1995, compared to 37 percent last year and a range of 24 percent to 61 percent over the past 20 years. During 1995, we repurchased 89,800 shares of our 9 3/8 % Serial Preferred Shares, Series A, at an average cost of $25.65 per share. Progressive supports risk-based capital monitoring by regulators and endorses the trend toward more demanding standards than those currently in use. This effort to improve the early detection of financial weakness before it leads to insolvency should benefit Progressive over time by reducing state insolvency fund assessments. The risk-based capital calculation reflects favorably on companies with historically high profitability, short-tailed liabilities, conservative reserves and investments. 1995 INITIATIVES Progressive's total concentration on auto insurance means that every initiative is designed to improve customer product, price and service. DIVERSITY Our growth plans suggest that most new hires will be either claim or customer service representatives. Our objective is to have the demographics of the people we hire for these positions reflect the demograph- ics of the communities where our offices are located, and ultimately the demographics of our customers. Our goal is not just to hire a more diverse population but, more importantly, to ensure an inclusive work environment that values each person regardless of his or her background and experiences. COMMUNITY ORGANIZATION We continued to experiment with moving profit and growth responsibility for high potential communities from state-focused division presidents to community managers which put us closer to customers to manage growth better. During the year, after two years of testing, we concluded that community management countrywide will best support our goals of delighting the customer, providing immediate response, giving consumers choice in how they purchase insurance and reinforcing a positive work environment. INTERNET SITE On April 7, 1995, we established a presence on the World Wide Web with our Home Page. Progressive was the first major insurer to have such a presence. Through our Site, anyone can obtain financial information, product and safety information, comparative auto rates from four insurers, as well as test his or her knowledge of the insurance industry through an interactive game, and much more. You can find Progressive's Home Page at http://www.auto-insurance.com. NEW FACILITIES During the year, Progressive expanded its disaster recovery capabilities through the creation of a separate print facility located in Tampa, Florida. In addition, we opened a training center in Tampa to perpetuate Progressive's learning environment and compliment the facility in Cleveland, which is operating at maximum capacity. 26 24 Consumers prefer different ways to buy, so we offer choices--with an independent agent, over the telephone, at a Progressive location or by mail. meeting the challenge 27 25 [ART] 28 26 shaping the future At Progressive, it is always as if we are just beginning our business and so we look at a future that is brighter than ever. [ART] RISKS Progressive faces tremendous opportunity. We point out risks to help our shareholders understand the Company better, not because our risk level is greater than that of other businesses. LEGISLATIVE AND REGULATORY RISK Insurance laws and regulations change continually. There were no significant reforms during the year. We rely on our division presidents, community managers and product managers to help regulators and legislators resolve issues in the way that best serves consumers. UNPREDICTABLE UNDERWRITING MARGIN AND GROWTH RATE Our strategy is to strive to achieve a four percent underwriting profit margin target in each program. We cannot predict with precision the timing and pace of changes in underwriting margins, nor the rate of growth. With margins approaching four percent, we monitor each program to ensure that rates are adjusted promptly and adequately to sustain these margins. ELIMINATION OF TAX-ADVANTAGED INVESTMENTS In 1995, proposed tax law changes created new risks to consider regarding our municipal bond portfolio. Several proposals were put forward, including the "flat tax," which would have the effect of eliminating the tax advantage from investing in municipal securities. The market value of these investments will be adversely affected if any of these measures are adopted. Early in 1995, we eliminated a substantial portion of our holdings with maturities longer than five years, thus reducing our exposure to the municipal market by more than 50 percent. This was a precautionary move since we continue to doubt that these tax initiaitives will become law. At year-end 1995, the portfolio contained $1,126.6 million of unhedged municipals with an average maturity of about 3.4 years. PRICING RISK We continue to learn how to price standard and preferred auto insurance, but have not yet conclusively proved our expertise. We minimize this risk by controlling volume in these new programs and changing rates immediately when experience dictates. HOMEOWNERS INSURANCE This type of insurance has the potential to expose Progressive to catastrophes. Thus, there will be risk if our auto insurance market share objectives require we offer it. The current situation of having no plans to write homeowners is also risky business 29 27 because many consumers prefer to buy all their insurance from one company. In 1996, we will continue to assess the demand for homeowners and will develop a plan to satisfy our customers' needs. ADVERTISED BRAND Consumer advertising and brand awareness require higher performance standards. We continually consider consumers' demands and appreciate their ability to make wise choices. In response, we are always looking for new and innovative ways to improve service at a lower cost. COMPETITOR RESPONSE Other insurers are reacting to Progressive's attempt to change consumers' auto insurance experience, but we cannot predict when and how their response will affect our growth and profitability. We monitor competitors and will promptly incorporate their product and service improvements in our consumer offerings. In addition, our people, whose knowledge of our operations along with their skills and talents, are being sought by companies with whom we compete. THE FUTURE Progressive is leading a wave of change in the United States' system for dealing with auto accident injuries and property damage. We are reducing auto accident victims' trauma and costs, improving how consumers feel about auto insurance and being rewarded for our leadership. Success so far encourages us to expand at a pace that tests our ability to provide the service we aspire to deliver. We begin 1996 as we began all other years--excited, respectful of the challenge implicit in our objectives and strategy, humbled by our failures, proud of having responded to them and confident that our excellent people will continue to achieve superior results. Much will be required to realize our vision. At Progressive, it is always as if we are just beginning our business and so we look at a future that is brighter than ever. We deeply appreciate the customers we are privileged to serve. Thank you for your business, and thanks especially to the more than 30,000 independent insurance agents who chose to do business with Progressive in 1995. We are particularly grateful for our shareholders' continued confidence. To the men and women who make Progressive a great company, thanks for all your contributions in 1995 and the promise you bring to our future. Joy Love and Peace /s/ Peter Lewis Peter B. Lewis Chairman, President and Chief Excutive Officer 30 28 WORKING TOGETHER Progressive's most important advantage is having superior people. Teamwork is the way we work. Our people's teamwork and esprit is high. [ART] 31 29 [ART] 32 30 [ART] 33 31 [ART] moving moutains Insurance laws and regulations change continually. We rely on our division presidents, community managers and product managers to help regulators and legislators resolve issues in the way that best serves consumers. 34 32 1995 Financial Review
Consolidated Financial Management's Discussion Analysis of Loss and Quarterly Financial and Statements 34 and Analysis 47 LAE Development 54 Common Share Data 55 Ten Year Summaries 50 Direct Premiums Written by State 54
[ART] 35 - -------------------------------------------------------------------------------- 33 report of coopers & lybrand l.l.p., independent accountants To the Board of Directors and Shareholders, The Progressive Corporation: We have audited the accompanying consolidated balance sheets of The Progressive Corporation and subsidiaries as of December 31, 1995 and 1994, and the related consolidated statements of income, changes in shareholders' equity and cash flows for each of the three years in the period ended December 31, 1995. These financial statements are the responsibility of The Progressive Corporation and subsidiaries' management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of The Progressive Corporation and subsidiaries as of December 31, 1995 and 1994, and the consolidated results of their operations and their cash flows for each of the three years in the period ended December 31, 1995, in conformity with generally accepted accounting principles. /s/ Coopers & Lybrand L.L.P. Cleveland, Ohio January 24, 1996 The Progressive Corporation and Subsidiaries 36 - -------------------------------------------------------------------------------- consolidated 34 statements of income
(millions-except per share amounts) For the years ended December 31, 1995 1994 1993 - -------------------------------------------------------------------------------------- Net Premiums Written $ 2,912.8 $ 2,457.2 $ 1,819.2 - -------------------------------------------------------------------------------------- Revenues Premiums earned $ 2,727.2 $ 2,191.1 $ 1,668.7 Investment income 199.1 158.5 134.5 Net realized gains on security sales 46.7 23.8 107.9 Service revenues 38.9 41.9 43.7 - -------------------------------------------------------------------------------------- Total revenues 3,011.9 2,415.3 1,954.8 - -------------------------------------------------------------------------------------- Expenses Losses and loss adjustment expenses 1,943.8 1,397.3 1,028.0 Policy acquisition costs 459.6 391.5 311.6 Other underwriting expenses 167.2 150.8 151.3 Investment expenses 8.1 8.7 10.2 Service expenses 30.2 31.9 36.9 Interest expense 57.1 55.3 39.7 Non-recurring item(1) -- -- 4.0 - -------------------------------------------------------------------------------------- Total expenses 2,666.0 2,035.5 1,581.7 - -------------------------------------------------------------------------------------- Net Income Income before income taxes 345.9 379.8 373.1 Provision for income taxes 95.4 105.5 105.8 - -------------------------------------------------------------------------------------- Net income $ 250.5 $ 274.3 $ 267.3 - -------------------------------------------------------------------------------------- Per Share Primary $ 3.26 $ 3.59 $ 3.59 Fully diluted 3.24 3.59 3.58
(1) See Note 10-Debt for discussion. See notes to consolidated financial statements. The Progressive Corporation and Subsidiaries 37 - -------------------------------------------------------------------------------- 35 consolidated balance sheets
(millions) December 31, 1995 1994 Assets Investments: Held-to-maturity: Fixed maturities, at amortized cost (market: $343.8) $ -- $ 337.6 Available-for-sale: Fixed maturities, at market (amortized cost: $2,729.5 and $2,129.7) 2,772.9 2,087.0 Equity securities, at market Preferred stocks (cost: $379.4 and $377.1) 382.3 370.1 Common stocks (cost: $277.6 and $103.9) 310.0 106.2 Short-term investments, at amortized cost (market: $302.8 and $279.2) 302.8 279.1 - -------------------------------------------------------------------------------------------------------------- Total investments 3,768.0 3,180.0 Cash 16.2 13.4 Accrued investment income 39.8 43.4 Premiums receivable, net of allowance for doubtful accounts of $19.2 and $15.6 649.9 542.4 Reinsurance recoverables 338.1 379.7 Prepaid reinsurance premiums 70.5 83.2 Deferred acquisition costs 181.9 161.6 Income taxes 58.3 103.2 Property and equipment, net of accumulated depreciation of $128.7 and $116.7 159.2 143.3 Other assets 70.6 24.9 - -------------------------------------------------------------------------------------------------------------- Total assets $5,352.5 $4,675.1 - -------------------------------------------------------------------------------------------------------------- Liabilities and Shareholders' Equity Unearned premiums $1,209.6 $1,036.7 Loss and loss adjustment expense reserves 1,610.5 1,434.4 Policy cancellation reserve 40.8 47.3 Accounts payable and accrued expenses 339.9 329.2 Funded debt 675.9 675.6 - -------------------------------------------------------------------------------------------------------------- Total liabilities 3,876.7 3,523.2 - -------------------------------------------------------------------------------------------------------------- Shareholders' equity: Serial Preferred Shares (authorized 20.0) 9 3/8% Serial Preferred Shares, Series A, no par value, cumulative, liquidation preference $25.00 per share (issued and outstanding 3.4 and 3.5) 83.6 85.8 Common Shares, $1.00 par value (authorized 200.0, issued 83.1 and 82.4, including treasury shares of 11.0 and 11.2) 72.1 71.2 Paid-in capital 374.8 357.1 Net unrealized appreciation (depreciation) on investment securities 51.1 (30.7) Retained earnings 894.2 668.5 - -------------------------------------------------------------------------------------------------------------- Total shareholders' equity 1,475.8 1,151.9 - -------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $5,352.5 $4,675.1 -----------------------
See notes to consolidated financial statements. The Progressive Corporation and Subsidiaries 38 - -------------------------------------------------------------------------------- consolidated 36 statements of changes in shareholders' equity
(millions-except per share amounts) For the years ended December 31, 1995 1994 1993 Preferred Shares, No Par Value Balance, Beginning of year $ 85.8 $ 87.9 $ 96.4 Treasury shares purchased-cost basis (2.2) (2.1) (8.5) - ------------------------------------------------------------------------------------------------------------------ Balance, End of year $ 83.6 $ 85.8 $ 87.9 - ------------------------------------------------------------------------------------------------------------------ Common Shares, $1.00 Par Value Balance, Beginning of year $ 71.2 $ 72.1 $ 67.1 Stock options exercised .9 .2 .1 Sale of Common Shares -- -- 5.0 Treasury shares purchased -- (1.1) (.1) - ------------------------------------------------------------------------------------------------------------------ Balance, End of year $ 72.1 $ 71.2 $ 72.1 - ------------------------------------------------------------------------------------------------------------------ Paid-In Capital Balance, Beginning of year $ 357.1 $ 357.6 $ 180.7 Stock options exercised 9.2 3.4 .8 Tax benefits on stock options exercised 8.5 1.5 .9 Stock rights issued -- -- 3.5 Sale of Common Shares -- -- 172.0 Treasury shares purchased -- (5.4) (.3) - ------------------------------------------------------------------------------------------------------------------ Balance, End of year $ 374.8 $ 357.1 $ 357.6 - ------------------------------------------------------------------------------------------------------------------ Net Unrealized Appreciation (Depreciation) On Investment Securities Balance, Beginning of year $ (30.7) $ 33.5 $ 77.5 Change in net unrealized appreciation (depreciation) 81.8 (64.2) (44.0) - ------------------------------------------------------------------------------------------------------------------ Balance, End of year $ 51.1 $ (30.7) $ 33.5 - ------------------------------------------------------------------------------------------------------------------ Retained Earnings Balance, Beginning of year $ 668.5 $ 446.8 $ 207.3 Net income 250.5 274.3 267.3 Cash dividends on Preferred Shares (9 3/8% annually) (8.3) (8.5) (9.2) Cash dividends on Common Shares ($.220, $.210 and $.200 per share) (15.8) (14.9) (13.9) Treasury shares purchased: Preferred Shares (.1) (.2) (1.3) Common Shares -- (27.5) (2.0) Other, net (.6) (1.5) (1.4) - ------------------------------------------------------------------------------------------------------------------ Balance, End of year $ 894.2 $ 668.5 $ 446.8 - ------------------------------------------------------------------------------------------------------------------ ---------------------------------------- Total Shareholders' Equity $1,475.8 $1,151.9 $ 997.9 ----------------------------------------
