The Direct business includes business written directly by us on the Internet, through mobile devices, and over the phone. The total net premiums written by the Direct business represented 49% of ourthe remaining Personal Lines volume in 2016, compared to 48% in 20152019, 2018, and 46% in 2014.
Our Personal Lines strategy is to be a competitively priced provider of a broad range of personal auto and special lines insurance products with distinctive service, distributed through whichever channel the customer prefers, and combined with property insurance and other products when appropriate to match our customers’ needs. Volume potential is driven by our price competitiveness, brand recognition, quality service, and the actions of our competitors, among other factors. See “Competitive Factors” below for further discussion.
We seek to refine our personal auto segmentation, underwriting models, and pricing over time. In mid-2016,mid-2019, we introduced our next generation auto product and willexpect to continue to roll this product out during 2017.2020. This product version expandshas improved the accuracy of matching rate to risk and introduced new risk verification variables that we believe has improved our use of prior claims information, adds billing and vehicle history segmentation, and expands our tiering mechanisms to affordcompetitiveness, especially in more competitive rates for new business while providing more stable rates for our longer-tenured customers.preferred segments.
Our special lines products and umbrella insurance can be combined with any of the auto, home, or renters coverages that we offer, in either the Direct or Agency businesses.
Our service businesses, which represent less than 1% of our total revenues and do not have a material effect on our overall operations, primarily include:
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| • | Commercial Automobile Insurance Procedures/Plans (CAIP) – We are the only servicing carrier on a nationwide basis for CAIP plans, which are state-supervised plans servicing the involuntary market in 43 states and the District of Columbia. As a service provider, we provide policy issuance and claims adjusting services and collect fee revenue. Reimbursements to us from the CAIP plans are required by state laws and regulations, subject to contractual service standards. Any changes in our participation as a CAIP service provider would not materially affect our financial condition, results of operations, or cash flows. |
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| • | Commission-based businesses – We act as an agent for other insurance companies. We offer home, condominium, and renters insurance, among other products, written by unaffiliated insurance companies in the continental United States in the direct channel. We also offer our customers the ability to package their commercial auto coverage with other commercial coverages that are written by unaffiliated insurance companies. We receive commissions for the policies written under this program, all of which are used to offset the expenses associated with maintaining this program. |
Reinsurance
We cede a portion of our direct premiums written to regulated reinsurance plans. We participate in several mandatory state pools, including the Michigan Catastrophic Claims Association, Florida Hurricane Catastrophe Fund, and North Carolina Reinsurance Facility, as well asFacility. We also act as a servicing agent for state-mandated involuntary plans for commercial vehicles (CAIP plans) and as a participant in the "Write“Write Your Own"Own” program for federally regulated plans for flood (National Flood Insurance Program), all. All of whichthese programs are governed by insurance regulations.
We also have voluntary contractual arrangements that primarily relate to the Property business underwrittenand to our transportation network company (TNC) business written by insurance subsidiaries of ARX.
our Commercial Lines business. The reinsurance program in our Property business is designed to reduce overall risk while, to anthe extent of coverage purchased, protecting capital from the costs associated with catastrophes. Thiscatastrophes and severe storms. The largest parts of this reinsurance program has two parts: an occurrenceare excess of loss programprograms and, anfor 2019, 2018, and 2017, aggregate stop-loss agreement, generally fromstop loss agreements. These reinsurance programs are with unaffiliated reinsurance companies, most of which are "A" rated “A” or better by A.M. Best.
The occurrence excess of loss program supports the goal of maintaining adequate capital within ARX’s insurance subsidiaries
while sustaining at least two one-in-one hundred year events in a single contract period. It contains several layers: privately-placed reinsurance, a catastrophe bond, and coverage obtained through the Florida Hurricane Catastrophe Fund, among other arrangements. ARX isThe program includes layers that are purchased for multi-year periods, and layers as to which we have prepaid premiums for reinstatement of coverage after the first covered event to ensure coverage for the second event. Under the current program, we are responsible for all losses where the losses and allocated loss adjustment expenses (LAE)(ALAE) that do not reach the reinsurance threshold of $50$60 million, and for the first $50$60 million in losslosses and LAEALAE from each of the first and second events in the same contract periodevent that exceedexceeds the threshold. ASIWe may be responsible for additional losses if we experience more than two such events or if claims incurred exceed the maximum limits of the reinsurance coverage.coverage that is then in place. Coverage limits for a first event in Florida would be $1.8 billion, while coverage for a first event outside of Florida would be $1.35 billion; coverage for a second event (and, potentially, for subsequent covered events) would depend on a number of factors, including the severity and location of the earlier events in the contract period. We expect that in mid-2020 our retention threshold for this program will increase to at least $70 million and that the maximum coverage limits may also be increased, subject to our ongoing negotiations with reinsurers.
ARX also entered into anWe have aggregate stop-loss agreement, effective January 1,reinsurance agreements (ASL), which are in effect for accident years 2019, 2018, and 2017, that covers allwith substantially the same terms. The ASL agreements for 2017 and 2018 cover accident year Property losses and certain ALAE except those from named storms (both hurricanes and tropical storms) and liability claims.claims, for business written by ARX subsidiaries that write Property business. As such, it provides protection for losses and ALAE incurred by our Property business in the ordinary course, including those resulting from other significant severe weather events, such as hail, tornadoes, etc. This agreement provides $200 million of coverage if ARX’s insurance subsidiariesto the extent that the net loss and LAEALAE ratio for the full accident year exceeds 63%. The aggregate stop-loss agreement reducesASL reduced the likelihood that ARX willwe would experience a net underwriting loss in 2017 for reasons other than named storms and liability claims. The ASL agreement for 2019 accident year losses has substantially the same terms as those discussed above for the 2017 and 2018 agreements with the exception that the 2019 ASL also covers an additional $100 million of retained losses and ALAE from named storms.
See Note 7 – ReinsuranceWe did not renew our ASL program for 2020. Instead, we entered into a property catastrophe aggregate excess of loss program in January 2020. This agreement contains two layers, each with a retention threshold of $375 million. The first layer provides $130 million of coverage for catastrophe losses and ALAE, except those from named storms (both hurricanes and tropical
storms). The second layer provides $60 million of coverage through May 31, 2020, and $70 million for the remainder of the year, for our Annual Report for further discussion.retained losses and ALAE from both named and non-named storms. The first layer does not have to be exhausted before the second layer can be applied. For example, if we incurred non-named catastrophe losses and ALAE of $350 million and named storm losses of $50 million, we would have no reinsurance coverage under the first layer since the non-named catastrophe losses did not exceed the retention threshold; however, we would recognize a reinsurance recoverable of $25 million under the second layer, representing the amount that our total losses of $400 million ($350 million of non-named and $50 million of named catastrophe losses) exceeded the $375 million retention threshold.
For the TNC business written by Commercial Lines, we have quota share reinsurance agreements, under which we cede a portion of premium, losses, and loss adjustment expenses. Some portion of that reinsurance is with captive reinsurers and a portion is with a panel of third-party reinsurers, which are rated “A” or better by A.M. Best. Cession rates vary by state, with recoverables collateralized at a target of over 100%.
Claims
We manage our vehiclePersonal and Commercial Lines claims handling on a companywide basis through approximately 200250 stand-alone claims offices and just over 2,500 network shops located throughout the United States. In addition,For our Property business, we operate 68 Service Centers in 51 metropolitan areas across the country, of which 55 have combinedmanage claims offices and Service Centers to improve our efficiency and manage costs. Insureds and other claimants can elect to have their vehicles repaired by repair shops of their choosing, have their vehicles repaired by one of our network shops, or have the entire repair process coordinated by representatives in one of our Service Centers. If a customer elects to repair their vehicle through a Service Center, we provide end-to-end resolution for auto physical damage losses. Customers can choose to bring their vehicles to one of these sites, where they can pick up a rental vehicle. Our representatives will arrange the repair, including pick-up and delivery of the vehicle, and inspect the vehicle once the repairs are complete. This innovative, patented approach to the vehicle repair process increases consumer satisfaction and our productivity and improves the cycle time in comparison to our other claims settlement processes. Under the Service Center and network shop options, we guarantee the repairs for as long as the customer owns or leases their car. If a customer decides not to repair their vehicle, our representatives will write an estimate and the customer can receive payment on the spot. ASI handles property claims separatelyadjusting primarily through a network primarily of independent claims adjusters.field adjusters, while internal claims representatives manage the overall claims process. We currently employ about 370 internal Property claim representatives. During 2020, we plan to increase our internal claims staff.