The 9 3/8% Serial Preferred Shares, Series A, may be redeemed at the Company's option any time on or after May 31, 1996. There are 5.0 million Voting Preference Shares authorized; no such shares have been issued. See notes to consolidated financial statements. The Progressive Corporation and Subsidiaries 39 - -------------------------------------------------------------------------------- 37 consolidated statements of cash flows
(millions) For the years ended December 31, 1995 1994 1993 Cash Flows From Operating Activities Net income $ 250.5 $ 274.3 $ 267.3 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 20.4 19.3 16.1 Net realized gains on security sales (46.7) (23.8) (107.9) Changes in: Unearned premiums 172.9 264.7 157.2 Loss and loss adjustment expense reserves 176.1 85.8 74.4 Accounts payable and accrued expenses 16.5 14.9 6.2 Policy cancellation reserve (6.5) (12.8) 8.0 Prepaid reinsurance premiums 12.7 1.4 (6.6) Reinsurance recoverables 41.6 1.2 (23.1) Premiums receivable (107.5) (161.8) (68.6) Deferred acquisition costs (20.3) (37.0) (23.3) Income taxes .6 9.9 2.0 Other, net 20.3 15.2 21.8 - ---------------------------------------------------------------------------------------------------------------------- Net cash provided by operating activities 530.6 451.3 323.5 Cash Flows From Investing Activities Purchases: Held-to-maturity: fixed maturities (.2) (89.6) (118.1) Available-for-sale: fixed maturities (2,575.5) (1,463.1) (1,215.6) equity securities (763.1) (350.2) (358.4) Sales: Available-for-sale: fixed maturities 1,744.9 731.6 325.6 equity securities 593.6 298.3 269.6 Maturities, paydowns, calls and other: Held-to-maturity: fixed maturities 87.1 58.6 59.5 Available-for-sale: fixed maturities 497.2 354.5 526.6 equity securities 10.4 17.7 56.5 Net (purchases) sales of short-term investments (23.7) (48.3) 69.2 (Receivable) payable on securities (52.0) (41.3) 55.9 Purchases of property and equipment (38.3) (58.2) (60.0) - ---------------------------------------------------------------------------------------------------------------------- Net cash used in investing activities (519.6) (590.0) (389.2) Cash Flows From Financing Activities Proceeds from exercise of stock options 10.1 3.6 .9 Tax benefits from exercise of stock options 8.5 1.5 .9 Proceeds from issuance of Common Shares -- -- 177.0 Proceeds from funded debt -- 198.4 148.2 Payments of funded debt (.4) (.4) (240.2) Dividends paid to shareholders (24.1) (23.4) (23.1) Acquisition of treasury shares (2.3) (36.3) (12.2) - ---------------------------------------------------------------------------------------------------------------------- Net cash provided by (used in) financing activities (8.2) 143.4 51.5 - ---------------------------------------------------------------------------------------------------------------------- Increase (decrease) in cash 2.8 4.7 (14.2) Cash, Beginning of year 13.4 8.7 22.9 - ---------------------------------------------------------------------------------------------------------------------- Cash, End of year $ 16.2 $ 13.4 $ 8.7 ----------------------------------------
See notes to consolidated financial statements. The Progressive Corporation and Subsidiaries 40 notes to 38 consolidated financial statements - -------------------------------------------------------------------------------- December 31, 1995, 1994 and 1993 1. REPORTING AND ACCOUNTING POLICIES NATURE OF OPERATIONS The Progressive Corporation, an insurance holding company formed in 1965, owns 63 operating subsidiaries and has one mutual insurance company affiliate. The companies provide personal automobile insurance and other specialty property-casualty insurance and related services sold primarily through independent insurance agents in the United States and Canada. BASIS OF CONSOLIDATION AND REPORTING The accompanying consolidated financial statements include the accounts of The Progressive Corporation, its subsidiaries and affiliate (the Company). All of the subsidiaries and its affiliate are wholly owned or controlled. All significant intercompany accounts and transactions are eliminated in consolidation. The parent company's investments in subsidiaries exceeded their underlying book value at dates of acquisition by $4.0 million, of which $1.6 million remains. INVESTMENTS Held-to-maturity: fixed maturity securities are securities which the Company has the positive intent and ability to hold to maturity. These securities are reported at amortized cost with the difference between the original cost and redemption value of these securities earned over the lives of the respective issues and included in investment income. In November 1995, the Financial Accounting Standards Board (FASB) issued a Special Report entitled "A Guide to Implementation of Statement 115 on Accounting for Certain Investments in Debt and Equity Securities." Concurrent with the initial adoption of this implementation guidance, the Company was able to reassess the appropriateness of the classifications of all securities held at that time. As a result, the Company reclassified its entire held-to-maturity portfolio to available-for-sale and marked the securities to market. The Company had no held-to-maturity securities at December 31, 1995. Available-for-sale: fixed maturity securities are securities held for indefinite periods of time, and may be used as a part of the Company's asset/liability strategy or sold in response to changes in interest rates, anticipated prepayments, risk/reward characteristics, liquidity needs or similar economic factors. These securities are carried at market value with the corresponding unrealized appreciation or depreciation, net of deferred income taxes, reflected in shareholders' equity. Available-for-sale: equity securities include common stocks and nonredeemable preferred stocks and are reported at quoted market values. Changes in the market values of these securities, net of deferred income taxes, are reflected as unrealized appreciation or depreciation in shareholders' equity. Changes in value due to foreign currency exchange are recognized in income in the current period. Derivatives, as defined by Statement of Financial Accounting Standards (SFAS) 119, "Disclosures about Derivative Financial Instruments and Fair Value of Financial Instruments," include futures, options, short positions, forward positions, foreign currency forwards and interest rate swap agreements, and are carried in the appropriate available-for-sale portfolio based on the nature of the instrument. Those instruments held or issued for purposes other than trading are carried at market value; changes in value of futures, options, foreign currency forwards and short positions are recorded to income in the current period, and changes in the value of forward positions and interest rate swaps are reflected in shareholders' equity as unrealized appreciation or depreciation, net of deferred income taxes. At disposition, changes in value of forward positions and interest rate swap agreements are recognized in income as "net realized gains or losses on security sales." Those instruments entered into for the purpose of hedging are carried at market value; changes in value follow the recognition of the asset being hedged. Gains or losses on closed hedge positions are recorded as basis adjustments to the cost of the assets hedged and amortized over their expected life. Unamortized amounts are recognized in income at the disposition of the assets hedged. Gains and losses on foreign currency hedges are recognized in income and offset the foreign exchange gains and losses on the underlying transactions. Trading securities are securities bought principally for the purpose of selling them in the near term and are reported at market value. Changes in market value are recognized in income in the current period. During the year, the net activity in trading securities was not material to the Company's financial position, cash flows and results of operations. The Company had no trading securities or financial instruments with off-balance-sheet risk held or issued for trading purposes at December 31, 1995 and 1994. Short-term investments include eurodollar deposits, commercial paper and other securities maturing within one year and are reported at amortized cost, which approximates market. Risk is individually evaluated for all positions, including financial instruments with off-balance-sheet risk. Realized gains and losses on sales of securities are computed based on the first-in first-out method. PROPERTY AND EQUIPMENT Property and equipment is recorded at cost. Depreciation is provided over the estimated useful lives of the assets using accelerated methods for computers and straight line for all other fixed assets. Capitalized interest costs were $0 in 1995, $1.6 million in 1994 and $2.7 million in 1993. INSURANCE PREMIUMS AND RECEIVABLES Insurance premiums written are earned primarily on a pro rata basis over the period of risk. For products where more than 50 percent cancellations are anticipated, premiums written and earned are reduced, though cancellations have not yet occurred. The Company provides insurance and related services to individuals, lenders and motor carriers throughout the United States and in Canada, and offers a variety of payment plans to meet individual customer needs. Generally, premiums are collected in advance of providing risk coverage, minimizing the Company's exposure to credit risk. LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES Loss reserves represent the estimated liability on claims reported to the Company, plus reserves for losses incurred but not yet reported (IBNR). These estimates are reported net of amounts recoverable from salvage and subrogation. Loss adjustment expense reserves represent the estimated expenses required to settle these claims and losses. The methods of making estimates and establishing these reserves are reviewed regularly, and resulting adjustments are reflected in income currently. The Progressive Corporation and Subsidiaries 41 - -------------------------------------------------------------------------------- 39 REINSURANCE The Company's reinsurance transactions are primarily attributable to premiums written under state-mandated involuntary plans for commercial vehicles (Commercial Auto Insurance Procedures-CAIP), for which the Company retains no indemnity risk. The remaining reinsurance arises from the Company seeking to reduce its loss exposure in its non-auto businesses. Prepaid reinsurance premiums are recognized on a pro rata basis over the period of risk. EARNINGS PER SHARE Net income is reduced by Preferred Share dividends earned during the period and the excess of the fair value over the carrying amount of Preferred Shares repurchased for both the primary and fully diluted earnings per share calculations. Primary and fully diluted earnings per share are computed using the weighted number of Common Shares and equivalents, including stock options, assumed outstanding during the period. DEFERRED ACQUISITION COSTS Deferred acquisition costs include commissions, premium taxes and other costs incurred in connection with writing business. These costs are deferred and amortized over the period in which the related premiums are earned. The Company considers anticipated investment income in determining the recoverability of these costs. There is no indication that these costs will not be fully recoverable in the near term. SERVICE REVENUES AND EXPENSES Service revenues are earned on a pro rata basis over the term of the related policies; acquisition expenses are deferred and amortized over the period in which the related revenues are earned. SUPPLEMENTAL CASH FLOW INFORMATION Cash includes only bank demand deposits. The Company paid income taxes of $75.5 million, $89.8 million and $91.0 million in 1995, 1994 and 1993, respectively. Total interest paid was $56.6 million for 1995, $48.3 million for 1994 and $38.3 million for 1993. As discussed above, on December 1, 1995, the Company reclassified $248.4 million of its held-to-maturity securities to available-for-sale, recognizing $10.4 million in gross unrealized gains. NEW ACCOUNTING STANDARD In October 1995, the FASB issued SFAS 123, "Accounting for Stock-Based Compensation." SFAS 123 introduces a fair value based method of accounting for stock-based compensation and encourages, but does not require, companies to recognize compensation expense for grants of stock, stock options and other equity instruments based on the new fair value accounting rules. If companies elect not to adopt the new fair value accounting rules, SFAS 123 requires them to provide expanded disclosures in the footnotes. The Company intends to adopt only the disclosure provisions of SFAS 123. The disclosure requirements, which are effective for fiscal years beginning after December 15, 1995, require companies to provide pro forma disclosures of net income and earnings per share as if they had adopted the fair value accounting method for awards granted in 1995 and 1996. ESTIMATES The Company is required to make estimates and assumptions when preparing its financial statements and accompanying notes in conformity with GAAP. Actual results could differ from those estimates. RECLASSIFICATIONS Certain amounts in the financial statements for prior periods were reclassified to conform with the 1995 presentation. 2. INVESTMENTS As of December 31, 1993, the Company elected to early adopt SFAS 115, "Accounting for Certain Investments in Debt and Equity Securities." The adoption of SFAS 115 did not have any effect on the Company's results of operations or financial position. The components of pretax investment income at December 31 were:
(millions) 1995 1994 1993 Held-to-maturity: fixed maturities $ 15.8 $ 18.4 $ 17.4 Available-for-sale: fixed maturities 140.3 103.8 88.7 equity securities 23.9 23.2 19.8 Short-term investments 19.1 13.1 8.6 - -------------------------------------------------------------------------------- Investment income 199.1 158.5 134.5 - -------------------------------------------------------------------------------- Gross realized gains: Held-to-maturity: fixed maturities .8 1.1 1.0 Available-for-sale: fixed maturities 49.0 49.6 20.9 equity securities 32.5 23.0 102.3 Short-term investments .1 -- -- Gross realized losses: Held-to-maturity: fixed maturities (.6) (.7) -- Available-for-sale: fixed maturities (22.3) (40.2) (4.6) equity securities (12.8) (9.0) (11.7) - -------------------------------------------------------------------------------- Net realized gains on security sales 46.7 23.8 107.9 - -------------------------------------------------------------------------------- $245.8 $182.3 $242.4 ----------------------------------
42 - -------------------------------------------------------------------------------- 40 In 1993, the Company sold its entire holding of MBNA Corporation recognizing realized gains of $74.3 million. At the time the Company purchased MBNA Corporation stock, Alfred Lerner was Chairman of the Board of The Progressive Corporation and Chairman of the Board and Chief Executive Officer of MBNA Corporation and owned 10% of its common stock. Changes in unrealized gains (losses) on fixed maturities and equity securities were:
(millions) 1995 1994 1993 Unrealized gains (losses): ------------------------------- Held-to-maturity: fixed maturities $(6.2) $(12.1) $ (2.5) ------------------------------- Available-for-sale: fixed maturities $86.1 $(73.4) $ 1.6 equity securities 40.0 (25.4) (67.6) Deferred income taxes (44.3) 34.6 22.0 - ---------------------------------------------------------------------------- $81.8 $(64.2) $(44.0) -------------------------------
The composition of the investment portfolio at December 31 was:
(millions) GROSS GROSS UNREALIZED UNREALIZED MARKET COST GAINS LOSSES VALUE 1995 Available-for-sale: U.S. government obligations $ 676.7 $ 9.5 $ (.1) $ 686.1 State and local government obligations 1,186.9 32.6 (7.9) 1,211.6 Foreign government obligations 33.9 1.0 -- 34.9 Corporate debt securities 59.7 1.4 -- 61.1 Asset-backed securities 722.3 8.8 (2.0) 729.1 Other debt securities 50.0 .8 (.7) 50.1 - ----------------------------------------------------------------------------------------------------------------------------- 2,729.5 54.1 (10.7) 2,772.9 Preferred stocks 379.4 3.7 (.8) 382.3 Common stocks 277.6 43.6 (11.2) 310.0 Short-term investments 302.8 -- -- 302.8 - ----------------------------------------------------------------------------------------------------------------------------- $ 3,689.3 $ 101.4 $ (22.7) $ 3,768.0 ------------------------------------------------------ 1994 Held-to-maturity: State and local government obligations $ 337.6 $ 8.4 $ (2.2) $ 343.8 - --------------------------------------------------------------------------------------------------------------------------- Available-for-sale: U.S. government obligations 30.1 -- (1.3) 28.8 State and local government obligations 1,210.2 8.9 (20.1) 1,199.0 Foreign government obligations 23.7 -- (.7) 23.0 Corporate debt securities 179.8 2.7 (14.4) 168.1 Asset-backed securities 634.9 1.4 (20.0) 616.3 Other debt securities 51.0 4.4 (3.6) 51.8 - --------------------------------------------------------------------------------------------------------------------------- 2,129.7 17.4 (60.1) 2,087.0 Preferred stocks 377.1 .2 (7.2) 370.1 Common stocks 103.9 5.9 (3.6) 106.2 Short-term investments 279.1 .1 -- 279.2 - --------------------------------------------------------------------------------------------------------------------------- $ 3,227.4 $ 32.0 $ (73.1) $ 3,186.3 ------------------------------------------------------
The composition of fixed maturities by maturity at December 31, 1995 was:
(millions) MARKET COST VALUE Less than one year $ 383.0 $ 386.8 One to five years 1,945.9 1,975.4 Five to ten years 213.9 218.8 More than ten years 186.7 191.9 - ----------------------------------------------------------------------------------------------------------------------------- $ 2,729.5 $ 2,772.9 -------------------------
Securities which do not have a single maturity date are reported at average maturity. 43 - -------------------------------------------------------------------------------- 41 At December 31, 1995, bonds in the principal amount of $62.0 million were on deposit with various regulatory agencies to meet statutory requirements. The components of derivative financial instruments were:
(millions) MARKET VALUE (CARRYING VALUE) CONTRACT/NOTIONAL VALUE AT DECEMBER 31, AT DECEMBER 31, -------------------------- -------------------------- 1995 1994 1995 1994 Forward and future positions: Assets $ .1 $ 13.3 $ 1.3 $ 755.4 Liabilities (3.0) -- 54.7 -- Option positions-assets (.3) -- 50.0 -- Interest rate swap positions-liabilities -- (11.7) -- 423.2 Foreign currency forward positions: Assets .1 -- 21.2 -- Liabilities .4 -- 97.1 -- - ------------------------------------------------------------------------- -------------------------- $ (2.7) $ 1.6 $ 224.3 $1,178.6 ----------------------- --------------------------
Derivatives are used to manage the risks and enhance the yields of the available-for-sale portfolio. This is accomplished by modifying the basis, duration, interest rate or foreign currency characteristics of the portfolio or hedged securities. Net cash requirements are limited to changes in market values, which may vary based upon changes in interest rates and other factors. Exposure to credit risk is limited to the carrying value; unless otherwise noted, collateral is not required to support the credit risk. As of December 31, 1995, the Company had an open investment funding commitment of $12.7 million. The Company had no uncollateralized lines and letters of credit as of December 31, 1995 or 1994. 3. REINSURANCE Reinsurance contracts do not relieve the Company from its obligations to policyholders. Failure of reinsurers to honor their obligations could result in losses to the Company. The Company evaluates the financial condition of its reinsurers and monitors concentrations of credit risk to minimize its exposure to significant losses from reinsurer insolvencies. As of December 31, 1995 and 1994, 69 percent and 64 percent, respectively, of the "prepaid reinsurance premiums" and 70 percent and 72 percent, respectively, of the "reinsurance recoverables" relate to CAIP, for which the Company retains no indemnity risk. The effect of reinsurance on premiums written and earned as of December 31 is as follows:
(millions) 1995 1994 1993 --------------------- ----------------------- --------------------- WRITTEN EARNED WRITTEN EARNED WRITTEN EARNED Direct premiums $ 3,068.9 $ 2,895.9 $ 2,645.1 $ 2,378.4 $ 1,966.4 $ 1,808.8 Assumed .1 .1 2.9 4.9 9.2 9.7 Ceded (156.2) (168.8) (190.8) (192.2) (156.4) (149.8) - --------------------------------------------------------------------------- ----------------------- --------------------- Net premiums $ 2,912.8 $ 2,727.2 $ 2,457.2 $ 2,191.1 $ 1,819.2 $ 1,668.7 --------------------- ----------------------- ---------------------
Losses and loss adjustment expenses are net of reinsurance ceded of $104.1 million in 1995, $145.9 million in 1994 and $138.8 million in 1993. 4. LITIGATION The Company is named as defendant in various lawsuits generally relating to its insurance operations. Numerous legal actions arise from claims made under insurance policies issued by the subsidiaries or in connection with previous reinsurance agreements. These actions were considered by the Company in establishing its loss and loss adjustment expense reserves. The Company believes that the ultimate disposition of these and other pending lawsuits will not materially impact the Company's results of operations, cash flows or financial position. 44 - -------------------------------------------------------------------------------- 42 5. INCOME TAXES The provision for income taxes in the accompanying consolidated statements of income differs from the statutory rate as follows:
(millions) 1995 1994 1993 ----------------- ----------------- ----------------- --------- --------- --------- Income before income taxes $ 345.9 $ 379.8 $ 373.1 --------- --------- --------- Tax at statutory rate $ 121.1 35% $ 132.9 35% $ 130.6 35% Tax effect of: Exempt interest income (21.9) (6) (24.8) (6) (15.4) (4) Dividends received deduction (5.7) (2) (3.4) (1) (4.3) (1) Other items, net 1.9 1 .8 -- (5.1) (2) - ----------------------------------------------------------------------- ----------------- ------------------ $ 95.4 28% $ 105.5 28% $ 105.8 28% ----------------- ----------------- ------------------
The current portion of the income tax provision was $95.2 million in 1995, $113.0 million in 1994 and $90.3 million in 1993. Deferred income taxes reflect the impact for financial statement reporting purposes of temporary differences between the financial statement carrying amounts and the tax bases of assets and liabilities. At December 31, 1995 and 1994, the components of the net deferred tax asset were as follows:
(millions) 1995 1994 Deferred tax assets: Unearned premium reserve $ 79.7 $ 66.8 Non-deductible accruals 29.4 25.7 Off-balance-sheet financial instruments -- 9.6 Capitalized expenditures 5.2 3.9 Loss reserve discounting 10.5 .5 Unrealized losses -- 16.7 Other 7.4 1.0 Deferred tax liabilities: Deferred acquisition costs (63.7) (56.6) Unrealized gains (27.6) -- - ----------------------------------------------------------------------------------------------------------------------------- Net deferred tax asset $ 40.9 $ 67.6 --------------------------
The Company is able to demonstrate that the benefit of its deferred tax assets is fully realizable. Deferred income taxes include noninterest bearing special estimated tax deposits made pursuant to Section 847 of the Internal Revenue Code of $38.5 million and $46.6 million at December 31, 1995 and 1994, respectively. As of December 31, 1994, a deferred tax asset of $9.6 million was recorded to reflect accelerated recognition of gains on off-balance-sheet financial instruments. 6. STATUTORY FINANCIAL INFORMATION At December 31, 1995, $121.5 million of consolidated statutory policyholders' surplus represents net admitted assets of the Company's insurance subsidiaries that are required to meet minimum statutory surplus requirements in the subsidiaries' states of domicile. The subsidiaries may be licensed in states, other than their states of domicile, which may have higher minimum statutory surplus requirements. Generally, the net admitted assets of insurance subsidiaries that, subject to other applicable insurance laws and regulations, are available for transfer to the parent company cannot include the net admitted assets required to meet the minimum statutory surplus requirements of the states where the subsidiaries are licensed. During 1995, the insurance subsidiaries paid aggregate cash dividends of $120.8 million to the parent company. Based on the dividend laws currently in effect, the insurance subsidiaries may pay aggregate dividends of $179.2 million in 1996 without prior approval from regulatory authorities. Statutory policyholders' surplus was $1,055.1 million and $945.1 million at December 31, 1995 and 1994, respectively. Statutory net income was $200.0 million, $230.3 million and $188.6 million for the years ended December 31, 1995, 1994 and 1993, respectively. During 1994, the insurance subsidiaries began to reduce loss reserves for anticipated salvage and subrogation recoveries in accordance with statutory accounting principles. Previously, salvage and subrogation was not reflected in the statutory financial statements until actually recovered. As a result of this change, statutory policyholders' surplus increased $39.9 million during 1994. 45 - -------------------------------------------------------------------------------- 43 The Company's insurance subsidiaries, as part of their statutory filings, are required to disclose their risk-based capital (RBC) requirements. The National Association of Insurance Commissioners developed the RBC program to enable regulators to take appropriate and timely regulatory actions with respect to insurers that show signs of weak or deteriorating financial condition. RBC is a series of dynamic surplus-related formulas which contain a variety of factors that are applied to financial balances based on a degree of certain risks, such as asset, credit and underwriting risks. 7. LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES Activity in the loss and loss adjustment expense reserves, prepared in accordance with generally accepted accounting principles, is summarized as follows:
(millions) 1995 1994 1993 Balance at January 1 $ 1,434.4 $ 1,348.6 $ 1,274.2 Less reinsurance recoverables on unpaid losses 334.2 334.8 316.7 - ----------------------------------------------------------------------------------------------------------------------------- Net balance at January 1 1,100.2 1,013.8 957.5 - ----------------------------------------------------------------------------------------------------------------------------- Incurred related to: Current year 2,000.4 1,539.8 1,126.5 Prior years (56.6) (142.5) (98.5) - ----------------------------------------------------------------------------------------------------------------------------- Total incurred 1,943.8 1,397.3 1,028.0 Paid related to: Current year 1,204.3 893.9 604.9 Prior years 525.3 417.0 366.8 - ----------------------------------------------------------------------------------------------------------------------------- Total paid 1,729.6 1,310.9 971.7 - ----------------------------------------------------------------------------------------------------------------------------- Net balance at December 31 1,314.4 1,100.2 1,013.8 Plus reinsurance recoverables on unpaid losses 296.1 334.2 334.8 - ----------------------------------------------------------------------------------------------------------------------------- Balance at December 31 $ 1,610.5 $ 1,434.4 $ 1,348.6 ----------------------------------------
During 1994, based on a review of the adequacy of its total loss reserves, the Company eliminated its $71.0 million "supplemental reserve" ($46.2 million after tax), resulting in a one-time increase in earnings of $.62 per share. The Company historically established case and IBNR reserves by product with the objective of being accurate to within plus or minus 2 percent. Pricing has been based on these estimates of reserves by product. Because the Company desired a very high degree of comfort that aggregate reserves were adequate, aggregate reserves were established near the upper end of the reasonable range of reserves, and the difference between such aggregate reserves and the midpoint of the reasonable range of case and IBNR reserves was called the "supplemental reserve." The Company concluded, after examining its historical aggregate reserves, that the practice of setting aggregate reserves at the upper end of the range of reasonable reserves provided an unnecessarily high level of comfort. At December 31, 1994, even without the high level of comfort provided by the "supplemental reserve," the Company's reserves would have been redundant by approximately 2 percent to 4 percent over the previous 5 years. The Company believes that this change in the estimate of its reserves placed it more in line with the practices of other companies in the industry. Because the Company is primarily an insurer of motor vehicles, it has limited exposure for environmental, product and general liability claims. The Company has established reserves for these exposures, in amounts which it believes to be adequate based on information currently known by it. The Company does not believe that these claims will have a material impact on the Company's liquidity, results of operations, cash flows or financial condition. During 1994, the Company settled the dispute arising out of its 1985 acquisition of American Star Insurance Company, over the seller's refusal to pay certain losses on pre-sale business written by American Star. Total reserves on this business, which are mainly for product liability and environmental claims, are $27.9 million, of which $8.8 million is recoverable from reinsurers. The Company will continue to monitor these exposures, adjust the related reserves appropriately as additional information becomes known and disclose any material developments. See Management's Discussion and Analysis for further discussion. The Company writes auto insurance in the coastal states, which could be exposed to natural catastrophes, such as hurricanes. Although the occurrence of a major catastrophe could have a significant impact on the Company's quarterly results, the Company believes such an event would not be so material as to disrupt the overall normal operations of the Company. The Company is unable to predict if any such events will occur in the near term. 46 - -------------------------------------------------------------------------------- 44 8. EMPLOYEE BENEFIT PLANS Retirement Plans The Company has a two-tiered Retirement Security Program. The first tier is a defined contribution pension plan covering all employees who meet requirements as to age and length of service. Contributions vary from one percent to five percent of annual eligible compensation up to the Social Security wage base, based on years of eligible service. Prior to January 1, 1994, the defined contribution plan covered only eligible employees hired after December 31, 1988, and was funded at 1.3 percent of annual eligible compensation up to the Social Security wage base. Company contributions were $3.6 million in 1995, $3.2 million in 1994 and $.7 million in 1993. The second tier is a long-term savings plan under which the Company matches, into a Company stock account, amounts contributed to the plan by an employee up to a maximum of three percent of the employee's eligible compensation. Company contributions were $4.4 million in 1995 and 1994 and $3.8 million in 1993. The Company has a defined benefit pension plan which covered employees hired before January 1, 1989, who met requirements as to age and length of service. This plan and future benefit accruals were frozen on December 31, 1993, and the Company recognized a $1.5 million gain; the benefits accruals through the date the plan was frozen were based on years of service and career average compensation up to the Social Security tax base. The Company's funding policy is to contribute annually the minimum amount required by the Employee Retirement Income Security Act of 1974, as amended. There is no past service liability requiring funding by the Company. The following table sets forth the defined benefit plan information as of December 31:
(millions) 1995 1994 1993 Actuarial present value of benefit obligations: --------------------------------------- Vested benefit obligation $ 19.6 $ 13.6 $ 15.8 --------------------------------------- Accumulated benefit obligation $ 19.6 $ 13.6 $ 16.8 --------------------------------------- Projected benefit obligation for service rendered to date $ 19.6 $ 13.6 $ 16.8 Plan assets at fair value, primarily government and corporate taxable bonds 18.1 17.1 17.9 - ----------------------------------------------------------------------------------------------------------------------------- Plan assets net of projected benefit obligation (1.5) 3.5 1.1 Unrecognized actuarial (gains) losses 2.2 (3.0) (1.9) Required minimum liability (2.0) -- -- Unrecognized transition asset at January 1, 1987, recognized over 21 years (.2) (.3) (.3) - ----------------------------------------------------------------------------------------------------------------------------- Pension asset (liability) recognized in the consolidated balance sheets $ (1.5) $ .2 $ (1.1) --------------------------------------- Net pension cost included the following components: Service cost-benefits earned during the period $ -- $ -- $ 1.9 Interest cost on projected benefit obligation 1.2 1.3 1.2 Actual return on plan assets (2.2) .1 (1.2) Net amortization and deferral .8 (1.6) (.5) - ----------------------------------------------------------------------------------------------------------------------------- Net periodic pension cost (return) $ (.2) $ (.2) $ 1.4 ---------------------------------------
The weighted average discount rate used in determining the actuarial present value of the projected benefit obligation was 7.0 percent for 1995, 8.0 percent for 1994 and 7.0 percent for 1993. The expected long-term rate of return on assets was 8.0 percent for 1995, 1994 and 1993. POSTEMPLOYMENT BENEFITS The Company provides various postemployment benefits to former or inactive employees who meet eligibility requirements, their beneficiaries and covered dependents. Postemployment benefits include salary continuation and disability-related benefits including workers' compensation and, if elected, continuation of health care benefits. The Company's obligation was $1.7 million, $1.3 million and $.9 million at December 31, 1995, 1994 and 1993, respectively. POSTRETIREMENT BENEFITS The Company provides postretirement health and life insurance benefits to all employees who met requirements as to age and length of service at December 31, 1988. The Company recognized its obligation of $.3 million at December 31, 1995, and $.4 million at December 31, 1994 and 1993. The Company's funding policy is to contribute annually the maximum amount that can be deducted for Federal income tax purposes. Contributions are intended to provide not only for benefits attributed to services to date, but also for those expected to be earned in the future. DEFERRED COMPENSATION In April 1995, the Company's shareholders approved The Progressive Corporation Executive Deferred Compensation Plan (Deferral Plan), which permits eligible executives to defer receipt of some or all of their annual bonuses or other incentive awards. These deferred amounts will be invested in one or more investment funds, including Common Shares of the Company, offered under the Deferral Plan. All distributions from the Deferral Plan will be made in cash, except that distributions representing amounts deemed invested in Common Shares will be made in Common Shares. The Company reserved 300,000 Common Shares for issuance under the Deferral Plan. The Company established an irrevocable grantor trust to provide a source of funds to assist the Company in meeting its liabilities under the Deferral Plan. At December 31, 1995, the trust held assets of $.9 million, of which $.2 million were held in Common Shares, to cover its liabilities. 47 - -------------------------------------------------------------------------------- 45 INCENTIVE COMPENSATION PLANS The Company's 1989 Incentive Plan provides for the granting of stock options and other stock-based awards to key employees of the Company. The 6,500,000 Common Shares authorized under the Incentive Plan have been registered. Outside of the Incentive Plan, the Company registered 1,425,000 Common Shares relating to stock options granted to key employees of the Company. The nonqualified stock options granted are for periods up to ten years, become exercisable at various dates not earlier than six months after the date of grant, and remain exercisable for specified periods thereafter. All options granted have an exercise price equal to the market value of the Common Shares at the date of grant. A summary of all stock option activity during the three years ended December 31, follows:
1995 1994 1993 ------------------------------ ----------------------------------- -------------------------------- NUMBER OF EXERCISE PRICES NUMBER OF EXERCISE PRICES NUMBER OF EXERCISE PRICES OPTIONS OUTSTANDING SHARES PER SHARE SHARES PER SHARE SHARES PER SHARE Beginning of year 5,263,822 $ 7.666 to 38.750 4,488,887 $ 7.666 to 29.625 4,123,003 $ 7.666 to 19.833 Add (deduct): Granted 888,725 38.000 to 44.875 1,156,450 31.000 to 38.750 693,325 29.625 Exercised (861,802) 7.666 to 29.625 (198,959) 7.666 to 19.666 (96,443) 9.250 to 19.666 Cancelled (347,421) 11.500 to 38.000 (182,556) 11.250 to 31.000 (230,998) 9.125 to 29.625 - --------------------------------------------------------- ----------------------------------- ------------------------------- End of year 4,943,324 $ 9.291 to 44.875 5,263,822 $ 7.666 to 38.750 4,488,887 $ 7.666 to 29.625 ------------------------------ ----------------------------------- ------------------------------- Exercisable, end of year 984,099 $ 9.291 to 31.000 1,128,902 $ 7.666 to 31.000 934,592 $ 7.666 to 19.833 ------------------------------ ----------------------------------- ------------------------------- Available, end of year 1,292,975 1,834,279 2,808,173 --------- --------- ---------
The amounts charged to income for incentive compensation plans, including an executive cash bonus program for key members of management and a gainsharing program for all other employees, were $33.9 million in 1995, $32.0 million in 1994 and $24.7 million in 1993. 9. CONTRACTUAL COMMITMENTS The Company has operating lease commitments and service agreements with terms greater than one year for equipment, office space and telecommunications services, some with options to renew at the end of the contract periods. The minimum commitments under such noncancelable leases and service contracts at December 31, 1995 are as follows (in millions): 1996-$33.9; 1997-$23.2; 1998-$11.5; 1999-$2.3; 2000-$.3; and thereafter-$0. Total expense incurred by the Company for such purposes for 1995, 1994 and 1993 was $51.3 million, $42.6 million, and $41.3 million, respectively. 10. DEBT During 1995, the maximum amount of bank borrowings outstanding was $5.9 million, and the daily average amount outstanding was $.1 million, at an average annual interest rate of 6.6 percent. Funded debt at December 31 consisted of:
(millions) 1995 1994 6.60% Notes $ 198.7 $ 198.5 7% Notes 148.3 148.2 8 3/4% Notes 29.2 29.0 10% Notes 149.5 149.4 10 1/8% Subordinated Notes 149.4 149.3 Other funded debt .8 1.2 - ----------------------------------------------------------------------------------------------- $ 675.9 $ 675.6 -------------------------
Funded debt includes amounts the Company has borrowed and contributed to the capital of its insurance subsidiaries or borrowed for other long-term purposes. 48 - -------------------------------------------------------------------------------- 46 In May 1990, the Company entered into a revolving credit arrangement with National City Bank, which is reviewed by the bank annually. Under this agreement, the Company had the right to borrow up to $50.0 million. In February 1994, the Company reduced this revolving credit arrangement to $20.0 million. By selecting from available credit options, the Company may elect to pay interest at rates related to the London interbank offered rate, the bank's base rate or at a money market rate. A commitment fee is payable on any unused portion of the committed amount at the rate of .125 percent per annum. The Company had no borrowings under this arrangement at December 31, 1995 or 1994. In January 1994, the Company sold $200.0 million of noncallable 6.60% Notes due 2004 with interest payable semiannually. The fair value of these Notes was $203.6 million and $174.2 million at December 31, 1995 and 1994, respectively. In October 1993, the Company sold $150.0 million of noncallable 7% Notes due 2013 with interest payable semiannually. The fair value of these Notes was $156.6 million and $124.6 million at December 31, 1995 and 1994, respectively. In May 1989, the Company issued $30.0 million of 8 3/4% Notes due 1999 in exchange for $30.0 million of its 8 3/4% Debentures due 2017. These Notes are noncallable and interest is payable semiannually. The fair value of these Notes was $32.7 million and $30.3 million at December 31, 1995 and 1994, respectively. In December 1988, the Company sold $150.0 million of 10% Notes due 2000 and $150.0 million of 10 1/8% Subordinated Notes due 2000. All such Notes are noncallable with interest payable semiannually on both issues. The fair values of the 10% Notes and 10 1/8% Subordinated Notes were $175.9 million and $176.1 million, respectively, at December 31, 1995, and $159.8 million and $159.7 million, respectively, at December 31, 1994. In February 1987, the Company sold $100.0 million ($70.0 million after the May 1989 debt exchange) of 8 3/4% Debentures due 2017 with interest payable semiannually. In December 1993, the Company redeemed the entire $70.0 million principal amount of these Debentures at 105.425% of the principal amount, plus accrued interest, with the proceeds of the sale of certain securities in its investment portfolios. A $4.0 million charge on debt extinguishment was recorded as a "non-recurring item." As of December 31, 1995, the Company was in compliance with its debt covenants. Aggregate principal payments on funded debt outstanding at December 31, 1995 are $.4 million for 1996, $.3 million for 1997, $.1 million for 1998, $30.0 million for 1999, $300.0 million for 2000, and $350.0 million thereafter. 11. SEGMENT INFORMATION The operating segments of the Company are classified into Insurance and Service. Expense allocations are based on assumptions and estimates; stated segment operating results would change if different methods were applied. The Company does not allocate assets to segments.
For the years ended December 31, 1995 1994 1993 ----------------------- ----------------------- ----------------------- PRETAX PRETAX PRETAX (millions) REVENUES PROFIT (LOSS) REVENUES PROFIT (LOSS) REVENUES PROFIT (LOSS) Insurance operations $2,727.2 $ 156.6 $2,191.1 $ 251.5 $1,668.7 $ 177.8 Service operations 38.9 8.7 41.9 10.0 43.7 6.8 - -------------------------------------------------------------- ----------------------- ----------------------- Total operations 2,766.1 165.3 2,233.0 261.5 1,712.4 184.6 Total investment income 245.8 245.8 182.3 182.3 242.4 242.4 Interest expense and other costs -- (65.2) -- (64.0) -- (53.9) - -------------------------------------------------------------- ----------------------- ----------------------- $3,011.9 $ 345.9 $2,415.3 $ 379.8 $1,954.8 $ 373.1 ----------------------- ----------------------- -----------------------
12. FAIR VALUE OF FINANCIAL INSTRUMENTS Information about specific valuation techniques and related fair value detail is provided in Note 1-Reporting and Accounting Policies, Note 2-Investments and Note 10-Debt. Pursuant to SFAS 119, the cost and market value of the financial instruments as of December 31 are summarized as follows:
(millions) 1995 1994 ------------------------ ------------------------ MARKET MARKET COST VALUE COST VALUE Investments: Held-to-maturity: fixed maturities $ -- $ -- $ 337.6 $ 343.8 Available-for-sale: fixed maturities 2,729.5 2,772.9 2,129.7 2,087.0 equity securities 657.0 692.3 481.0 476.3 Short-term investments 302.8 302.8 279.1 279.2 Funded debt (675.9) (745.7) (675.6) (649.8)
49 - -------------------------------------------------------------------------------- 47 management's discussion and analysis of financial condition and results of operations The consolidated financial statements and the related notes on pages 34 through 46, together with the supplemental information on pages 50 through 55, should be read in conjunction with the following discussion of the consolidated financial condition and results of operations. FINANCIAL CONDITION The Progressive Corporation is a holding company and does not have any revenue producing operations of its own. It receives cash through borrowings, equity sales, subsidiary dividends and other transactions, and may use the proceeds to contribute to the capital of its insurance subsidiaries in order to support premium growth, to repurchase its Common Shares and other outstanding securities, to redeem its outstanding securities and for other business purposes. During 1995, the Company repurchased .1 million of its 9 3/8% Serial Preferred Shares, Series A, at a cost of $2.3 million. During the three-year period ended December 31, 1995, the Company sold 4,950,000 Common Shares for net proceeds of $177.0 million and repurchased 1.2 million Common Shares at a total cost of $36.4 million (average cost of $31.92 per share) and .6 million of its 9 3/8% Serial Preferred Shares, Series A, at a total cost of $14.4 million (average cost $27.08 per share). The Company also sold $350.0 million of notes, repaid $170.0 million borrowed under its credit facilities, and redeemed the entire $70.0 million of its 8 3/4% Debentures. During the same period, The Progressive Corporation received $254.3 million from its insurance subsidiaries, net of capital contributions made to these subsidiaries. The regulatory restrictions on subsidiary dividends are described in Note 6 to the financial statements. The Company has substantial capital resources and is unaware of any trends, events or circumstances that are reasonably likely to affect its capital resources in a material way. The Company also has available a $20.0 million revolving credit agreement. Given its 31% debt to equity ratio, the Company believes it has sufficient borrowing capacity and other capital resources to support current and anticipated growth. The Company's insurance operations create liquidity by collecting and investing premiums from new and renewal business in advance of paying claims. For the three years ended December 31, 1995, operations generated a positive cash flow of $1,305.4 million, and cash flow is expected to be positive in both the short-term and reasonably foreseeable future. The Company's substantial investment portfolio is highly liquid, consisting almost entirely of readily marketable securities. On or after May 31, 1996, the Company's 9 3/8% Serial Preferred Shares, Series A, are redeemable at the Company's option at the price of $25 per share plus accrued dividends to the redemption date. If the Company elects to redeem these securities, the redemption could be funded through operating cash flows or, if market conditions warrant, funds could be raised externally on the debt or equity markets. The Company does not expect any material changes in its cash requirements and is not aware of any trends, events or uncertainties that are reasonably likely to have a material effect on its liquidity. Total capital expenditures for the three years ended December 31, 1995, aggregated $156.5 million. In 1994, the Company completed its new corporate office complex in Mayfield Village, Ohio. The cost of the project was $75.5 million and was funded through operating cash flows. INVESTMENTS The Company invests in fixed-maturity, equity and short-term securities. The Company's investment strategy recognizes its need to maintain capital adequate to support its insurance operations and commitment to risk adverse investment policies. Therefore, the Company evaluates the risk/reward trade-offs of investment opportunities, measuring their effects on stability, diversity, overall quality and liquidity of the investment portfolio. The majority of the portfolio is