Competitive Factors
The automobile insurance and other property-casualty insurance markets in which we operate are highly competitive. Property-casualty insurers generally compete on the basis of price, agent commission rates, consumer recognition and confidence, coverages offered and other product features, claims handling, financial stability, customer service, and geographic coverage. Vigorous competition is provided by large, well-capitalized national companies in both the Agency and Direct channels, and by smaller regional insurers. In the Agency channel, some of our competitors have broad distribution networks of employed or captive agents. With widely available comparative rating services, consumers can easily compare prices among competitors. Many competitors invest heavily in advertising and marketing efforts and/or expanding their online or mobile service offerings. Over the past decade, these changes have further intensified the competitive nature of the property-casualty insurance markets in which we operate.
We rely heavily on technology to operate our business and on extensive data gathering and analysis to segment markets and price accurately according to risk potential.risk. We have remained competitive by refining our risk measurement and price segmentation skills, closely managing expenses, and achieving operating efficiencies. High-quality customer service, fair and accurate claims adjusting, and strong brand recognition are also important factors in our competitive strategy. Competition in our insurance markets is also affected by the pace of technological developments. An insurer’s ability to adapt to change, innovate, develop, and implement new applications and other technologies can affect its competitive position. In addition, our competitive position could be adversely impacted if we sustain security breaches or other “cyber attacks” on our systems or are unable to maintain uninterrupted access to our systems, business functions, and the systems of certain third-party providers. See Item 1A, Risk Factors, for more information.
In addition, there has been a proliferation of patents related to new ways in which technologies can affect competitive positions in the insurance industry. Some of our competitors have many more patents than we do. WeSome of the patents we currently hold include a U.S.usage-based insurance patent (expiring in 2021)2024), and have a U.S. patent application pending, ontwo patents for the innovative approach to vehicle repair service usedsystem we use for securing e-signature transactions (expiring in our Service Centers, as described above, and2025), two U.S. patents (expiring in 2028) on the Name Your Price® functionality on our website. In addition, we holdwebsite (expiring in 2028), two multi-product quoting patents (expiring in 2019) related to2032), two patents for our implementation of a mobile insurance platform and architecture (expiring in 2032), a patent on our system of providing customized insurance quotes based on user’s price and/or coverage preferences (expiring in 2033), two patents for our loyalty call routing system (expiring in 2033), a patent for a multivariate predictive system that processes usage-based data (expiring in 2035), and two patents for the implementation of a chatbot in online policy self-service technology.quoting and servicing (expiring in 2038 and 2039).
We have a substantial amount of “know-how” developed from years of experience with usage-based insurance, and from analyzing the data from over 18almost 33 billion driving miles derived from our usage-based devices.devices and our mobile app. We believe this intellectual property provides us with a competitive advantage in the usage-based insurance market.
State Insurance Licenses
Our insurance subsidiaries operate under licenses issued by various state insurance authorities. These licenses may be of perpetual duration or renewable periodically, provided the holder continues to meet applicable regulatory requirements. Our licenses govern the kinds of insurance coverages that may be written by our insurance subsidiaries 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 that are material to our subsidiaries’ businesses are in good standing.
Insurance Regulation
Our 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 our insurance subsidiaries is licensed and subject to regulation in each of the 50 states and the District of Columbia. 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. Our insurance subsidiaries, and our mutual insurance company, and Lloyds (together our mutual insurance company affiliates) are domiciled in the states of California, Delaware, Florida, Illinois, Indiana, Louisiana, Michigan, New Jersey, New York, Ohio, Texas, and Wisconsin. In addition, California and Florida treat certain of our subsidiaries as domestic insurers for certain purposes under their “commercial domicile” laws.
We also have a subsidiary that writes excess and surplus lines; these activities do not require a license but are regulated.
State insurance laws impose numerous requirements, conditions, and limitations on the operations of insurance companies. Insurance departments have broad regulatory powers relating to those operations. Regulated areas include, among others:
Licensing of insurers and agents,
Capital and surplus requirements,
Statutory accounting principles specific to insurance companies and the content of required financial and other reports,
Requirements for establishing insurance reserves,
Investments,
Acquisitions of insurers and transactions between insurers and their affiliates,
Limitations on rates of return or profitability,
Rating criteria, rate levels, and rate changes,
Insolvencies of insurance companies,
Assigned risk programs,
Authority to exit a business, and
Numerous requirements relating to other areas of insurance operations, including: required coverages, policy forms, underwriting standards, and claims handling.
Insurance departments are authorized to conduct periodic and other examinations of regulated insurers’ financial condition and operations to monitor the financial stability of the insurers and to ensure adherence to statutory accounting principles and compliance with state insurance laws and regulations. In addition, in some states, the attorney general’s office may exercise certain supervisory authority over insurance companies and, from time to time, may investigate certain insurance company practices.
Insurance departments establish and monitor compliance with capital and surplus requirements. Although the ratio of written premiums to surplus that the regulators will allow is a function of a number of factors (including applicable law, the type of business being written, the adequacy of the insurer’s reserves, and the quality of the insurer’s assets), the annual net premiums that an insurer may write historically have been perceived to be limited to a specified multiple of the insurer’s total surplus, generally 3 to 1 for property and casualty insurance, which is the target for our vehicle businesses; our Property business maintains a lower premiums-to-surplus ratio. Thus, the amount of an insurer’s statutory surplus, in certain cases, may limit its ability to grow its business. At year-end 2016,2019, we had net premiums written of $23.4$37.6 billion and statutory surplus of $8.6$13.7 billion. The combined premiums-to-surplus ratio for all of our insurance companies was 2.7 to 1. In addition, as of December 31, 2016,2019, we had access to $1.3$3.2 billion of securities held in a non-insurance subsidiary, portions of which could be contributed to the capital of our insurance subsidiaries to support growth or for other purposes. In January 2020, we used $1.4 billion of these securities to pay our common share dividends.
The National Association of Insurance Commissioners (NAIC) also has developed a risk-based capital (RBC) program to enable regulators to identify and take appropriate and timely regulatory actions relating to insurers that show signs of weak or deteriorating financial condition. RBC is determined by a series of dynamic surplus-related formulas that contain a variety of factors that are applied to financial balances based on the degree of certain risks, such as asset, credit, and underwriting risks. At December 31, 2016,2019, our RBC ratios were well in excess of minimum requirements.
Insurance companies are generally required to file detailed annual and other reports with the insurance department of each jurisdiction in which they conduct business. These reports include:
the insurer’s financial statements under statutory accounting principles,
details concerning claims reserves held by the insurer,
specific investments held by the insurer, and
numerous other disclosures about the insurer’s financial condition and operations.
State insurance laws and insurance departments also regulate investments that insurers are permitted to make. Limitations are placed on the amounts an insurer may invest in a particular issuer, as well as the aggregate amount an insurer may invest in certain types of investments. Certain investments are prohibited.
Insurance holding company laws enacted in many jurisdictions authorize insurance departments to regulate acquisitions of insurers and certain other transactions and to require periodic disclosure of specified information. These laws impose prior approval requirements for certain transactions between insurers and their affiliates and generally regulate dividend and other distributions, including loans and cash advances, between insurers and their affiliates. See the “Dividends” discussion Note 8 – Statutory Financial Information in Item 5(c) belowour Annual Report for further information on these dividend limitations. The scope of insurance holding company regulation has expanded as states have adopted the revised model holding company act promulgated by the NAIC in 2010.discussion.
Under state insolvency and guaranty laws, insurers can be assessed or required to contribute to state guaranty funds to cover policyholder losses resulting from the insolvency of other insurers. Insurers are also required by many states, as a condition of doing business in the state, to provide coverage to certain risks that cannot find coverage in the voluntary market. These “assigned risk” plans generally specify the types of insurance and the level of coverage that must be offered to such involuntary risks, as well as the allowable premium. Many states also have involuntary market plans, which hire a limited number of servicing carriers to provide insurance to involuntary risks. These plans, through assessments, pass underwriting and administrative expenses on to insurers that write voluntary coverages in those states.
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 or non-renew policies. Certain states also 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 the cancellation or non-renewal of policies, or that subject program withdrawals to prior approval requirements, may restrict an insurer’s ability to exit unprofitable markets or businesses.
As mentioned above, insurance departments have regulatory authority over many other aspects of an insurer’s insurance operations, including coverages, forms, rating criteria, and rate levels. The ability to implement changes to these items on a timely basis is critical to our ability to compete effectively in the marketplace. Rate regulation varies from “use and file,” to “file and use,” to prior approval.
Regulation of insurance constantly changes as real or perceived issues and developments arise. Some changes may be due to economic developments, such as changes in investment laws made to recognize new investment products or to respond to perceived investment risks, while others reflect concerns about consumer privacy, insurance availability, prices, allegations of discriminatoryunfair-discriminatory pricing, underwriting practices, and solvency. In recent years, legislation, regulatory measures, and voter initiatives have been introduced, and in some cases adopted, which deal with use of non-public consumer information, cybersecurity, use of credit information in underwriting and rating, insurance rate development, rate of return limitations, and the ability of insurers to cancel or non-renew insurance policies. 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. Since 2010, theThe Federal Insurance Office has beenis required to collect information about the insurance industry and monitor the industry for systemic risk.