invested in high-grade, fixed-income securities, of which short- and intermediate-term securities represented $2,876.2 million, or 76.4%, in 1995 and $2,319.4 million, or 72.9%, in 1994. Long-term securities were $191.9 million, or 5.1%, in 1995 and $245.0 million, or 7.7%, in 1994. The duration of the fixed-income portfolio was 2.2 years at December 31, 1995. Early in 1995, the Company eliminated a substantial portion of its municipal securities with maturities longer than 5 years in response to the proposal of a "flat tax," which would effectively eliminate the tax advantage of these securities. A relatively small portion of the investment portfolio was invested in marketable equity securities providing risk/reward balance and diversification. Common stocks represented $310.0 million, or 8.2%, in 1995 and $106.2 million, or 3.4%, in 1994. The increase in common stocks reflects the Company's objective to increase its position in common stock investments to 15% of the entire portfolio and to optimize value and further diversify the portfolio through foreign equity investments. The foreign equity portfolio, which may utilize stock index futures and foreign currency forwards, comprised $52.6 million of the common stock portfolio at December 31, 1995. The remainder of the equity portfolio of $382.3 million, or 10.1%, in 1995 and $370.1 million, or 11.6%, in 1994, was comprised of over 90% of fixed-rate preferred stocks with mechanisms that may provide an opportunity to liquidate at par. Consistent with the Company's objective to increase its common stock investments, the Company liquidated its high-yield portfolio, reducing it to .2% of the portfolio at December 31, 1995, from 4.4% at December 31, 1994, resulting in a net gain of $6.6 million. In conjunction with guidance issued by the FASB, the Company reclassified $248.4 million of its held-to-maturity securities to available-for-sale, recognizing $10.4 million in gross unrealized gains. The Company had no held-to-maturity securities at December 31, 1995. As of December 31, 1995, the Company's portfolio had $78.7 million in unrealized gains, compared to $41.1 million in unrealized losses in 1994. This increase in value was the result of falling interest rates and rising prices in the bond and stock market. The weighted average fully taxable equivalent book yield of the portfolio was 6.9%, 6.7% and 6.8% for the years ended December 31, 1995, 1994 and 1993, respectively. Investments in the Company's portfolio have varying degrees of risk. Equity securities generally have greater risks than the non-equity The Progressive Corporation and Subsidiaries 50 - -------------------------------------------------------------------------------- 48 portion of the portfolio since these securities are subordinate to rights of debt holders and other creditors of the issuer. Financial instruments with off-balance-sheet risk are used to manage the risks and enhance the yields of the available-for-sale portfolio. This is accomplished by modifying the basis, duration, interest rate or foreign currency characteristics of the portfolio or hedged securities. Net cash requirements are limited to changes in market values which may vary based upon changes in interest rates and other factors. Exposure to credit risk is limited to the carrying value; unless otherwise noted, collateral is not required to support the credit risk. During 1995, the Company added a government bond trading portfolio to benefit from short-term market rate opportunities. The Company has stringent restrictions on the amount of open positions in the trading portfolio limiting its exposure to acceptable levels. At December 31, 1995, there were no trading securities or off-balance-sheet trading positions. As of December 31, 1995, the Company held $729.1 million of asset-backed securities which represented 19.3% of the total investment portfolio. The portfolio included collateralized mortgage obligations (CMOs) and commercial mortgage-backed obligations (CMBs) totaling $335.2 million and $117.2 million, respectively. As of December 31, 1995, the CMO portfolio included sequential bonds representing 65.9% of the CMO portfolio ($221.0 million) with an average life of 3.1 years, and planned amortization class bonds representing 34.1% of the CMO portfolio ($114.2 million) with an average life of 1.6 years. One hundred percent of the CMOs held by the Company are rated AAA by Moody's or Standard & Poor's. At December 31, 1995, the CMB portfolio had an average life of 7.4 years and a weighted average Moody's or Standard & Poor's rating of A. At December 31, 1995, the CMO and CMB portfolios had unrealized gains of $3.9 million and $1.1 million, respectively. The single largest unrealized loss in any CMO security was $.1 million, or .5% of such position, and there were no unrealized losses in any CMB security at December 31, 1995. Both the CMO and CMB portfolios are highly liquid with readily available quotes and contain no residual interests. The remainder of the asset-backed portfolio is invested primarily in auto loan and credit card-backed securities. The Company regularly reviews the individual holdings in its portfolio for evidence of impairment. Changes in market value are evaluated to determine the extent to which such changes are attributable to: (i) interest rates, (ii) market-related factors other than interest rates and (iii) financial conditions, business prospects and other fundamental factors specific to the issuer. Declines attributable to issuer fundamentals are reviewed in further detail. Available evidence is considered to estimate the realizable value of the investment. When a security in the Company's investment portfolio has a decline in market value which is other than temporary, the Company is required by GAAP to reduce the carrying value of such security to its net realizable value. It is the Company's general policy to dispose of securities when the Company determines that the issuer is unable to reverse its deteriorating financial condition and the prospects for its business within a reasonable period of time. In less severe circumstances, the Company may decide to dispose of a portion of its holdings in a specific issuer when the risk profile of the investment becomes greater than its tolerance for such risk. RESULTS OF OPERATIONS Operating income, which excludes net realized gains and losses from security sales and one-time items, was $220.1 million, or $2.84 per share, in 1995, $212.7 million, or $2.76 per share, in 1994 and $197.3 million, or $2.61 per share, in 1993. The GAAP combined ratio was 94.3 in 1995, 91.7 (88.5 including the elimination of the "supplemental reserve" discussed below) in 1994 and 89.3 in 1993. Direct premiums written increased 16% to $3,068.9 million in 1995, compared to $2,645.1 million in 1994 and $1,966.4 million in 1993. Net premiums written increased 19% to $2,912.8 million, compared to $2,457.2 million in 1994 and $1,819.2 million in 1993. The difference between direct and net premiums written is largely attributable to premiums written under state-mandated involuntary Commercial Auto Insurance Procedures (CAIP), for which the Company retains no indemnity risk, of $105.4 million in 1995, $115.4 million in 1994 and $98.0 million in 1993. The Company provided policy and claim processing services to 28 state CAIPs. Premiums earned, which are a function of the amount of premiums written in the current and prior periods, increased 24% in 1995, compared to 31% in 1994 and 17% in 1993. The Company's Core divisions' net premiums written grew 21%, 38% and 25% for 1995, 1994 and 1993, respectively, primarily driven by an increase in unit sales. In 1995, the Company raised rates an average of 6.5%, compared to no rate changes in 1994 and a rate decrease of .8% in 1993. The Company continues to write standard and preferred auto risks which represented between 5% and 10% of total Core business volume. The Company anticipates continued growth in its Core business in 1996, which could result from the number of states in which the Company seeks to insure all auto risks, from working with independent agents dedicated to regaining market share and from integrating other buying options. The Core divisions generated underwriting profit margins of 5% in 1995, 7% in 1994 and 10% in 1993; the Company's strategy is to achieve a 4% underwriting margin. Claim costs, the Company's most significant expense, represent actual payments made and changes in estimated future payments to be made to or on behalf of its policyholders, including expenses required to settle claims and losses. These costs include a loss estimate for future assignments and assessments, based on current business, under state-mandated involuntary automobile programs. Claims costs are influenced by inflation and loss severity and frequency, the impact of which is mitigated by adequate pricing. Increases in the rate of inflation increase loss payments, which are made after premiums are collected. Accordingly, anticipated rates of inflation are taken into account when the Company establishes premium rates and loss re- 51 - -------------------------------------------------------------------------------- 49 serves. Claim costs, expressed as a percentage of premiums earned, were 71% in 1995, compared to 67% (excluding the elimination of the "supplemental reserve") in 1994 and 62% in 1993. The Company has allowed loss costs to rise at a faster pace than rates, reflecting the Company's intent to maintain rates at competitive levels. During 1994, based on a review of the adequacy of its total loss reserves, the Company eliminated its $71.0 million "supplemental reserve," resulting in a one-time increase in earnings of $.62 per share, a 3.2 point increase in the underwriting profit margin and a $46.2 million increase in capital. The Company historically established case and IBNR reserves by product with the objective of being accurate to within plus or minus 2%. Pricing has been based on these estimates of reserves by product. Because the Company desired a very high degree of comfort that aggregate reserves were adequate, aggregate reserves were established near the upper end of the reasonable range of reserves, and the difference between such aggregate reserves and the midpoint of the reasonable range of case and IBNR reserves was called the "supplemental reserve." The Company concluded, after examining its historical aggregate reserves, that the practice of setting aggregate reserves at the upper end of the range of reasonable reserves provided an unnecessarily high level of comfort. At December 31, 1994, even without the high level of comfort provided by the "supplemental reserve," the Company's reserves would have been redundant by approximately 2% to 4% over the previous 5 years. The Company believes that this change in the estimate of its reserves placed it more in line with the practices of other companies in the industry. Because the Company is primarily an insurer of motor vehicles, it has limited exposure for environmental, product and general liability claims. The Company has established reserves for these exposures, in amounts which it believes to be adequate based on information currently known by it. The Company does not believe that these claims will have a material impact on the Company's liquidity, results of operation, cash flows or financial condition. During 1994, the Company settled the dispute, arising out of its 1985 acquisition of American Star Insurance Company (since renamed National Continental Insurance Company), over the seller's refusal to pay certain losses on pre-sale business written by American Star. Under the settlement, National Continental received $10.1 million from the seller and agreed to be solely responsible for the next $20 million of gross losses. The seller will thereafter be responsible for half the losses, net of reinsurance, if it achieves certain minimum net worth requirements. In addition to the $10.1 million, National Continental will be entitled to the proceeds of various treaty and facultative reinsurance policies that had been purchased by American Star. National Continental has established reserves for these exposures, which are mainly for product liability and environmental claims, in amounts it believes to be adequate based on information currently available to it, including a study by independent actuaries for the seller. Total reserves on this business are $27.9 million, of which $8.8 million is recoverable from reinsurers. The Company will continue to monitor these exposures, adjust the related reserves appropriately as additional information becomes known and disclose any material developments. Policy acquisition and other underwriting expenses as a percentage of premiums earned were 23% in 1995, compared to 25% in 1994 and 28% in 1993. The decrease primarily reflects process improvement initiatives and lower commission programs. Service businesses generated a pretax operating profit of $8.7 million in 1995, compared to $10.0 million in 1994 and $6.8 million in 1993. Recurring investment income (interest and dividends) increased 26% to $199.1 million in 1995, compared to $158.5 million in 1994 and $134.5 million in 1993, primarily due to an increase in the average investment portfolio and a mix shift in the portfolio to taxable securities. Net realized gains on security sales were $46.7 million in 1995, $23.8 million in 1994 and $107.9 million in 1993. A significant portion of the 1993 realized gains resulted from the sale of certain equity securities held in the Company's investment portfolio. 52 50 - -------------------------------------------------------------------------------- ten year summary-financial not covered by report of independent accountants highlights (millions-except per share amounts and number of people employed)
1995 1994 Insurance Companies Selected Financial Information and Operating Statistics-Statutory Basis Reserves: Loss and loss adjustment expense(1) $ 1,314.4 $ 1,100.2 Unearned premiums 1,140.4 954.8 Policyholders' surplus(1) 1,055.1 945.1 Ratios: Net premiums written to policyholders' surplus 2.8 2.6 Loss and loss adjustment expense reserves to policyholders' surplus 1.2 1.2 Loss and loss adjustment expense 71.6 64.2 Underwriting expense 21.4 22.4 - ------------------------------------------------------------------------------------------------------- Statutory combined ratio 93.0 86.6 Selected Consolidated Financial Information-GAAP Basis Total revenues $ 3,011.9 $ 2,415.3 Total assets 5,352.5 4,675.1 Total shareholders' equity(2) 1,475.8 1,151.9 Common Shares outstanding 72.1 71.2 Common Share price High $49 1/2 $40 1/2 Low 34 3/4 27 3/4 Close(3) 48 7/8 35 Market capitalization $ 3,523.9 $ 2,492.0 Book value per Common Share(2) $ 19.31 $ 14.97 Return on average shareholders' equity(4) 19.6% 27.4% Funded debt outstanding $ 675.9 $ 675.6 Ratio of funded debt to capital 31% 37% GAAP underwriting margin(2) 5.7 11.5 Number of people employed 8,025 7,544
(1) During 1994, the Company began accruing for salvage and subrogation recoverables. See Note 6-Statutory Financial Information for further discussion. (2) In 1994, the $71.0 million "supplemental reserve" was eliminated, increasing book value per share $.65, underwriting profit margin 3.2% and shareholders' equity $46.2 million. See Management's Discussion and Analysis for further discussion. (3) Represents the closing price at December 31. (4) Net income minus preferred share dividends divided by average common shareholders' equity. All share and per share amounts were adjusted for stock splits. The Progressive Corporation and Subsidiaries 53 - -------------------------------------------------------------------------------- 51
1993 1992 1991 1990 1989 1988 1987 1986 Insurance Companies Selected Financial Information and Operating Statistics-Statutory Basis Reserves: Loss and loss adjustment expense(1) $ 1,053.7 $ 994.7 $ 901.7 $ 827.4 $ 787.7 $ 685.5 $ 496.1 $ 342.0 Unearned premiums 688.9 538.5 513.6 474.1 467.6 505.0 446.8 323.9 Policyholders' surplus(1) 701.9 658.3 676.7 636.7 578.1 495.0 452.0 312.0 Ratios: Net premiums written to policyholders' surplus 2.6 2.2 2.0 1.9 2.0 2.6 2.5 2.5 Loss and loss adjustment expense reserves to policyholders' surplus 1.5 1.5 1.3 1.3 1.4 1.4 1.1 1.1 Loss and loss adjustment expense 62.6 68.3 65.7 62.1 65.9 62.9 58.3 61.0 Underwriting expense 25.4 29.8 33.5 31.1 31.4 33.2 35.8 34.3 - ----------------------------------------------------------------------------------------------------------------------------------- Statutory combined ratio 88.0 98.1 99.2 93.2 97.3 96.1 94.1 95.3 Selected Consolidated Financial Information-GAAP Basis Total revenues $ 1,954.8 $ 1,738.9 $ 1,493.1 $ 1,376.2 $ 1,392.7 $ 1,355.8 $ 1,066.2 $ 749.4 Total assets 4,011.3 3,440.9 3,317.2 2,912.4 2,643.7 2,316.3 1,782.5 1,259.2 Total shareholders' equity(2) 997.9 629.0 465.7 408.5 435.2 417.2 395.0 311.4 Common Shares outstanding 72.1 67.1 63.3 69.3 76.2 80.7 86.1 84.0 Common Share price High $46 1/8 $29 3/8 $20 5/8 $18 3/4 $14 1/2 $10 3/4 $11 7/8 $12 7/8 Low 26 5/8 14 3/4 15 11 7 1/2 7 1/4 8 1/2 6 3/4 Close(3) 40 1/2 29 1/8 18 17 1/8 12 7/8 7 5/8 10 1/8 10 3/8 Market capitalization $ 2,920.1 $ 1,954.3 $ 1,139.4 $ 1,186.8 $ 981.1 $ 615.3 $ 871.8 $ 871.5 Book value per Common Share(2) $ 12.62 $ 7.94 $ 5.83 $ 5.89 $ 5.71 $ 5.17 $ 4.59 $ 3.71 Return on average shareholders' equity(4) 36.0% 34.7% 6.7% 21.5% 17.4% 25.9% 24.7% 26.9% Funded debt outstanding $ 477.1 $ 568.5 $ 644.0 $ 644.4 $ 645.9 $ 479.2 $ 216.9 $ 100.8 Ratio of funded debt to capital 32% 47% 58% 61% 60% 53% 35% 24% GAAP underwriting margin(2) 10.7 3.5 (3.7) 1.0 (1.2) 2.9 5.6 4.3 Number of people employed 6,101 5,591 6,918 6,370 6,049 5,854 5,879 4,711
54 - -------------------------------------------------------------------------------- 52 ten year summary-gaap consolidated not covered by report of independent accountants operating results
(millions-except per share amounts) 1995 1994 1993 1992 1991 Direct premiums written: Personal lines $ 2,644.6 $ 2,181.7 $ 1,548.9 $ 1,214.6 $ 1,047.4 Commercial lines 424.3 463.4 417.5 422.2 489.4 - --------------------------------------------------------------------------------------------------------------------------- Total direct premiums written 3,068.9 2,645.1 1,966.4 1,636.8 1,536.8 Reinsurance assumed .1 2.9 9.2 4.3 .1 Reinsurance ceded (156.2) (190.8) (156.4) (189.9) (212.3) - --------------------------------------------------------------------------------------------------------------------------- Net premiums written 2,912.8 2,457.2 1,819.2 1,451.2 1,324.6 Net change in unearned premiums reserve(1) (185.6) (266.1) (150.5) (25.1) (37.7) - --------------------------------------------------------------------------------------------------------------------------- Premiums earned 2,727.2 2,191.1 1,668.7 1,426.1 1,286.9 - --------------------------------------------------------------------------------------------------------------------------- Expenses: Losses and loss adjustment expenses(2) 1,943.8 1,397.3 1,028.0 930.9 858.0 Policy acquisition costs 459.6 391.5 311.6 304.1 313.7 Other underwriting expenses 167.2 150.8 151.3 141.5 162.1 - --------------------------------------------------------------------------------------------------------------------------- Total underwriting expenses 2,570.6 1,939.6 1,490.9 1,376.5 1,333.8 - --------------------------------------------------------------------------------------------------------------------------- Underwriting profit (loss) before taxes 156.6 251.5 177.8 49.6 (46.9) Provision (benefit) for income taxes 54.8 88.0 62.2 16.9 (15.9) - --------------------------------------------------------------------------------------------------------------------------- Underwriting profit (loss) after taxes 101.8 163.5 115.6 32.7 (31.0) Service operations profit (loss) after taxes 5.6 6.5 4.4 (2.8) (1.4) - --------------------------------------------------------------------------------------------------------------------------- 107.4 170.0 120.0 29.9 (32.4) Investment income after taxes 156.2 131.2 107.1 110.4 121.1 Net realized gains (losses) on security sales after taxes 30.4 15.5 70.1 9.6 4.9 Interest expense after taxes (37.1) (35.9) (25.8) (29.4) (31.6) Proposition 103 reserve reduction after taxes -- -- -- 70.0 -- Non-recurring items after taxes -- -- (2.6) (42.6) -- Other expenses after taxes(3) (6.4) (6.5) (1.5) (8.3) (14.9) - --------------------------------------------------------------------------------------------------------------------------- Income before tax adjustments and cumulative effect of accounting change 250.5 274.3 267.3 139.6 47.1 Tax adjustments(4) -- -- -- -- (14.2) Cumulative effect of accounting change(5) -- -- -- 14.2 -- - --------------------------------------------------------------------------------------------------------------------------- Net income $ 250.5 $ 274.3 $ 267.3 $ 153.8 $ 32.9 ---------------------------------------------------------------- Per share Net income(2) $ 3.24 $ 3.59 $ 3.58 $ 2.05 $ .41 Dividends .220 .210 .200 .191 .172 Average equivalent shares Primary 74.2 74.0 71.8 62.3 66.6 Fully diluted 74.7 74.0 72.0 71.9 75.6
(1) Amount represents change in unearned premiums reserve less change in prepaid reinsurance premiums. (2) In 1994, the "supplemental reserve" was eliminated, resulting in a one-time decrease to losses and loss adjustment expenses of $71.0 million, or $.62 per share. See Management's Discussion and Analysis for further discussion. (3) Reflects investment expenses after taxes and other tax adjustments. (4) 1991 reflects a deferred tax asset write-down and 1990 reflects a fresh start tax benefit. (5) 1992 reflects adoption of SFAS 109, "Accounting for Income Taxes," and 1987 reflects adoption of SFAS 96, "Accounting for Income Taxes." All share and per share amounts were adjusted for stock splits. The Progressive Corporation and Subsidiaries 55 - -------------------------------------------------------------------------------- 53
(millions-except per share amounts) 1990 1989 1988 1987 1986 Direct premiums written: Personal lines $ 876.0 $ 800.1 $ 817.0 $ 690.2 $ 526.2 Commercial lines 482.8 487.0 521.0 488.0 303.9 - ------------------------------------------------------------------------------------------------------------------------ Total direct premiums written 1,358.8 1,287.1 1,338.0 1,178.2 830.1 Reinsurance assumed .1 7.2 9.4 19.5 9.2 Reinsurance ceded (162.6) (134.0) (72.4) (81.2) (58.4) - ------------------------------------------------------------------------------------------------------------------------ Net premiums written 1,196.3 1,160.3 1,275.0 1,116.5 780.9 Net change in unearned premiums reserve(1) (5.1) 36.2 (59.6) (122.1) (103.7) - ------------------------------------------------------------------------------------------------------------------------ Premiums earned 1,191.2 1,196.5 1,215.4 994.4 677.2 - ------------------------------------------------------------------------------------------------------------------------ Expenses: Losses and loss adjustment expenses(2) 762.9 799.3 752.0 571.9 406.6 Policy acquisition costs 292.7 296.7 321.3 292.6 190.2 Other underwriting expenses 123.7 114.9 106.6 74.4 51.8 - ------------------------------------------------------------------------------------------------------------------------ Total underwriting expenses 1,179.3 1,210.9 1,179.9 938.9 648.6 - ------------------------------------------------------------------------------------------------------------------------ Underwriting profit (loss) before taxes 11.9 (14.4) 35.5 55.5 28.6 Provision (benefit) for income taxes 4.0 (2.9) 10.0 12.2 13.1 - ------------------------------------------------------------------------------------------------------------------------ Underwriting profit (loss) after taxes 7.9 (11.5) 25.5 43.3 15.5 Service operations profit (loss) after taxes 2.8 2.5 (1.3) (1.0) -- - ------------------------------------------------------------------------------------------------------------------------ 10.7 (9.0) 24.2 42.3 15.5 Investment income after taxes 126.4 135.3 91.3 59.3 45.1 Net realized gains (losses) on security sales after taxes (8.4) (.4) 12.3 (1.9) 9.4 Interest expense after taxes (32.0) (32.5) (10.5) (6.5) (3.3) Proposition 103 reserve reduction after taxes -- -- -- -- -- Non-recurring items after taxes -- -- -- -- -- Other expenses after taxes(3) (13.2) (15.4) (9.2) (3.4) (2.0) - ------------------------------------------------------------------------------------------------------------------------ Income before tax adjustments and cumulative effect of accounting change 83.5 78.0 108.1 89.8 64.7 Tax adjustments(4) 9.9 -- -- -- -- Cumulative effect of accounting change(5) -- -- -- 3.7 -- - ------------------------------------------------------------------------------------------------------------------------ Net income $ 93.4 $ 78.0 $ 108.1 $ 93.5 $ 64.7 -------------------------------------------------------------- Per share Net income(2) $ 1.19 $ .94 $ 1.23 $ 1.08 $ .77 Dividends .160 .147 .133 .077 .019 Average equivalent shares Primary 72.9 79.8 84.0 86.7 85.5 Fully diluted 82.5 89.1 90.9 86.7 85.5
56 - --------------------------------------------------------------------------------------------------------------------------- 54
analysis of loss and loss adjustment expenses not covered by report of independent accountants (lae) development
(millions) For the years ended December 31, 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994(3) 1995 Loss and LAE reserves(1) $ 215.3 $ 323.8 $ 471.0 $ 651.0 $ 748.6 $ 791.6 $ 861.5 $ 956.4 $1,012.4 $1,098.7 $1,314.4 Re-estimated reserves as of: One year later 218.7 300.6 446.6 610.3 685.4 748.8 810.0 857.9 869.9 1,042.1 Two years later 213.6 293.6 422.2 573.4 677.9 726.5 771.9 765.5 837.8 Three years later 205.3 282.8 402.4 581.3 668.6 712.7 718.7 737.4 Four years later 203.4 274.1 403.9 575.1 667.1 683.7 700.1 Five years later 200.9 275.6 399.6 578.4 654.7 666.3 Six years later 204.4 275.8 400.2 582.2 647.1 Seven years later 205.2 277.5 408.5 574.3 Eight years later 206.7 285.7 408.1 Nine years later 215.3 286.7 Ten years later 216.3 Cumulative redundancy (deficiency) $ (1.0) $ 37.1 $ 62.9 $ 76.7 $ 101.5 $ 125.3 $ 161.4 $ 219.0 $ 174.6 $ 56.6 Percentage(2) (.5) 11.5 13.4 11.8 13.6 15.8 18.7 22.9 17.2 5.2
The chart represents the development of the property-casualty loss and LAE reserves for 1985 through 1994. The reserves are re-estimated based on experience as of the end of each succeeding year and are increased or decreased as more information becomes known about the frequency and severity of claims for individual years. The cumulative redundancy (deficiency) represents the aggregate change in the estimates over all prior years. (1) Represents loss and LAE reserves, net of reinsurance recoverables on unpaid losses, at the balance sheet date. (2) Cumulative redundancy (deficiency) divided by loss and LAE reserves. (3) In 1994, based on a review of its total loss reserves, the Company eliminated its $71.0 million "supplemental reserve." See Management's Discussion and Analysis for further discussion. - -------------------------------------------------------------------------------- direct premiums written by state not covered by report of independent accountants
(millions) 1995 1994 1993 1992 1991 ------------------ ------------------ ------------------ ------------------ ------------------ Florida $ 421.9 13.7% $ 369.9 14.0% $ 265.6 13.5% $ 195.3 11.9% $ 173.9 11.3% Texas 313.2 10.2 246.4 9.3 146.6 7.4 117.0 7.2 96.2 6.3 Ohio 284.1 9.3 232.0 8.8 175.9 8.9 140.7 8.6 137.1 8.9 New York 225.6 7.4 195.2 7.4 170.4 8.7 156.8 9.6 132.1 8.6 Pennsylvania 184.9 6.0 161.2 6.1 113.0 5.8 70.1 4.3 52.8 3.4 Georgia 155.1 5.1 129.7 4.9 120.0 6.1 114.6 7.0 122.9 8.0 California 126.6 4.1 126.8 4.8 80.2 4.1 90.6 5.5 156.1 10.2 All other 1,357.5 44.2 1,183.9 44.7 894.7 45.5 751.7 45.9 665.7 43.3 ------------------ ------------------ ------------------ ------------------ ------------------ Total $3,068.9 100.0% $2,645.1 100.0% $1,966.4 100.0% $1,636.8 100.0% $1,536.8 100.0% ------------------ ------------------ ------------------ ------------------ ------------------
The Progressive Corporation and Subsidiaries 57 - -------------------------------------------------------------------------------- 55 quarterly financial and common not covered by report of independent accountants share data
(millions-except per share amounts) NET INCOME OPERATING INCOME(1) ------------------- -------------------- STOCK PRICE OPERATING PER PER HIGH-LOW DIVIDENDS APPRECIATION YEAR QUARTER REVENUES TOTAL SHARE(2) TOTAL(3) SHARE(2) PRICE(4) PER SHARE (DEPRECIATION)(5) 1995 1 $ 633.6 $ 60.7 $ .79 $ 50.7 $ .66 $42 1/8 - 34 3/4 $.055 2 687.4 60.8 .79 46.4 .60 41 7/8 - 37 1/8 .055 3 719.0 62.5 .81 59.0 .76 48 - 37 3/4 .055 4 726.1 66.5 .86 64.0 .83 49 1/2 - 41 1/2 .055 - ------------------------------ ------------------- ----------------- ---------------- ----- -------- $2,766.1 $ 250.5 $ 3.24 $220.1 $2.84 $49 1/2 - 34 3/4 $.220 40.4% -------- ------------------- ----------------- ---------------- ----- -------- 1994 1 $ 488.2 $ 48.1 $ .62 $ 49.8 $ .64 $40 1/2 - 27 3/4 $.050 2 547.1 60.5 .79 54.7 .71 35 5/8 - 28 1/2 .050 3 582.3 64.8 .85 57.4 .75 38 7/8 - 33 1/4 .055 4 615.4 100.9(6) 1.34(6) 50.8 .66 38 3/8 - 32 1/4 .055 - ------------------------------ ------------------- ----------------- ---------------- ----- -------- $2,233.0 $ 274.3(6) $ 3.59(6) $212.7 $2.76 $40 1/2 - 27 3/4 $.210 (13.1)% -------- ------------------- ----------------- ---------------- ----- -------- 1993 1 $ 382.8 $ 51.6 $ .71 $ 39.9 $ .54 $36 1/8 - 26 5/8 $.050 2 423.3 79.7 1.11 54.5 .75 36 1/4 - 27 1/2 .050 3 442.8 82.6 1.09 54.7 .71 44 1/4 - 31 3/4 .050 4 463.5 53.4 .68 49.3 .63 46 1/8 - 38 3/8 .050 - ------------------------------ ------------------- ----------------- ---------------- ----- -------- $1,712.4 $267.3 $3.58 $197.3 $2.61 $46 1/8 - 26 5/8 $.200 39.8% -------- ------------------- ----------------- ---------------- ----- --------
(1) Represents net income less realized gains and losses on security sales and one-time items. (2) Presented on a fully diluted basis. The sum does not equal the total because the average equivalent shares differ in the periods. (3) For 1993, the sum of the quarterly operating income does not equal the total due to the retroactive impact of the Omnibus Budget Reconciliation Act of 1993. (4) Prices as reported on the consolidated transaction reporting system. The Company's Common Shares are listed on the New York Stock Exchange. (5) Represents annual rate of return, including quarterly dividend reinvestment. (6) In the fourth quarter 1994, the "supplemental reserve" was eliminated, resulting in a one-time increase of $71.0 million before taxes, or $.63 per share for the quarter and $.62 per share for the year. See Management's Discussion and Analysis for further discussion. The Progressive Corporation and Subsidiaries 58 - -------------------------------------------------------------------------------- 56 directors and officers Directors Milton N. Allen(1),(2) Director, various corporations B. Charles Ames(1) Partner, Clayton, Dubilier & Rice, Inc. (management consulting) Stephen R. Hardis(1),(2) Chairman of the Board and Chief Executive Officer, Eaton Corporation (manufacturing) Janet Hill(3) Vice President, Alexander & Associates, Inc. (management consulting) and President, Staubach Alexander Hill, LLC (commercial real estate consulting) Peter B. Lewis(2) Chairman of the Board, President and Chief Executive Officer Norman S. Matthews(3) Consultant, formerly President, Federated Department Stores, Inc. (retailing) Donald B. Shackelford(3) Chairman, State Savings Company (savings and loan) Dr. Paul B. Sigler(3) Professor, Yale University and Investigator, Howard Hughes Medical Institute (medical research and education) (1)Audit Committee member (2)Executive Committee member (3)Executive Compensation Committee member Corporate Officers Peter B. Lewis Chairman, President and Chief Executive Officer David M. Schneider Secretary Charles B. Chokel Treasurer Corporate Support Team Charles B. Chokel Peter B. Lewis Bruce W. Marlow David M. Schneider Tiona M. Thompson Senior Managers Alan R. Bauer William P. Cadden G. Edward Combs John M. Davies Allan W. Ditchfield W. Thomas Forrester Steven B. Gellen William H. Graves Michael J. Hanerty Moira A. Lardakis Daniel R. Lewis Robert E. Mathe Robert J. McMillan Glenn M. Renwick Andrew W. Rogacki David L. Roush Gregory J. Trapp Robert T. Williams David W. Young Annual Meeting The Annual Meeting of Shareholders will be held at the offices of The Progressive Corporation, 6671 Beta Drive, Mayfield Village, Ohio 44143 on April 26, 1996, at 10:00 a.m. There were 4,781 shareholders of record on December 31, 1995. Principal Office The principal office of The Progressive Corporation is at 6300 Wilson Mills Road, Mayfield Village, Ohio 44143 World Wide Web Address: http://www.auto-insurance.com Toll-free Telephone Numbers For assistance after an accident or to report a loss, 24 hours a day, 7 days a week, call: 1-800-274-4499 For Progressive's smart new way to shop for auto insurance, available 24 hours a day, 7 days a week, call: 1 800 AUTO PRO(R) (1-800-288-6776) For 24 Hour Policy Service, call: 1-800-888-7764 Transfer Agent and Registrar If you have questions about your Common or Preferred Shares accounts, write or call: Corporate Trust Customer Service, National City Bank, 1900 East Ninth Street, Cleveland, Ohio 44114. Phone: 800-622-6757 Counsel Baker & Hostetler, Cleveland, Ohio Common and Preferred Shares The Progressive Corporation's Common Shares (symbol PGR) and 9 3/8% Serial Preferred Shares, Series A (symbol PGRPrA) are traded on the New York Stock Exchange. Dividends are customarily paid on the last day of each quarter. Interim Reporting The Progressive Corporation is no longer distributing quarterly shareholders' reports. To hear the text of the latest earnings release, receive key financial information for the past several quarters, or receive dividend and other information, shareholders can call 800-879-PROG. This toll-free shareholder services line is available 24 hours a day, 7 days a week. Such information is also available from the Company's internet site: http://www.auto-insurance.com Investor Relations Any shareholder wishing to receive public financial information on the Company may write or call: The Progressive Corporation, Investor Relations, 6300 Wilson Mills Road, Box E61, Mayfield Village, Ohio 44143. Phone: 216-446-2851 Credits Design: Nesnadny + Schwartz, Cleveland + New York + Toronto Artwork: Teun Hocks. All pieces are "Untitled," oil on toned silverprints. Courtesy P.P.O.W., Inc., New York and Torch Gallery, Amsterdam. Printing: Fortran Printing Inc., Cleveland Printed on Recycled Paper EX-21 8 EXHIBIT 21 1 EXHIBIT 21 SUBSIDIARIES OF THE PROGRESSIVE CORPORATION