In addition to our U.S. operations, we write personal auto physical damage and auto property damage liability insurance in Australia through a branch of one of our U.S. insurance subsidiaries. This insurance is primarily offered through the Internet. We do not write auto bodily injury liability or medical payment insurance in Australia. There are two primary agencies that regulate insurance in Australia: the Australian Securities and Investment Commission, which regulates consumer disclosures, and the Australian Prudential Regulatory Authority, which regulates solvency. Both agencies enforce laws within their jurisdictions, issue regulations, take enforcement actions, and, in general, have broad regulatory powers. Progressive Direct Insurance Company has been issued licenses by both agencies and the licenses are in good standing.
Statutory Accounting Principles
Our results are reported in accordance with accounting principles generally accepted in the United States of America (GAAP), which differ in certain respects from amounts reported under statutory accounting principles (SAP) prescribed by insurance regulatory authorities. Certain significant differences are described below:
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| Category | GAAP Accounting | SAP Accounting |
Acquisition Expenses | Commissions, premium taxes, and other variable costs incurred in connection with the successful acquisition of new and renewal business are capitalized and amortized pro rata over the policy term as premiums are earned. | Commissions, premium taxes, and all other acquisition expensescosts are expensed as incurred. |
Non-admittedNonadmitted
Assets | Premiums receivable are reported net of an allowance for doubtful accounts. | Premiums receivable over 90 days past due are “non-admitted,“nonadmitted,” which means they are excluded from surplus. For premiums receivable less than 90 days past due, we also estimaterecord a bad debt reserve. |
| | Furniture, equipment, application software and implementation costs, leasehold improvements, and prepaid expenses are capitalized and amortized over their useful lives or periods benefited. | Excluding computer equipment and operating software, the value of all other furniture, equipment, application software and implementation costs, leasehold improvements, and prepaid expenses, net of accumulated depreciation or amortization, is non-admittednonadmitted against surplus. Computer equipment and operating software are capitalized, subject to statutory limitations based on surplus, and depreciated over three years. |
| | Deferred tax assets are recorded based on estimated future tax effects attributable to temporary differences. A valuation allowance would be recorded for any tax benefits that are not expected to be realized. | The accounting for deferred tax assets is consistent with GAAP, except for deferred tax assets that do not meet statutory requirements for recognition, which are non-admittednonadmitted against surplus. |
| Reinsurance | Ceded reinsurance balances are shown as an asset on the balance sheet as “prepaid reinsurance premiums” and “reinsurance recoverables.recoverables,” net of an allowance for expected credit losses. | Ceded unearned premiums are netted against the “unearned premiums” liability. Ceded unpaid loss and loss adjustment expense (LAE) amounts are netted against “loss and LAE reserves.” Only ceded paid loss and LAE are shown as a “reinsurance recoverables” asset. A credit loss write down is recorded when incurred; an allowance for expected credit losses is not established. |
Investment Valuation | Fixed-maturity securities, which are classified as available-for-sale and presented net of an allowance for expected credit losses, are reported at fair values. | Fixed-maturity securities are reported at amortized cost or the lower of amortized cost or fair value, depending on the NAIC designation of the security. A credit loss write down is recorded when events indicating impairment occur; an allowance for expected credit losses is not established. |
| | Preferred stocks, both redeemable and nonredeemable, are reported at fair values. | Redeemable preferred stocks are reported at amortized cost or the lower of amortized cost or fair value, depending on the NAIC designation of the security. Nonredeemable preferred stocks are reported at fair value, consistent with GAAP. |
| Operating Leases | Operating leases are reported on the balance sheet as both an asset and liability. | Operating leases are considered off-balance-sheet items. |
Federal Income Taxes | The income tax provision includes both current and deferred income taxes. | For income statement reporting, the income tax provision only includes current tax expense. Deferred taxes are recorded directly to surplus. Deferred tax assets are subject to certain limitations on admissibility. |
| State Income Taxes | The income tax provision includes both current and deferred income taxes. | Current income taxes are recorded as a component of underwriting expenses. Deferred income taxes are not recorded. |
Investments
Our investment portfolio, which had a fair value of $39.3 billion at December 31, 2019, compared to $33.6 billion at December 31, 2018, consists of fixed-maturity securities, short-term investments, and equity securities (nonredeemable preferred stocks and common equity securities). Our fixed-maturity securities, short-term investments, and nonredeemable preferred stocks are collectively referred to as fixed-income securities. Our principal investment goals are to manage our portfolio on a total return basis to support all of the insurance premiums that we can profitably write and contribute to our comprehensive income. Our portfolio is invested primarily in short-term and intermediate-term, investment-grade fixed-income securities. Our investment portfolio had a fair value of $23.5 billion at December 31, 2016, compared to $20.9 billion at December 31, 2015.
Investment income is affected by the variability of cash flows to or from the portfolio, shifts in the type and quality of investments in the portfolio, changes in yield, and other factors. For securities held in our investment portfolios, the total investment income includingincludes interest and dividends, net realized gains (losses) on securities sold, net holding period gains (losses) on securities, which for 2019 and 2018 was composed primarily of valuation changes on equity securities, and write-downs on securities held in our investment portfolio. Total investment income, before expenses and taxes, was $589.7$2,134.5 million in 2016,2019, compared to $567.3$483.3 million in 20152018, and $632.6$662.3 million in 2014.2017. For our investment portfolio, on a pretax total return basis (i.e., total investment income plus changes in net unrealized gains/losses)gains (losses)), investment income was $791.0$2,728.1 million, $242.9$357.5 million, and $747.9$1,210.8 million for the years ended December 31, 2016, 2015,2019, 2018, and 2014,2017, respectively. Outside of our investment portfolio, we recognized a $59.7but reported in impairment losses in the consolidated statements of comprehensive income, were $63.3 million, $68.3 million, and $49.6 million of other-than-temporary impairment losslosses resulting from two renewable energy tax credit investments entered into during 2016.2019, 2018, and 2017, respectively. For more detailed discussion of our investment portfolio, see
Note 2 – Investments, Note 3 – Fair Value, and Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Annual Report.
Employees
The number of employees at December 31, 20162019, was 31,721,41,571, all of whom were employed by subsidiaries of The Progressive Corporation, including 692 employees employed by ARX and its subsidiaries and affiliates.Corporation.
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 our insurance subsidiaries. Our objective is to ensure that total reserves (i.e., case reserves and incurred but not recorded reserves, or “IBNR”)IBNR) are adequate to cover all loss costs, while sustaining minimal variation from the time reserves are initially established until losses are fully developed. 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 claims settlement, among other factors.
These estimates are continually reviewed and adjusted as experience develops and new information becomes known. Adjustments, if any, relating to accidents that occurred in prior years are reflected in the current year results of operations and are referred to as “development” of the prior year estimates. In establishing loss reserves, we take into account projected changes in claim severity caused by anticipated inflation and a number of factors that vary with the individual type of policy written. These severities are projected based on historical trends, adjusted for anticipated changes in underwriting standards, inflation, policy provisions, claims resolution practices, and general economic trends. These anticipated trends are reconsidered periodically based on actual development and are modified if necessary.
We have not entered into any loss reserve transfers or similar transactions having a material effect on earnings or reserves.
See Note 6 – Loss and Loss Adjustment Expense Reserves in the Annual Report for a detailed discussion of our loss reserving practices and a reconciliation of our loss and LAE reserve activity, along with incurred and paid claims development by accident year for our segments, based on definitions pursuant to statutory definition. In addition, further information about our loss reserving practices can be found in our “Report on Loss Reserving Practices,” which was filed with the Securities and Exchange Commission (SEC) on Form 8-K on August 12, 2016.accounting principles.
(d) Financial Information About Geographic Areas
We operate our businesses throughout the United States; we also sell personal auto physical damage and auto property damage liability insurance in Australia. For the years ended December 31, 2016, 2015, and 2014, net premiums earned in our Australian business were $20.3 million, $15.9 million, and $17.1 million, respectively. The amount of Australian assets is immaterial to our consolidated financial condition.
(e) Available Information
Our website is located at progressive.com. As soon as reasonably practicable, we make all documents that we file with, or furnish to, the SEC, including our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and any amendments to these reports, available free of charge via our website at progressive.com/investors. These reports are also available on the SEC’s website: http://www.sec.gov. Information on our website does not constitute soliciting material and should not be deemed filed or incorporated by reference into any other Progressive filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent we specifically incorporate such information by reference in such a filing.