Jurisdiction Name of Subsidiary of Incorporation - ------------------ ---------------- Airy Insurance Center, Inc. Pennsylvania Allied Insurance Agency, Inc. Ohio Classic Insurance Company Wisconsin Express Quote Services, Inc. Florida Garden Sun Insurance Services, Inc. Hawaii Gold Key Insurance Agency California Greenberg Financial Insurance Services, Inc. California Halcyon Insurance Company Ohio Husky Sun Insurance Services, Inc. Washington Insurance Confirmation Services, Inc. Delaware Lakeside Insurance Agency, Inc. Ohio Maryland Auto Insurance Solutions, Inc. Maryland Mountain Laurel Assurance Company Pennsylvania Mountainside Insurance Agency, Inc. Colorado National Continental Insurance Company New York Pacific Motor Club California Paloverde Insurance Company of Arizona Arizona PCIC Canada Holdings, Ltd. Canada Progressive Casualty Insurance Company of Canada Canada Progny Agency, Inc. New York Progressive Adjusting Company, Inc. Ohio Progressive American Insurance Company Florida Bayside Underwriters Insurance Agency, Inc. Florida Progressive Gulf Insurance Company Mississippi Progressive American Life Insurance Company Ohio Progressive Life Insurance, Ltd. Turks & Caicos Islands Progressive Bayside Insurance Company Florida Progressive Casualty Insurance Company Ohio PC Investment Company Delaware Auto Pro Insurance Company Florida Marathon Insurance Company California Ohana Insurance Company of Hawaii, Inc. Hawaii Preferred Consumers Insurance Company Florida Progressive Express Insurance Company Florida Progressive Indemnity Insurance Company Louisiana Progressive Michigan Insurance Company Michigan Progressive Security Insurance Company Louisiana Progressive Value Insurance Company Louisiana Progressive Specialty Insurance Company Ohio Progressive Insurance Agency, Inc. Ohio Progressive Investment Company, Inc. Delaware Progressive Max Insurance Company Ohio Progressive Mountain Insurance Company Colorado Progressive Northeastern Insurance Company New York Progressive Northern Insurance Company Wisconsin Progressive Premier Insurance Company of Illinois Illinois Progressive Universal Insurance Company of Illinois Illinois Progressive Northwestern Insurance Company Washington Progressive Partners, Inc. New York Progressive Preferred Insurance Company Ohio Progressive Premium Budget, Inc. Ohio Progressive Southeastern Insurance Company Florida Pro-West Insurance Company California Silver Key Insurance Agency, Inc. Nevada Tampa Insurance Services, Inc. Florida The Paradyme Corporation Ohio United Financial Insurance Agency, Inc. Ohio United Financial Insurance Agency of Washington, Inc. Washington The Progressive Agency, Inc. Virginia Transportation Recoveries, Inc. Ohio United Financial Adjusting Company Ohio United Financial Casualty Company Missouri Village Transport Corp. Delaware Wilson Mills Land Co. Ohio
Each subsidiary is wholly owned by its parent. 2 EX-24 9 EXHIBIT 24 1 EXHIBIT 24 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that I hereby constitute and appoint Peter B. Lewis, David M. Schneider, Dane A. Shrallow and Michael R. Uth, and each of them, my true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for me and in my name, place and stead, in any and all capacities, to sign and file with the Securities and Exchange Commission the Annual Report on Form 10-K of The Progressive Corporation for the year 1995, and any and all amendments relating thereto and other documents in connection therewith, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing necessary and requisite to be done in connection with the foregoing, as fully to all intents and purposes as I might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their respective substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto subscribed my name in the capacity(ies) set forth below this 5th day of March, 1996. Position(s) with Signature The Progressive Corporation - --------- --------------------------- /s/ Paul B. Sigler ____________________________ Paul B. Sigler Director 2 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that I hereby constitute and appoint Peter B. Lewis, David M. Schneider, Dane A. Shrallow and Michael R. Uth, and each of them, my true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for me and in my name, place and stead, in any and all capacities, to sign and file with the Securities and Exchange Commission the Annual Report on Form 10-K of The Progressive Corporation for the year 1995, and any and all amendments relating thereto and other documents in connection therewith, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing necessary and requisite to be done in connection with the foregoing, as fully to all intents and purposes as I might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their respective substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto subscribed my name in the capacity(ies) set forth below this 26th day of February, 1996. Position(s) with Signature The Progressive Corporation - --------- ---------------------------- /s/ Norman S. Matthews ____________________________ Norman S. Matthews Director 3 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that I hereby constitute and appoint Peter B. Lewis, David M. Schneider, Dane A. Shrallow and Michael R. Uth, and each of them, my true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for me and in my name, place and stead, in any and all capacities, to sign and file with the Securities and Exchange Commission the Annual Report on Form 10-K of The Progressive Corporation for the year 1995, and any and all amendments relating thereto and other documents in connection therewith, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing necessary and requisite to be done in connection with the foregoing, as fully to all intents and purposes as I might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their respective substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto subscribed my name in the capacity(ies) set forth below this 26th day of February, 1996. Position(s) with Signature The Progressive Corporation - --------- --------------------------- /s/ Janet M. Hill ____________________________ Janet M. Hill Director 4 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that I hereby constitute and appoint Peter B. Lewis, David M. Schneider, Dane A. Shrallow and Michael R. Uth, and each of them, my true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for me and in my name, place and stead, in any and all capacities, to sign and file with the Securities and Exchange Commission the Annual Report on Form 10-K of The Progressive Corporation for the year 1995, and any and all amendments relating thereto and other documents in connection therewith, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing necessary and requisite to be done in connection with the foregoing, as fully to all intents and purposes as I might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their respective substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto subscribed my name in the capacity(ies) set forth below this 26th day of February, 1996. Position(s) with Signature The Progressive Corporation - --------- --------------------------- /s/ Milton N. Allen ____________________________ Milton N. Allen Director 5 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that I hereby constitute and appoint Peter B. Lewis, David M. Schneider, Dane A. Shrallow and Michael R. Uth, and each of them, my true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for me and in my name, place and stead, in any and all capacities, to sign and file with the Securities and Exchange Commission the Annual Report on Form 10-K of The Progressive Corporation for the year 1995, and any and all amendments relating thereto and other documents in connection therewith, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing necessary and requisite to be done in connection with the foregoing, as fully to all intents and purposes as I might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their respective substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto subscribed my name in the capacity(ies) set forth below this 26th day of February, 1996. Position(s) with Signature The Progressive Corporation - --------- --------------------------- /s/ B. Charles Ames ____________________________ B. Charles Ames Director 6 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that I hereby constitute and appoint Peter B. Lewis, David M. Schneider, Dane A. Shrallow and Michael R. Uth, and each of them, my true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for me and in my name, place and stead, in any and all capacities, to sign and file with the Securities and Exchange Commission the Annual Report on Form 10-K of The Progressive Corporation for the year 1995, and any and all amendments relating thereto and other documents in connection therewith, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing necessary and requisite to be done in connection with the foregoing, as fully to all intents and purposes as I might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their respective substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto subscribed my name in the capacity(ies) set forth below this 26th day of February, 1996. Position(s) with Signature The Progressive Corporation - --------- --------------------------- /s/ Donald B. Shackelford ____________________________ Donald B. Shackelford Director 7 POWER OF ATTORNEY KNOW ALL MEN BY THESE PRESENTS, that I hereby constitute and appoint Peter B. Lewis, David M. Schneider, Dane A. Shrallow and Michael R. Uth, and each of them, my true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, for me and in my name, place and stead, in any and all capacities, to sign and file with the Securities and Exchange Commission the Annual Report on Form 10-K of The Progressive Corporation for the year 1995, and any and all amendments relating thereto and other documents in connection therewith, granting unto said attorneys-in-fact and agents, and each of them, full power and authority to do and perform each and every act and thing necessary and requisite to be done in connection with the foregoing, as fully to all intents and purposes as I might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their respective substitutes, may lawfully do or cause to be done by virtue hereof. IN WITNESS WHEREOF, I have hereunto subscribed my name in the capacity(ies) set forth below this 26th day of February, 1996. Position(s) with Signature The Progressive Corporation - --------- --------------------------- /s/ Stephen R. Hardis ____________________________ Stephen R. Hardis Director EX-27 10 EXHIBIT 27
7 This schedule contains summary financial information extracted from the consolidated balance sheets and statements of income and is qualified in its entirety by reference to such financial statements. 1000 U.S. DOLLARS YEAR DEC-31-1995 JAN-01-1995 DEC-31-1995 1 2,772,900 0 0 692,300 0 0 3,768,000 16,200 338,100 181,900 5,352,500 1,610,500 1,209,600 0 0 675,900 0 83,600 72,100 1,320,100 5,352,500 2,727,200 191,000 46,700 38,900 1,943,800 459,600 167,200 345,900 95,400 250,500 0 0 0 250,500 3.26 3.24 1,098,700 2,002,100 (56,600) 1,204,500 525,300 1,314,400 (56,600)
EX-28 11 EXHIBIT 28 1 EXHIBIT 28 Form 2 ANNUAL STATEMENT FOR THE YEAR 1995 OF THE PROGRESSIVE INSURANCE GROUP SCHEDULE P - ANALYSIS OF LOSSES AND LOSS EXPENSES Notes to Schedule P 1. The Parts of Schedule P: Part 1 - Detailed information on losses and loss expenses. Part 2 - History on incurred losses and allocated expenses. Part 3 - History of loss and allocated expense payments. Part 4 - History of bulk and incurred but not reported reserves. Part 5 - History of claims. Part 6 - History of premiums earned. Part 7 - History of loss sensitive contracts. Schedule P Interrogatories. 2. Lines of business A through M, R and S are groupings of the lines of business used on the state page. 3. Reinsurance A, B, C, and D (lines N to Q) are: Reinsurance A = nonproportional property (1988 and subsequent) Reinsurance B = nonproportional liability (1988 and subsequent) Reinsurance C = financial lines (1988 and subsequent) Reinsurance D = old Schedule 0 line 30 (1987 and prior) SCHEDULE P-PART 1-SUMMARY (000 omitted)