ITEM 1A. RISK FACTORS
Our business involves various risks and uncertainties, certain of which are discussed in this section. Management divides these risks into fourfive broad categories in assessing how they may affect our financial condition, cash flows, and results of operations, as well as our ability to achieve our business objectives:
Insurance Risks - risks associated with assuming, or indemnifying for, the losses or liabilities incurred by policyholders
Operating Risks - risks stemming from external or internal events or circumstances that directly or indirectly may affect our insurance operations
Market Risks - risks that may causechanges in the value of assets held in our investment portfolios, and
Credit and Other Financial Risks - risks that the other party to a transaction will fail to perform according to the terms of a contract, or that we will be unable to satisfy our obligations when due or obtain capital when necessary.
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| • | Insurance Risks - risks associated with assuming, or indemnifying for, the losses or liabilities incurred by policyholders |
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| • | Operating Risks - risks stemming from external or internal events or circumstances that directly or indirectly may affect our insurance operations |
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| • | Market Risks - risks that may causechanges in the value of assets held in our investment portfolios |
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| • | Liquidity Risk - risk that our financial condition will be adversely affected by the inability to meet our short-term cash, collateral, or other financial obligations, and |
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| • | Credit and Other Financial Risks - risks that the other party to a transaction will fail to perform according to the terms of a contract, or that we will be unable to satisfy our obligations when due or obtain capital when necessary. |
Although we have organized risks generally according to these categories in the discussion below, many of the risks may have ramifications in more than one category. For example, although presented as an Operating Risk below, governmental regulation of insurance companies also affects our underwriting, investing, and financing activities, which are addressed separately under Insurance Risks, Market Risks, and Credit and Other Financial Risks below. These categories, therefore, should be viewed as a starting point for understanding the significant risks facing us and not as a limitation on the potential impact of the matters discussed.
It also should be noted that our business and that of other insurers may be adversely affected by a downturn in general economic conditions and other forces beyond our control. Issues such as unemployment rates, the number of vehicles sold, technological advances, home ownership trends, inflation or deflation, consumer confidence, and construction spending, among a host of other factors, will have a bearing on the amount of insurance that is purchased by consumers and small businesses and the costs that we incur. Also, to the extent that we have a concentration of business in one or more states or regions of the country, general economic conditions in those states or regions may have a greater impact on our business.
We cannot predict whether the risks and uncertainties discussed in this section, or other risks not presently known to us or that we currently believe to be immaterial, may develop into actual events and impact our businesses. If any one or more of them does so, the events could materially adversely affect our financial condition, cash flows, or results of operations, and the market prices of our common sharesequity or debt securities could decline.
This information should be considered carefully together with the other information contained in this report and in the other reports and materials filed by us with the SEC, as well as news releases and other information we publicly disseminate from time to time.
I. Insurance Risks
Our success depends on our ability to underwrite and price risks accurately and to charge adequate rates to policyholders.
Our financial condition, cash flows, and results of operations depend on our ability to underwrite and set rates accurately for a full spectrum of risks. A primary role of the pricing function is to ensure that rates are adequate to generate sufficient premiums to pay losses, loss adjustment expenses, and underwriting expenses, and to earn a profit.
Pricing involves the acquisition and analysis of historical data regarding vehicle accidents, other insured events, and associated losses, and the projection of future trends for such accidents and events, loss costs, expenses, and inflation, among other factors, for each of our products in multiple risk tiers and many different markets. Our ability to price accurately is subject to a number of risks and uncertainties, including, without limitation:
the availability of sufficient, reliable data
our ability to conduct a complete and accurate analysis of available data
uncertainties inherent in estimates and assumptions, generally
our ability to timely recognize changes in trends and to predict both the severity and frequency of future losses with reasonable accuracy
our ability to predict changes in operating expenses with reasonable accuracy
our ability to reflect changes in reinsurance costs in a timely manner
the development, selection, and application of appropriate rating formulae or other pricing methodologies
our ability to innovate with new pricing strategies and the success of those strategies
our ability to implement rate changes and obtain any required regulatory approvals on a timely basis
our ability to predict policyholder retention accurately
unanticipated court decisions, legislation, or regulatory actions
the frequency, severity, duration, and severitygeographic location and scope of catastrophe events
our ability to understand the impact of ongoing changes in our claimsclaim settlement practices
changing vehicle usage and driving patterns, which may be influenced by oil and gas prices among other factors, changes in residential occupancy patterns, and the emerging sharing economy
advancements in vehicle or home technology or safety features, such as accident and loss prevention technologies or the development of autonomous or partially autonomous vehicles
unexpected changes in the medical sector of the economy, including medical costs and systemic changes resulting from national or state health care laws or regulations
unforeseen disruptive technologies and events,
the ability to understand the risk profile of significant customers, such as transportation network companies, and
unanticipated changes in auto repair costs, auto parts prices, used car prices, or construction requirements or labor and materials costs.costs, or the imposition and impacts of tariffs.
The realization of one or more of these risks may result in our pricing being based on inadequate or inaccurate data or inappropriate analyses, assumptions, or methodologies, and may cause us to estimate incorrectly future changes in the frequency or severity of claims. As a result, we could underprice risks, which would negatively affect our underwriting profit margins, or we could overprice risks, which could reduce our competitiveness and growth prospects. In either event, our financial condition, cash flows, and results of operations could be materially adversely affected. In addition, underpricing insurance policies over time could erode the capital position of one or more of our insurance subsidiaries, thereby constraining our ability to write new business.
Our success depends on our ability to establish accurate loss reserves.
Our financial statements include loss reserves, which represent our best estimate as of the date of the financial statements of the amounts that our insurance subsidiaries ultimately will pay on claims that have been incurred, and the related costs of adjusting those claims. There is inherent uncertainty in the process of establishing property and casualty insurance loss reserves, which can arise from a number of factors, including:
the availability of sufficient, reliable data
the difficulty in predicting the rate and direction of changes in frequency and severity trends, including the effects of future inflation rates, for multiple products in multiple markets
unexpected changes in medical costs, auto repair costs, or the costs of construction labor and materials, and the imposition and impacts of tariffs
unanticipated changes in governing statutes and regulations
new or changing interpretations of insurance policy provisions and coverage-related issues by courts
the effects of changes in our claims settlement practices
our ability to recognize fraudulent or inflated claims
the accuracy of our estimates regarding claims that have been incurred but not recorded as of the date of the financial statements
the accuracy and adequacy of actuarial techniques and databases used in estimating loss reserves, and
the accuracy and timeliness of our estimates of loss and loss adjustment expenses as determined for different categories of claims, andclaims.
The ultimate paid losses and loss adjustment expenses may deviate, perhaps substantially, from point-in-time estimates of such losses and expenses, as reflected in the loss reserves included in our financial statements. Consequently, ultimate losses paid could materially exceed reported loss reserves and have a material adverse effect on our financial condition, cash flows, or results of operations. Further information on our loss reserves can be found in Note 6 - Loss and Loss Adjustment Expense Reserves in our Annual Report.
Our insurance operating results may be materially adversely affected by severe weather conditions or other catastrophe events.events, and changing climate conditions may be exacerbating these impacts.
Catastrophes canOur insurance operating results could be causedmaterially adversely affected by natural events, such as hurricanes, tornadoes, windstorms, floods, earthquakes, hailstorms, severe winter weather, and fires, or by other events, such as explosions, terrorist attacks, cyber attacks, epidemics, pandemics, riots, and hazardous material releases. The frequency, severity, duration, and severitygeographic location and scope of such events are inherently unpredictable. Moreover, changing climate conditions, whether due to an increase in average temperatures (globalglobal climate change)change or other causes, may increase how often severe weather events and other natural disasters occur, how long they last, and how much insured damage they cause.cause, and may change where the events occur. Catastrophe losses may adversely affect the results of our Property segment more than they affect the results of our other businesses.
The extent of insured losses from a catastrophe event is a function of both our total net insured exposure in the area affected by the event, the nature, severity, and duration of the event, and the nature and severityextent of thereinsurance that we have obtained with respect to such an event. We use catastrophe modeling tools to help estimate our exposure to such events. Those tools are based on historical data and other assumptions that limit their reliability and predictive value, and they may become even less reliable as climatic conditions change. As a result, our forecasting efforts may generate projections that prove to be materially inaccurate. An increase in the frequency, severity or severityduration, or unanticipated changes in geographic location or scope, of catastrophes could materially adversely affect our financial condition, cash flows, and results of operations.
Our success will depend on our ability to continue to accurately predict our reinsurance needs, obtain sufficient reinsurance coverage for our homeownersProperty and other businesses at reasonable cost, and collect under our reinsurance contracts.
Like many homeowners insurance companies, ourOur Property business relies on reinsurance contracts, state reinsurance funding, and catastrophe bonds (collectively, “reinsurance arrangements”) to reduce its exposure to certain catastrophe events. We also use reinsurance contracts to reinsure portions of our Commercial Lines businesses, including the transportation network company business, and our umbrella insurance businesses.business. Reinsurance arrangements are often subject to a threshold below which reinsurance does not apply, so that we are responsible for all losses below the threshold from a covered event, and to an aggregate dollar coverage limit, so that our claims liabilities arising from a covered event may exceed our reinsurance coverage. In addition, although the reinsurer is liable to the insurerus to the extent of the reinsurance coverage, the original insurer remainswe remain liable under theour policies to the insured as the direct insurer on
all risks reinsured. As a result, we are subject to the risk that reinsurers will be unable to pay, or will dispute, our reinsurance claims. Further, the availability and cost of reinsurance are subject to prevailing reinsurance market conditions, (which canwhich have been and in the future could be impacted by the occurrence of significant reinsured events).events, such as catastrophes. We may not be able to obtain reinsurance coverage in the future at commercially reasonable rates or at all. The availability andunavailability and/or cost of reinsurance could adversely affect our business volume, profitability, or financial condition.
II. Operating Risks
We compete in property-casualty markets that are highly competitive.
We writeThe markets in which we sell insurance for personal autos and recreational vehicles, commercial autos and trucks for small businesses, homeowners, and renters. All of these markets are highly competitive. We face vigorous competition from large, well-capitalized national and international companies, as well as smaller regional insurers. Other largecompanies, potentially including existing insurance companies, vehicle manufacturing companies, other well-financed companies seeking new opportunities, or financial services companiesnew competitors with technological or other innovations, also may enterhave entered these markets and may continue to do so in the future. Many of our competitors have substantial resources, experienced management, and strong marketing, underwriting, and pricing capabilities. The property and casualty insurance industry is a relatively mature industry, in which brand recognition, marketing skills, innovation, operational effectiveness, pricing, scale, and cost control are major competitive factors. If our competitors offer similar insurance products at lower prices, offer such insurance products bundled with other products or services that we do not offer, are permitted to offer their products under different legal and regulatory constraints than those that apply to us, or engage in other successful competitive initiatives, our ability to generate new business or to retain a sufficient number of our existing customers could be compromised. In addition, because auto insurance constitutes a significant portion of our overall business, we may be more sensitive than other insurers to, and more adversely affected by, trends that could decrease auto insurance rates or reduce demand for auto insurance over time, such as advances in vehicle technology, autonomous or semi-autonomous vehicles, andor vehicle sharing arrangements.
We expect similar, and perhaps greater, competitive pressures with respect to any new insurance or non-insurance businesses that we decide to enter in the future. In such cases, we would be selling products or services that are new to us, while our competitors could include large, well-financed companies with significant product and marketing experience in such businesses.
Historically, the auto and property insurance markets have been described as cyclical, with periods of relatively strong profitability being followed by increased pricing competition among insurers. This price competition, which is sometimes referred to as a “soft market,” can adversely affect revenue and profitability levels. As insurers recognize this situation (which can occur at different times for different companies), the historical reaction has been for insurers to raise their rates (sometimes referred to as a “hard market”) in an attempt to restore profitability to acceptable levels. As more insurers react in this way, profit levels in the industry may increase to a point where some insurers begin to lower their rates, starting the cycle over again. InThe ability to discern at any point in time whether we are in a “hard” or “soft” market is often difficult, as such a conclusion represents an assessment of innumerable data points including, among others, the past, this cycle has generally played out overoperating results of, and the dynamic competitive actions taken by, us and many competitors in multiple markets involving a numbervariety of years. We cannot be certain whetherproducts. Often detailed information on our competitors becomes available on a delayed basis, and the nature of the market becomes apparent only in retrospect. Our ability to what extent such cyclicalitypredict future competitive conditions is currently impacting the auto or property insurance markets, nor can we predict whether it will do so in the future.also constrained as a result.
The highly competitive nature of the insurance marketplace could result in consolidation within the industry, or in the failure of one or more competitors. The concentration of premium volumeinsurance business in a reduced number of major competitors could significantly increase the level of competition in a manner that is not favorable to us. In addition, in the event of a failure of a major insurer or a state-sponsored catastrophe fund, our company and other insurance companies may be required by law to absorb the losses of the failed insurer or fund, resulting in a potentially significant increase in our costs. We might also be faced with an unexpected surge in new business from a failed insurer’s former policyholders. Such events could materially adversely affect our financial results, brand, and future business prospects.
Our success depends on our ability to innovate effectively and respond to our competitors’ initiatives.
Our ability to develop and implement innovative products and services that are accepted and valued by our customers and independent agents is critical to maintaining and enhancing our competitive position. Innovations must be implemented in compliance with applicable insurance regulations and may require extensive modifications to our systems and processes and extensive coordination with and reliance on the systems of third parties. As a result, if we do not handle these transitions effectively and efficiently,bring such innovations to market with the requisite speed, the quality of our products, our relationships with our customers and agents, and our business prospects, may be materially adversely affected. In addition, innovations by competitors or other market participants may increase the level of competition in the industry. If we fail to respond appropriately to those innovations on a timely basis, our competitive position and results may be materially adversely affected.
We must effectively manage complexity as we develop and deliver high quality products and customer experiences.
Ongoing competitive, technological, regulatory, informational, and other developments result in significant levels of complexity in our products and in the systems and processes we use to run our business.businesses. These risks include our increasing reliance on third-party systems, the development of new modes of communication, changing insurance shopping trends, our understanding of the operations and needs of significant customers, and the availability of very large volumes of data (i.e., Big Data) and the challenges relating to analyzing those data sets. Complexity may create barriers to innovation or the provision of high-quality products and customer and agent experiences, may require us to modify our business practices, to adopt new systems, or to upgrade or replace outdated systems, each at significant expense, and may lead to increased difficulty in executing our business strategies.
Intellectual property rights could affect our competitiveness and our business operations.
There has been a proliferation of patents, both inside and outside the insurance industry, that significantly impacts our businesses. The existence of such patents, and other claimed intellectual property rights, may resultfrom time to time has resulted in legal challenges to certain of our business practices by other insurance companies and non-insurance entities alleging that we are violating their rights. Such legal challenges could result in costly legal proceedings, substantial monetary damages, or expensive changes in our business processes and practices. Similarly, we may seek or obtain patent protection for innovations developed by us. However, we may not be able to obtain patents on these processes and practices, and defending our patents and other intellectual property rights against challenges, and enforcing and defending our rights, including if necessary through litigation, can be time consuming and expensive, and the results are inherently uncertain, which can further complicate business plans.
Our success depends on our ability to adjust claims accurately.
We must accurately evaluate and pay claims that are made under our insurance policies. Our failure to pay claims fairly, accurately, and in a timely manner, or to deploy claims resources appropriately and in a cost-effective manner, could result in unanticipated costs to us, lead to material litigation, undermine customer goodwill and our reputation in the marketplace, and impair our brand and, as a result, materially adversely affect our competitiveness, customer retention, financial results, prospects, and liquidity.
We must develop and maintain a brand that is recognized and trusted by consumers.
ItWe have made significant investments in our brand over many years, and we believe it is critical to our business that consumers recognize and trust the Progressive brand. We undertake distinctive advertising and marketing campaigns and other efforts to maintain and improve brand recognition, enhance perceptions of us, generate new business, and increase the retention of our current customers. We believe that maintaining and improving the effectiveness of our advertising and marketing campaigns relative to those of our competitors is particularly important given the significance of brand and reputation in the marketplace and the continuing high level of advertising and marketing efforts and related expenditures within the insurance market. If our marketing campaigns are unsuccessful or are less effective than those of competitors, or if our reliance on a particular spokesperson or character is compromised, our business could be materially adversely affected.
Our brand also could be adversely affected by incidentssituations that reflect negatively on us, whether due to our business practices, adverse financial developments, perceptions of our corporate governance or social responsibility, the conduct of our officers or employees, the actions of a significant customer or other businesses with which we do business, including unaffiliated insurers through whichwhose products we offer bundled products (such as homeowners insurance),or make available to our customers, or other causes. The negative impacts of these or other events may be aggravated as the perceptions of consumers and othersother stakeholders increase their expectations regarding corporate conduct and responsibility. These impacts may be further complicated by the fact that their perceptions are formed based onthrough rapid and broad interactions using modern communication and social media tools over which we have no control. Any such event could decrease demand for our products, reduce our ability to recruit and retain employees, and lead to greater regulatory scrutiny of our businesses.
Our ability to attract, develop, and retain talentedtalent, including employees, managers, and executives, and to maintain appropriate staffing levels, is critical to our success.