_________________________________________________________________________________________________________________ | 1 | Premiums Earned | Loss and Loss Expense Payments | | |_________________________________________|_______________________________________________________| | | 2 | 3 | 4 | | Allocated Loss | | Years In | | | | Loss Payments | Expense Payments | | Which | | | |___________________________|___________________________| |Premiums Were| | | | 5 | 6 | 7 | 8 | | Earned and | Direct | | | Direct | | Direct | | | Losses Were | and | | Net | and | | and | | | Incurred | Assumed | Ceded |(Cols. 2 - 3)| Assumed | Ceded | Assumed | Ceded | |_____________|_____________|_____________|_____________|_____________|_____________|_____________|_____________| | 1. Prior...| X X X X | X X X X | X X X X | 1,145 | (66)| 866 | 583 | | 2. 1986....| 726,141 | 42,619 | 683,522 | 324,470 | 14,913 | 21,635 | 1,093 | | 3. 1987....| 1,066,680 | 64,496 | 1,002,184 | 484,699 | 31,664 | 30,535 | 1,378 | | 4. 1988....| 1,292,530 | 67,431 | 1,225,099 | 652,608 | 44,434 | 37,855 | 1,212 | | 5. 1989....| 1,357,845 | 109,736 | 1,248,109 | 714,338 | 81,398 | 40,087 | 1,495 | | 6. 1990....| 1,397,185 | 144,903 | 1,252,282 | 676,262 | 87,987 | 34,178 | 1,906 | | 7. 1991....| 1,528,677 | 199,174 | 1,329,503 | 749,449 | 114,193 | 33,847 | 3,742 | | 8. 1992....| 1,579,939 | 195,140 | 1,384,799 | 802,623 | 116,331 | 35,364 | 4,106 | | 9. 1993....| 1,795,466 | 150,074 | 1,645,392 | 900,709 | 92,074 | 25,431 | 2,626 | | 10. 1994....| 2,359,681 | 191,788 | 2,167,893 | 1,140,500 | 75,062 | 20,428 | 2,058 | | 11. 1995 | 2,875,211 | 181,999 | 2,693,212 | 1,077,790 | 37,225 | 10,897 | 777 | |_____________|_____________|_____________|_____________|_____________|_____________|_____________|_____________| | 12. Totals | X X X X | X X X X | X X X X | 7,524,593 | 695,213 | 291,124 | 20,977 | ----------------------------------------------------------------------------------------------------------------
________________________________________________________________________ | 1 | Loss and Loss Expense Payments | 12 | | |_________________________________________ |______________| | | 9 | 10 | 11 | | | Years In | | | | | | Which | | | | Number of | |Premiums Were| Salvage | Unallocated | Total | Claims | | Earned and | and | Loss | Net Paid | Reported- | | Losses Were | Subrogation | Expense |(Cols. 5 - 6 +| Direct and | | Incurred | Received | Payments | 7 - 8 + 10) | Assumed | |_____________|_____________|_____________|______________|______________| | 1. Prior...| 0 | 0 | 1,494 | X X X X | | 2. 1986....| 19,402 | 40,956 | 371,056 | X X X X | | 3. 1987....| 25,211 | 66,817 | 549,009 | X X X X | | 4. 1988....| 77,836 | 95,310 | 740,128 | X X X X | | 5. 1989....| 79,531 | 108,825 | 780,357 | X X X X | | 6. 1990....| 71,037 | 120,415 | 740,962 | X X X X | | 7. 1991....| 71,260 | 141,623 | 806,983 | X X X X | | 8. 1992....| 54,504 | 115,342 | 832,893 | X X X X | | 9. 1993....| 47,962 | 129,868 | 961,308 | X X X X | | 10. 1994....| 90,785 | 161,084 | 1,244,892 | X X X X | | 11. 1995 | 48,279 | 153,906 | 1,204,590 | X X X X | |_____________|_____________|_____________|______________|______________| | 12. Totals | 585,807 | 1,134,145 | 8,233,672 | X X X X | ------------------------------------------------------------------------
_____________________________________________________________________________________________________________________________ | | Losses Unpaid | Allocated Loss Expenses Unpaid | | |_______________________________________________________|_______________________________________________________| | Years In | Case Basis | Bulk + IBNR | Case Basis | Bulk + IBNR | | Which |___________________________|___________________________|___________________________|___________________________| |Premiums Were| 13 | 14 | 15 | 16 | 17 | 18 | 19 | 20 | | Earned and | Direct | | Direct | | Direct | | Direct | | | Losses Were | and | | and | | and | | and | | | Incurred | Assumed | Ceded | Assumed | Ceded | Assumed | Ceded | Assumed | Ceded | |_____________|_____________|_____________|_____________|_____________|_____________|_____________|_____________|_____________| | 1. Prior...| 11,975 | 2,592 | 14,611 | 5,013 | 3,110 | 1,150 | 2,320 | 0 | | 2. 1986....| 206 | 1 | 0 | 0 | 24 | 0 | 0 | 0 | | 3. 1987....| 605 | 367 | 160 | 72 | 80 | 1 | 20 | 14 | | 4. 1988....| 5,880 | 1,406 | 160 | 72 | 248 | 10 | 20 | 14 | | 5. 1989....| 9,052 | 2,634 | 2,951 | 72 | 957 | 83 | 20 | 14 | | 6. 1990....| 12,727 | 3,531 | 3,356 | 560 | 1,312 | 110 | 229 | 30 | | 7. 1991....| 37,521 | 15,047 | 4,602 | 1,371 | 3,280 | 357 | 314 | 55 | | 8. 1992....| 62,414 | 24,140 | 13,061 | 5,867 | 7,127 | 902 | 1,744 | 632 | | 9. 1993....| 107,646 | 35,199 | 23,047 | 8,604 | 15,092 | 1,556 | 2,766 | 899 | | 10. 1994....| 236,644 | 53,763 | 54,069 | 17,396 | 30,083 | 2,623 | 6,146 | 2,063 | | 11. 1995 | 597,115 | 68,599 | 164,332 | 32,238 | 57,211 | 3,653 | 18,100 | 2,253 | |_____________|_____________|_____________|_____________|_____________|_____________|_____________|_____________|_____________| | 12. Totals | 1,081,786 | 207,279 | 280,348 | 71,265 | 118,525 | 10,446 | 31,680 | 5,974 | ------------------------------------------------------------------------------------------------------------------------------
_______________________________________________________________________ | | 21 | 22 | 23 | 24 | | | | | | | | Years In | | | | | | Which | | | | Number of | |Premiums Were| Salvage | Unallocated | Total | Claims | | Earned and | and | Loss | Net Losses | Outstanding- | | Losses Were |Subrogation | Expenses | and Expenses | Direct and | | Incurred |Anticipated | Unpaid | Unpaid | Assumed | |_____________|____________|______________|______________|______________| | | | 1. Prior...| 0 | 0 | 23,261 | X X X X | | 2. 1986....| 0 | 2 | 231 | X X X X | | 3. 1987....| 46 | 16 | 427 | X X X X | | 4. 1988....| 1,409 | 54 | 4,861 | X X X X | | 5. 1989....| 629 | 149 | 10,326 | X X X X | | 6. 1990....| 3,742 | 285 | 13,678 | X X X X | | 7. 1991....| 2,450 | 804 | 29,691 | X X X X | | 8. 1992....| 3,426 | 1,959 | 54,765 | X X X X | | 9. 1993....| 5,565 | 4,750 | 107,043 | X X X X | | 10. 1994....| 13,753 | 14,070 | 265,167 | X X X X | | 11. 1995 | 69,354 | 56,496 | 786,511 | X X X X | |_____________|____________|______________|______________|______________| | 12. Totals | 100,374 | 78,585 | 1,295,961 | X X X X | ------------------------------------------------------------------------
______________________________________________________________________________________________________________________________ | | | Loss and Loss Expense Percentage | Discount for Time | | | Total Losses and Loss Expenses Incurred | (Incurred/Premiums Earned) | Value of Money | | Years In |_________________________________________|_________________________________________|___________________________| | Which | 25 | 26 | 27 | 28 | 29 | 30 | 31 | 32 | |Premiums Were| | | | | | | | | | Earned and | Direct | | | Direct | | | | | | Losses Were | and | | | and | | | | Loss | | Incurred | Assumed | Ceded | Net | Assumed | Ceded | Net | Loss | Expense | |_____________|_____________|_____________|_____________|_____________|_____________|_____________|_____________|_____________| | | | 1. Prior...| X X X X | X X X X | X X X X | X X X X | X X X X | X X X X | 0 | 0 | | 2. 1986....| 387,294 | 16,007 | 371,287 | 53.3 | 37.6 | 54.3 | 0 | 0 | | 3. 1987....| 582,932 | 33,496 | 549,436 | 54.6 | 51.9 | 54.8 | 0 | 0 | | 4. 1988....| 792,136 | 47,147 | 744,989 | 61.3 | 69.9 | 60.8 | 0 | 0 | | 5. 1989....| 876,380 | 85,697 | 790,683 | 64.5 | 78.1 | 63.4 | 0 | 0 | | 6. 1990....| 848,764 | 94,123 | 754,640 | 60.7 | 65.0 | 60.3 | 0 | 0 | | 7. 1991....| 971,440 | 134,766 | 836,674 | 63.5 | 67.7 | 62.9 | 0 | 0 | | 8. 1992....| 1,039,636 | 151,978 | 887,658 | 65.8 | 77.9 | 64.1 | 0 | 0 | | 9. 1993....| 1,209,308 | 140,957 | 1,068,351 | 67.4 | 93.9 | 64.9 | 0 | 0 | | 10. 1994....| 1,663,025 | 152,966 | 1,510,059 | 70.5 | 79.8 | 69.7 | 0 | 0 | | 11. 1995 | 2,135,847 | 144,746 | 1,991,101 | 74.3 | 79.5 | 73.9 | 0 | 0 | |_____________|_____________|_____________|_____________|_____________|_____________|_____________|_____________|_____________| | 12. Totals | X X X X | X X X X | X X X X | X X X X | X X X X | X X X X | 0 | 0 | ------------------------------------------------------------------------------------------------------------------------------
_________________________________________________________ | | 33 | Net Balance Sheet Reserves | | | | After Discount | | Years In | |_____________________________| | Which | | 34 | | |Premiums Were|Inter-Company| | 35 | | Earned and | Pooling | | Loss | | Losses Were |articipation | Losses | Expenses | | Incurred |Percentage | Unpaid | Unpaid | |_____________|_____________|______________|______________| | | | 1. Prior...| X X X X | 18,981 | 4,280 | | 2. 1986....| | 205 | 26 | | 3. 1987....| | 326 | 101 | | 4. 1988....| | 4,563 | 298 | | 5. 1989....| | 9,297 | 1,029 | | 6. 1990....| | 11,992 | 1,686 | | 7. 1991....| | 25,705 | 3,986 | | 8. 1992....| | 45,468 | 9,296 | | 9. 1993....| | 86,890 | 20,154 | | 10. 1994....| | 219,554 | 45,613 | | 11. 1995 | | 660,609 | 125,902 | |_____________|_____________|______________|______________| | 12. Totals | X X X X | 1,083,590 | 212,371 | --------------------------------------------------------
2 Form 2 ANNUAL STATEMENT FOR THE YEAR 1995 OF THE PROGRESSIVE INSURANCE GROUP SCHEDULE P - PART 2 - SUMMARY
___________________________________________________________________________________________________________________________ | 1 | INCURRED LOSSES AND ALLOCATED EXPENSES REPORTED AT YEAR END (000 OMITTED) | | |________________________________________________________________________________________________________| | | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | | | | | | | | | | | | | | | | | | | | | | Years | | | | | | | | | | in Which | | | | | | | | | | Losses Were | | | | | | | | | | Incurred | 1986 | 1987 | 1988 | 1989 | 1990 | 1991 | 1992 | 1993 | |_________________|_____________|____________|____________|____________|____________|____________|____________|____________| | | | | | | | | | | | 1. Prior.......| 118,280 | 111,748 | 99,298 | 97,101 | 93,511 | 94,320 | 95,322 | 96,844 | | 2. 1986........| 382,994 | 353,616 | 351,417 | 340,706 | 334,564 | 331,385 | 330,779 | 330,825 | | 3. 1987........| X X X X | 555,993 | 524,333 | 504,689 | 492,954 | 490,684 | 485,339 | 484,182 | | 4. 1988........| X X X X | X X X X | 719,839 | 684,469 | 663,722 | 666,604 | 663,150 | 664,095 | | 5. 1989........| X X X X | X X X X | X X X X | 786,249 | 734,190 | 710,990 | 704,871 | 700,038 | | 6. 1990........| X X X X | X X X X | X X X X | X X X X | 751,597 | 692,671 | 676,616 | 663,002 | | 7. 1991........| X X X X | X X X X | X X X X | X X X X | X X X X | 792,930 | 753,500 | 725,991 | | 8. 1992........| X X X X | X X X X | X X X X | X X X X | X X X X | X X X X | 900,892 | 833,470 | | 9. 1993........| X X X X | X X X X | X X X X | X X X X | X X X X | X X X X | X X X X | 1,013,519 | | 10. 1994........| X X X X | X X X X | X X X X | X X X X | X X X X | X X X X | X X X X | X X X X | | 11. 1995 | X X X X | X X X X | X X X X | X X X X | X X X X | X X X X | X X X X | X X X X | ___________________________________________________________________________________________________________________________
________________________________________________________________________ | | INCURRED LOSSES AND | | | | ALLOCATED EXPENSES | | | | REPORTED | | | | AT YEAR END | | | 1 | (000 OMITTED) | DEVELOPMENT | | |________________________|___________________________| | | 10 | 11 | 12 | 13 | | | | | | | | | | | | | | Years | | | | | | in Which | | | | | | Losses Were | | | One | Two | | Incurred | 1994 | 1995 | Year | Year | |_________________|___________|____________|_____________|_____________| | | | | | | | 1. Prior.......| 105,962 | 106,934 | 972 | 10,090 | | 2. 1986........| 330,330 | 330,329 | (1)| (496)| | 3. 1987........| 483,999 | 482,603 | (1,396)| (1,579)| | 4. 1988........| 657,166 | 649,625 | (7,541)| (14,470)| | 5. 1989........| 681,839 | 681,709 | (130)| (18,329)| | 6. 1990........| 644,228 | 633,940 | (10,288)| (29,062)| | 7. 1991........| 695,730 | 694,246 | (1,484)| (31,745)| | 8. 1992........| 783,533 | 770,357 | (13,177)| (63,114)| | 9. 1993........| 940,668 | 933,734 | (6,934)| (79,785)| | 10. 1994........| 1,363,711 | 1,334,905 | (28,806)| X X X X | | 11. 1995 | X X X X | 1,780,699 | X X X X | X X X X | __________________________________________|_____________|_____________| | 12. Totals | (68,785)| (228,489)| |________________________________________|
SCHEDULE P - PART 3 - SUMMARY
___________________________________________________________________________________________________________________________ | 1 | CUMULATIVE PAID LOSSES AND ALLOCATED EXPENSES AT YEAR END (000 OMITTED) | | |________________________________________________________________________________________________________| | | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | | | | | | | | | | | | | | | | | | | | | | Years | | | | | | | | | | in Which | | | | | | | | | | Losses Were | | | | | | | | | | Incurred | 1986 | 1987 | 1988 | 1989 | 1990 | 1991 | 1992 | 1993 | |_________________|_____________|____________|____________|____________|____________|____________|____________|____________| | 1. Prior.......| 000 | 45,159 | 67,661 | 77,942 | 84,668 | 87,427 | 90,599 | 91,152 | | 2. 1986........| 168,353 | 255,882 | 291,744 | 312,656 | 322,815 | 326,820 | 328,152 | 328,815 | | 3. 1987........| X X X X | 240,199 | 360,939 | 420,316 | 447,789 | 467,599 | 476,252 | 480,425 | | 4. 1988........| X X X X | X X X X | 318,747 | 482,587 | 545,480 | 582,880 | 617,027 | 636,778 | | 5. 1989........| X X X X | X X X X | X X X X | 362,510 | 521,039 | 595,914 | 636,386 | 657,870 | | 6. 1990........| X X X X | X X X X | X X X X | X X X X | 354,849 | 499,445 | 569,700 | 598,833 | | 7. 1991........| X X X X | X X X X | X X X X | X X X X | X X X X | 369,194 | 533,684 | 614,888 | | 8. 1992........| X X X X | X X X X | X X X X | X X X X | X X X X | X X X X | 415,371 | 597,616 | | 9. 1993........| X X X X | X X X X | X X X X | X X X X | X X X X | X X X X | X X X X | 513,910 | | 10. 1994........| X X X X | X X X X | X X X X | X X X X | X X X X | X X X X | X X X X | X X X X | | 11. 1995 | X X X X | X X X X | X X X X | X X X X | X X X X | X X X X | X X X X | X X X X | ---------------------------------------------------------------------------------------------------------------------------
______________________________________________________________________ | | CUMULATIVE PAID LOSSES | | | | | AND ALLOCATED EXPENSES | | | | 1 | AT YEAR END | | | | | (000 OMITTED) | 12 | 13 | |_________________|___________|____________|_____________|_____________| | | 10 | 11 | | | | | | | | Number of | | | | | Number of | Claims | | Years | | | Claims | Closed | | in Which | | | Closed | Without | | Losses Were | | | With Loss | Loss | | Incurred | 1994 | 1995 | Payment | Payment | |_________________|___________|____________|_____________|_____________| | 1. Prior.......| 82,179 | 83,673 | X X X X | X X X X | | 2. 1986........| 329,711 | 330,100 | X X X X | X X X X | | 3. 1987........| 481,860 | 482,192 | X X X X | X X X X | | 4. 1988........| 646,867 | 644,818 | X X X X | X X X X | | 5. 1989........| 667,611 | 671,532 | X X X X | X X X X | | 6. 1990........| 612,925 | 620,547 | X X X X | X X X X | | 7. 1991........| 646,936 | 665,359 | X X X X | X X X X | | 8. 1992........| 679,065 | 717,551 | X X X X | X X X X | | 9. 1993........| 746,587 | 831,440 | X X X X | X X X X | | 10. 1994........| 770,113 | 1,083,808 | X X X X | X X X X | | 11. 1995 | X X X X | 1,050,684 | X X X X | X X X X | ----------------------------------------------------------------------
SCHEDULE P - PART 4 - SUMMARY
____________________________________________________________________________________________________________________________ | 1 | BULK AND INCURRED BUT NOT REPORTED RESERVES ON LOSSES AND ALLOCATED EXPENSES AT YEAR END (000 OMITTED) | | |________________________________________________________________________________________________________| | | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 | | | | | | | | | | | | | | | | | | | | | | Years | | | | | | | | | | in Which | | | | | | | | | | Losses Were | | | | | | | | | | Incurred | 1986 | 1987 | 1988 | 1989 | 1990 | 1991 | 1992 | 1993 | |_________________|_____________|____________|____________|____________|____________|____________|____________|____________| | | | | | | | | | | | 1. Prior.......| 41,422 | 28,005 | 11,697 | 7,678 | 1,845 | 1,667 | 1,616 | 1,268 | | 2. 1986........| 83,987 | 35,929 | 23,115 | 10,239 | 3,162 | 0 | 63 | 36 | | 3. 1987........| X X X X | 126,103 | 57,172 | 31,435 | 13,026 | 4,203 | 178 | 814 | | 4. 1988........| X X X X | X X X X | 161,589 | 70,035 | 33,821 | 14,301 | 2,013 | 6,663 | | 5. 1989........| X X X X | X X X X | X X X X | 179,116 | 62,544 | 27,935 | 15,702 | 14,096 | | 6. 1990........| X X X X | X X X X | X X X X | X X X X | 146,165 | 57,375 | 28,293 | 17,575 | | 7. 1991........| X X X X | X X X X | X X X X | X X X X | X X X X | 155,871 | 51,534 | 29,932 | | 8. 1992........| X X X X | X X X X | X X X X | X X X X | X X X X | X X X X | 151,702 | 54,711 | | 9. 1993........| X X X X | X X X X | X X X X | X X X X | X X X X | X X X X | X X X X | 132,250 | | 10. 1994........| X X X X | X X X X | X X X X | X X X X | X X X X | X X X X | X X X X | X X X X | | 11. 1995 | X X X X | X X X X | X X X X | X X X X | X X X X | X X X X | X X X X | X X X X | ---------------------------------------------------------------------------------------------------------------------------
____________________________________________ | | BULK AND INCURRED | | | BUT NOT REPORTED | | | RESERVES ON LOSSES | | | AND ALLOCATED EXPENSES| | | AT YEAR END | | 1 | (000 OMITTED) | |_________________|________________________| | | 10 | 11 | | | | | | | | | | Years | | | | in Which | | | | Losses Were | | | | Incurred | 1994 | 1995 | |_________________|___________|____________| | | | | | 1. Prior.......| 10,286 | 11,918 | | 2. 1986........| 0 | 0 | | 3. 1987........| 0 | 94 | | 4. 1988........| 83 | 94 | | 5. 1989........| 655 | 2,885 | | 6. 1990........| 5,750 | 2,995 | | 7. 1991........| 5,420 | 3,490 | | 8. 1992........| 19,674 | 8,306 | | 9. 1993........| 32,260 | 16,310 | | 10. 1994........| 123,230 | 40,757 | | 11. 1995 | X X X X | 147,941 | ------------------------------------------
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