Our success depends on our ability to attract, develop, compensate, motivate, and retain talented employees, including executives, other key managers, and employees with strong technological, analytical, and other skills and know-how necessary for us to run our vehicle and property insurance businesses.businesses and assess potential expansion into new products and business areas. Our loss of certain officers and key employees, or the failure to attract or develop talented employees, executives, managers, and managersemployees with diverse backgrounds and experiences, could have a material adverse effect on our business.
In addition, we must forecast sales and claims volume and other factors in changing business environments (for multiple products and business units and in many geographic markets) with reasonable accuracy, and we must adapt to increases in business due to additions of or expansions with significant customers, such as transportation network companies. In any such case, we must adjust our hiring and training programs and employmentstaffing levels accordingly.appropriately. Our failure to recognize the need for such adjustments, or our failure or inability to react appropriately on a timely basis, could lead either to over-staffing or under-staffing in one or more business units or locations. In either such event, our financial results, customer relationships, employee morale, and brand could be materially adversely affected.
We use third-party labor to meet a portion of our staffing needs. Any significant loss in access to qualified external talent on a cost-effective basis could have an adverse effect on our business.
Our success also depends, in large part, on our ability to maintain and improve the staffing effectiveness and culture that we have developed over the years. Our ability to do so may be impaired as a result of litigation against us, other judicial decisions, legislation or regulations, or other factors in the employment marketplace, as well as our failure to recognize and respond to changing trends and other circumstances that affect our employees. In such events, the productivity of our workers and the efficiency of our operations could be adversely affected, which could lead to an erosion of our operating performance and margins.
We are subject to a variety of complex laws and regulations.
Our insurance businesses operate in highly regulated environments. Our insurance subsidiaries are subject to regulation and supervision by state insurance departments in all 50 states and the District of Columbia, and Australia, each of which has a unique and complex set of laws and regulations. In addition, certain federal laws impose additional requirements on businesses, including insurers, in a wide range of areas, such as the use of credit information, privacy,methods of customer communications, employment practices, and the reimbursement of certain medical costs incurred by the government. Our insurance subsidiaries’ ability to implement business plans and remain competitive while complying with these laws and regulations, and to obtain necessary regulatory action in a timely manner, is and will continue to be critical to our success.
Most jurisdictions impose restrictions on, or require prior regulatory approval of, various actions by regulated insurers, which may adversely affect our insurance subsidiaries’ ability to operate, innovate, and obtain necessary rate adjustments in a timely manner. Our compliance efforts are further complicated by changes in laws or regulations applicable to insurance companies, or by judicial interpretations of those laws or regulations. Insurance laws and regulations may limit, among other things, our insurance subsidiaries’an insurer’s ability to underwrite and price risks accurately, prevent our subsidiariesthe insurer from obtaining timely rate changes to respond to increased or decreased costs, restrict our subsidiaries’the ability to discontinue unprofitable businesses or exit unprofitable markets,businesses, prevent insurers from terminating policies under certain circumstances, and dictate or limit the types of investments that an insurance company may hold.hold, and impose specific requirements relating to information technology systems and related cybersecurity risks. Moreover, inconsistencies between requirements at the state and federal level may further complicate our compliance efforts, potentially resulting in additional costs being imposed onfor us. In addition, laws in certain jurisdictions mandate that insurance companies pay assessments in a number of circumstances, including potentially material assessments to pay claims upon the insolvency of other insurance companies or to cover losses in government-provided insurance programs for high risk auto and homeowners coverages. Compliance with laws and regulations often results in increased costs, which can be substantial, to our insurance subsidiaries. These costs, in turn, may adversely affect our profitability or our ability or desire to grow or operate our business in the applicable jurisdictions.
In addition, data privacy and security regulations impose complex compliance and reporting requirements and challenges. For example, California’s new consumer privacy protection legislation became effective in 2020. Compliance with this new legislation is challenging as it has required us to modify our current business systems and operations in a short time frame and without the benefit of related regulations, which are not required to be issued in final form until six months after the legislation’s effective date. Other states have enacted or are considering privacy and security legislation or regulations, and variations in requirements across the states present ongoing compliance challenges. Compliance with these laws and regulations will result in increased costs, which may be substantial and may adversely affect our profitability or our ability or desire to grow or operate our business in certain jurisdictions.
The actual or alleged failure to comply with this complex variety of laws and regulations by us or other companies in the insurance, financial services, or related industries, also could result in actions or investigations by regulators, state attorneys general, federal officials, or other law enforcement officials. Such actions and investigations, and any determination that we have not complied with an applicable law or regulation, could potentially lead to significant monetary payments, fines and penalties, adverse publicity and damage to our reputation in the marketplace, and in certain cases, revocation of a subsidiary’s authority to do business in one or more jurisdictions. In addition, The Progressive Corporation and its subsidiaries could face individual and class action lawsuits by insureds and other parties for alleged violations of certain of these laws or regulations.
New federal or state legislation or regulations may be adopted in the future that could materially adversely affect our operations or ability to write business profitably in one or more jurisdictions.
For further information on these risks and uncertainties, see the “Insurance Regulation” discussion included in this report.
Lawsuits challenging our business practices, and those of our competitors and other companies, are pending and more may be filed in the future.
The Progressive Corporation and/or its subsidiaries are named as defendants in class actionclass/collective/representative actions and other lawsuits challenging various aspects of the subsidiaries’ business operations. Additional litigation may arise in the future concerning similar or other business practices. These lawsuits have included cases alleging damages as a result of, among other things, our subsidiaries’ use of credit in underwriting and related requirements under the U.S. Fair Credit Reporting Act; methods used for evaluating and paying medical or injury claims or benefits, including, but not limited to, certain bodily injury, personal injury protection, uninsured motorist/underinsured motorist (UM/UIM), and medical payment claims orand for reimbursing medical costs incurred by MedicareMedicare/Medicaid beneficiaries; other claims handling procedures;procedures, including, but not limited to, challenges relating to our network of repair facilities, our methods used for estimating physical damage to vehicles for repair purposes and for evaluating the actual cash value of total loss vehicles, our payment of fees and taxes, our subrogation practices, and our handling of diminution of value claims; our assessment of fees related to insufficient funds or our Service Center program;reversed payments; interpretations of the provisions of our insurance policies; rating practices; certain policy marketing, sales, services, implementation and renewal procedures;practices and employment-related litigation,procedures, including federal wagewith respect to accessibility; our Snapshot program; certain relationships with independent insurance agents; patent matters, and hourcertain employment practices, including claims relating to pay practices and fair employment practices, among other matters. Additional litigation may be filed against us concerning allegationsin the future challenging similar or other of other general liability theories.our business practices. In addition, lawsuits have been filed, and other lawsuits may be filed in the future, against our competitors and other businesses, and although we are not a party to such litigation, the results of those cases may create additional risks for, and/or impose additional costs and/or limitations on, our subsidiaries’ business operations.
Lawsuits against us often seek significant monetary damages and injunctive relief. The potential for injunctive relief can threaten our use of important business practices. Moreover,In addition, the resolution of individual or class action litigation in insurance or related fields may lead to a new layer of judicial regulation, resulting in material increases in our costs of doing business.
Litigation is inherently unpredictable. Adverse court decisions or significant settlements of pending or future cases could have a material adverse effect on our financial condition, cash flows, and results of operations. For further information on the risks of pending litigation, see Note 12 –- Litigation in the Annual Report.
Our business could be materially adversely affected by a security breach or other attack involving our computer systems or the systems of one or more of our vendors.
Our business requires that we develop and maintain large and complex computer systems to run our operations and to store the significant volume of data that we acquire, including the personal confidential information of our customers and employees and our intellectual property, trade secrets, and other sensitive business and financial information. All of these systems are subject to “cyber attacks” by sophisticated third parties with substantial computing resources and capabilities, and to unauthorized or illegitimate actions by employees, consultants, agents and other persons with legitimate access to our systems. Such attacks or actions may include attempts to:
steal, corrupt, or destroy data, including our intellectual property, financial data, or the personal information of our customers or employees
misappropriate funds
disrupt or shut down our systems
deny customers, agents, brokers, or others access to our systems, or
infect our systems with viruses or malware.
Some of our systems rely on third-party vendors, through either a connection to, or an integration with, those third-parties’ systems. This approach may increase the risk of loss, corruption, or unauthorized publication of our information or the confidential information of our customers and employees or other cyber attack.attack, and although we may review and assess third-party vendor cyber security controls, our efforts may not be successful in preventing or mitigating the effects of such events. Third-party risks may include, among other factors, the vendor’s lax security measures, data location uncertainty, and the possibility of data storage in inappropriate jurisdictions where laws or security measures may be inadequate.
We undertake substantial efforts to protect our systems and sensitive or confidential information. These efforts include internal processes and technological defenses that are preventative or detective, and other controls designed to provide multiple layers of security protection. In addition, we seek to protect the security and confidentiality of information provided to our vendors under “cloud computing” or other arrangements through appropriate risk evaluation, security and financial due diligence,
contracts designed to require high security and confidentiality standards, and review of third-party compliance with the required standards. While we expend significant resources on these defensive measures, our systems are being threatened on a regular basis, we have experienced minor incidents in the past, and there can be no assurance that we will be successful in preventing future attacks or detecting and stopping them once they have begun.
Our business could be significantly damaged by a security breach, data loss or corruption, or cyber attack. In addition to the potentially high costs of investigating and stopping such an event and implementing necessary fixes, we could incur substantial liability if confidential customer or employee information is stolen. In addition, such an event could cause a significant disruption of our ability to conduct our insurance operations, adversely affect our competitive position if material trade secrets or other confidential information are stolen, and have severe ramifications on our reputation and brand, potentially causing customers to refrain from buying insurance from us or other businesses to refrain from doing business with us. We have elected to self-insure these risks at this time. Therefore, the occurrence of a security breach, data loss or corruption, or cyber-attack,cyber attack, if sufficiently severe, could have a material adverse effect on our business results, prospects, and liquidity.
If we were not able to send or accept electronic payments, our business and financial results could be adversely affected.
We rely on access to various financial networks to process payments received from our customers. These include credit card and debit card networks and the Automated Clearing House (ACH) network. Our ability to participate in these networks is dependent on our compliance with applicable laws and regulations and with the complex rules of each network and any related industry supervisory groups. If we fail to comply with legal requirements or rules and best practices established by a network or industry group, including those related to data security, we could be assessed significant monetary fines and other penalties, including, in certain cases, the termination of our right to use the applicable network or system. Such fines and penalties, and any disruption in or termination of our ability to process customer payments electronically, could materially adversely affect our business and our brand.
Our business depends on the secure and uninterrupted operation of our facilities, systems, and business functions.functions and the operation of various third-party systems.
Our business is highly dependent upon our ability to perform, in an efficient and uninterrupted manner, necessary business functions. The shut-down or unavailability of one or more of our systems or facilities for any reason could significantly impair our ability to perform critical business functions on a timely basis. In addition, many of our critical business systems interface with and depend on third-party systems; an interruption of service from a third-party system for any reason could significantly impair our ability to perform critical business functions. If sustained or repeated, and if an alternate system, process, or vendor is not immediately available to us, such events could result in a deterioration of our ability to write and process policies, provide customer service, resolve claims in a timely manner, make payments when required, or perform other necessary business functions. Any such event could have a material adverse effect on our financial results and business prospects, as well as cause damage to our brand and customer goodwill.
The ARX acquisitionEfforts to develop new products or enter new areas of business may not producebe successful and may create enhanced risks.
We are developing, and may develop in the anticipated benefitsfuture, new insurance products, including those that insure risks that we have not previously insured, contain new coverages, or change coverage terms. These new products may not be as profitable as our existing products and may not perform as well as we expect. In addition, these new products may change our risk exposures, and the business systems, data, and models we use to manage those exposures may be less accurate or less effective than those we use with existing products.
In addition, we are evaluating other business models, both insurance and non-insurance related, and are considering investments in different business areas. These activities may take the company,form of internal development, equity investments, targeted mergers or acquisitions, joint ventures, or strategic partnerships. These new ventures may require us to make significant expenditures, which may negatively impact our results in the near term, and if not successful, could materially and adversely affect our results of operations. While at the onset of the venture we would expect these projects to provide long-term value, there can be no assurance that our expectations will be realized.
If we were not able to send or accept electronic payments, our business and financial results could be adversely affected.
We rely on access to various financial networks to process payments received from our customers. These include credit card and debit card networks and the Automated Clearing House (ACH) network. Our ability to participate in these networks depends on our compliance with applicable laws and regulations and with the complex rules of each network and any related industry supervisory groups. If we fail to comply with legal requirements or rules and best practices established by a network or industry group, including those related to data security, we could be assessed significant monetary fines and other penalties, including, in certain cases, the termination of our right to use the applicable network or system. Such fines and penalties, and any disruption in or termination of our ability to process customer payments electronically, could materially adversely affect our business and our brand.
We may be required to recognize impairments in the value of the goodwill or intangible assets may become impaired.recorded in our financial statements.
The ARX acquisition may not produceAs a result of business acquisitions, we have recorded goodwill (generally representing the anticipated benefits to us, or such benefits may be delayed longer than anticipated. In addition, as we identify opportunities for integrationamount paid in excess of ARX’s products, employees, operations or systems with our own, we may be unable to execute on such opportunitiesthe fair value of the assets acquired) and generate the benefits identified, the costs of those efforts may be greater than expected, or those efforts may cause difficulties or unintended consequences that could adversely impact our operations and results.
Atcertain intangible assets (at fair value at the time of the ARX acquisition,acquisition) and we recordedmay record additional goodwill and intangible assets at fair value.in the future. We review goodwill and intangible assets for impairment at least annually. Valuing these assets, and evaluating their recoverability, requires us to make estimates and assumptions related to future returns on equity, margins, growth rates, discount rates, and other matters, and our estimates may change over time, potentially resulting
in write-downs of the assets.asset write-downs. Goodwill and intangible assets impairment charges could result from declines in operating results, divestitures or sustained market declines, among other factors, and could materially affect our financial condition and results of operations in the period in which they are recognized.
III. Market Risks
The performance of our fixed-income and equity investment portfolios is subject to a variety of investment risks.
Our investment portfolio consists principally of fixed-income securities and common equities. General economic conditions and other factors beyond our control can adversely affect the value of our investments and the amount and realization of investment income, or result in realized or unrealized investment losses.
Our fixed-income portfolio is actively managed by our investment group and includes short-term investments, fixed-maturity securities, and preferred stocks. The performance of the fixed-income portfolio is subject to a number of risks, including:
Interest rate risk - the risk of adverse changes in the value of fixed-income securities as a result of increases in market interest rates.
Investment credit risk - the risk that the value of certain investments may decrease due to a deterioration in the financial condition, operating performance or business prospects of, or the liquidity available to, one or more issuers of those securities or, in the case of asset-backed securities, due to the deterioration of the loans or other assets that underlie the securities.
Concentration risk - the risk that the portfolio may be too heavily concentrated in the securities of one or more issuers, sectors, or industries, which could result in a significant decrease in the value of the portfolio in the event of a deterioration of the financial condition or performance of, or outlook for, those issuers, sectors, or industries.
Prepayment or extension risk - applicable to certain securities in the portfolio, such as residential mortgage-backed securities and other bonds with call provisions, prepayment risk is the risk that, as interest rates change, the principal of such securities may be repaid earlier than anticipated, requiring that we reinvest the proceeds at less attractive rates. Extension risk is the risk that a security may not be redeemed when anticipated, adversely affecting the value of the security and preventing the reinvestment of the principal at higher market rates.
Liquidity risk - the risk that we will not be able to convert investment securities into cash on favorable terms and on a timely basis, or that we will not be able to sell them at all, when we desire to do so.
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| • | Interest rate risk - the risk of adverse changes in the value of fixed-income securities as a result of increases in market interest rates. |
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| • | Investment credit risk - the risk that the value of certain investments may decrease due to a deterioration in the financial condition, operating performance or business prospects of, or the liquidity available to, one or more issuers of those securities or, in the case of asset-backed securities, due to the deterioration of the loans or other assets that underlie the securities. |
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| • | Concentration risk - the risk that the portfolio may be too heavily concentrated in the securities of one or more issuers, sectors, or industries, which could result in a significant decrease in the value of the portfolio in the event of a deterioration of the financial condition or performance of, or outlook for, those issuers, sectors, or industries. |
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| • | Prepayment or extension risk - applicable to certain securities in the portfolio, such as residential mortgage-backed securities and other bonds with call provisions, prepayment risk is the risk that, as interest rates change, the principal of such securities may be repaid earlier than anticipated, requiring that we reinvest the proceeds at less attractive rates. Extension risk is the risk that a security may not be redeemed when anticipated, adversely affecting the value of the security and preventing the reinvestment of the principal at higher market rates. |
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| • | Liquidity risk - discussed separately below. |
In addition, the success of our investment strategies and asset allocations in the fixed-income portfolio may vary depending on the market environment. The fixed-income portfolio’s performance also may be adversely impacted if, among other factors:
there is a deterioration in the underlying businesses of the issuers of the securities that we hold; credit ratings assigned to such securities by nationally recognized statistical rating organizations are based on incomplete or inaccurate information or otherwise prove unwarranted; or our risk mitigation strategies are ineffective for the applicable market conditions.
TheOur common equity portfolio is primarily managed externally to track the Russell 1000 Index, with a small portion actively managed by an externalalthough we anticipate that during 2020 we will add exchange traded funds or similar securities designed to track the Russell 1000 or the Standard & Poor’s 500 (“S&P 500”) Index. Our equity investment advisor.strategies may not successfully replicate the performance of the Indexes that they seek to track. Our equity investments are also subject to general movements in the values of equity markets and to the changes in the prices of the securities we hold. An investment portfolio or exchange traded fund that is designed to track an index, such as the Russell 1000 or that follows a specific investment discipline, such as value investing,S&P 500, is not necessarily less risky than other equity investment strategies. Equity markets, sectors, industries, and individual securities may be subject to high volatility and to long periods of depressed or declining valuations, and they are also subject to most of the same risks that affect our fixed-income portfolio, as discussed above. In addition, even though the Russell 1000 Index isand S&P 500 Indexes are generally considered to be broadly diversified, significant portions of theeach index may be concentrated in one or more sectors, reducing our ability to manage our concentration risk through sector diversification. The actively managed equity portfolio is also subject to risks arising from the investment decisions of the investment advisor.
Both the fixed-income and the common equity portfolios are also subject to risks inherent in the nation’s and world’s capital markets. Any disruption in the functioning of those markets or our ability to liquidate investments when desired could have a material adverse effect on our financial condition, cash flows, and results of operations. In addition, ifIf the fixed-income or equity portfolios, or both, were to suffer a substantial decrease in value, our liquidity, financial position, and financial results could be materially adversely affected. Under these circumstances, our income from these investments could be materially reduced, and declines in the value of our securities could further reduce our reported earnings and capital levels. A decrease in value of an insurance subsidiary’s investment portfolio could also put the subsidiary at risk of failing to satisfy regulatory minimum capital requirements and could limit the subsidiary’s ability to write new business. In any such event, our business could be materially adversely affected.affected and our financial flexibility could be substantially constrained.
See Management’s Discussion and Analysis of Financial Condition and Results of Operations in the Annual Report for additional discussion of the composition of our investment portfolio as of December 31, 2016,2019, and of the market risks associated with our investment portfolio.
The elimination of or change in the London Interbank Offered Rate (LIBOR) may adversely affect the interest rates on and value of certain floating rate securities and other instruments that we hold.
LIBOR is a common benchmark interest rate (or reference rate) used to set and make adjustments to interest rates for certain floating rate securities and other financial instruments. Published reports have indicated that regulatory authorities and/or financial institutions may change how LIBOR is calculated or discontinue its calculation and publication after 2021. Alternative reference rates have been developed, including The Federal Reserve Bank of New York’s Secured Overnight Financing Rate (SOFR), but the acceptance of such alternative rates and their applicability to existing instruments is uncertain. If LIBOR ceases to exist or if the methods of calculating LIBOR change from current methods for any reason, outstanding securities with interest rates tied to LIBOR may be adversely affected if those securities either do not provide for the automatic substitution of another reference rate or convert to another reference rate or a fixed rate that could be less favorable to us. Outstanding securities and contracts that could be affected include certain preferred stocks and other floating rate securities, fixed rate securities that may convert to LIBOR-based floating rate instruments in the future, certain derivatives, and any other assets or liabilities whose value is tied to LIBOR. Any uncertainty regarding the continued use and reliability of LIBOR as a benchmark interest rate could also adversely affect the value of those instruments.
IV. Liquidity Risk
The inability to access our cash accounts or to convert investments into cash on favorable terms when we desire to do so may materially and adversely affect our business.
We rely on our ability to access our cash accounts at banks and other financial institutions to operate our business. If we are unable to access the cash in those accounts as needed, whether due to our own systems difficulties, an institution-specific issue at the bank or financial institution (such as a cybersecurity breach), a broader disruption in banking, financial or wire transfer systems, or otherwise, our ability to pay insurance claims and other financial obligations when due and otherwise operate our business could be materially adversely affected. Likewise, our investment portfolios are subject to risks inherent in the nation’s and world’s capital markets. Any disruption in the functioning of those markets or in our ability to liquidate investments or specific categories of investments on favorable terms when desired, could impair our ability to pay claims or other financial obligations when due. Any such event or series of such events could result in significant operational difficulties, reputational harm and adverse actions by regulators and have a material adverse effect on our financial condition, cash flows, and results of operations.
V. Credit and Other Financial Risks
Our financial condition may be adversely affected if one or more parties with which we enter into significant contracts or transact business (including under certain government programs) become insolvent, experience other financial difficulties, or default in the performance of contractual or reimbursement obligations.
Our business is dependent on the performance by third parties of their responsibilities under various contractual or service arrangements.arrangements and government programs. These include, for example:example, agreements with other insurance carriers to bundlesell their products that we do not offer, andto our customers in bundled packages or otherwise, arrangements for transferring certain of our risks (including reinsurance arrangements used by us, our corporate insurance policies, and the performance of state reinsurance facilities/associations)., and reimbursement obligations under various state or federal programs, such as the Michigan Catastrophic Claims Association or the National Flood Insurance Program. In addition, from time to time, we enter into significant financial transactions, such as derivative instruments, with major banks, other financial institutions, or security clearinghouses. If one or more of these parties were to default in the performance of their obligations under their respective contracts or programs or determine to abandon or terminate support for a system, product, obligation, or service that is significant to our business, we could suffer significant financial losses or other problems, which in turn could materially adversely affect our financial condition, cash flows, or results of operations and cause damage to our brand and reputation.
Our insurance subsidiaries may be limited in the amount of dividends that they can pay, which in turn may limit our ability to repay indebtedness, make capital contributions to other subsidiaries or affiliates, pay dividends to shareholders, repurchase securities, or meet other obligations.
The Progressive Corporation is a holding company with no business operations of its own. Consequently, if its subsidiaries are unable to pay dividends or make other distributions, or are able to pay only limited amounts, The Progressive Corporation may be unable to make payments on its indebtedness, make capital contributions to or otherwise fund its subsidiaries or affiliates,
pay dividends to its shareholders, or meet its other obligations. Each insurance subsidiary’s ability to pay dividends may be limited by one or more of the following factors:
insurance regulatory authorities require insurance companies to maintain specified minimum levels of statutory capital and surplus
insurance regulations restrict the amounts available for distribution based on either net income or surplus of the insurance company
competitive pressures require our insurance subsidiaries to maintain high financial strength ratings, and
in certain jurisdictions, prior approval must be obtained from regulatory authorities for the insurance subsidiaries to pay dividends or make other distributions to affiliated entities, including the parent holding company.
In addition, under the ARX stockholders’ agreement, ARX cannot pay a dividend without the consent of Progressive and otheranother specified ARX stockholders. Further information on insurance laws and regulations that may limit the abilitystockholder.
The terms of our insurance subsidiariesoutstanding preferred shares prohibit us from paying a dividend on our common shares in certain circumstances.
The terms of our outstanding preferred shares prohibit us from declaring or paying dividends or distributions on our common shares while our preferred shares are outstanding, unless all accrued and unpaid dividends on the preferred shares, including the full dividends for all current dividend periods, have been declared and paid or a sum sufficient for payment thereof set apart, subject to pay dividends can be found in Item 5(c), “Dividends,” of this report.certain exceptions.
If we are unable to obtain capital when necessary to support our business, our financial condition and our ability to grow could be materially adversely affected.
We may need to acquire additional capital from time to time as a result of many factors. These could include increased regulatory requirements, losses in our insurance or investment operations, or significant growth in the insurance premiums that we write, among others. If we are unable to obtain capital at favorable rates when needed, whether due to our results, volatility or disruptions in debt and equity markets beyond our control, or other reasons, our financial condition could be materially adversely affected. In such an event, unless and until additional sources of capital are secured, we may be limited in our ability, or unable, to service our debt obligations, pay dividends, grow our business, pay our other obligations when due or engage in other corporate transactions. Such a deterioration of our financial condition could adversely affect the perception of our company by insurance regulators, potentially resulting in regulatory actions, and the price of our common sharesequity or debt securities could fall significantly.
Our access to capital markets, ability to obtain or renew financing arrangements, obligations to post collateral under certain derivative contracts, and business operations are dependent on favorable evaluations and ratings by credit and other rating agencies.
Our credit and financial strength are evaluated and rated by various rating agencies, such as Standard & Poor’s, Moody’s Investors Service, Fitch Ratings, and A.M. Best. Downgrades in our credit ratings could adversely affect our ability to access the capital markets and/or lead to increased borrowing costs in the future (although the interest rates we pay on our current indebtedness would not be affected), as would adverse recommendations by equity analysts at the various brokerage houses and investment firms. Perceptions of our company by other businesses and consumers could also be significantly impaired. In addition, a downgrade could trigger contractual obligations in certain derivative transactions requiring us to post substantial amounts of additional collateral or allow a third party to liquidate the derivative transaction. Downgrades in the ratings of our insurance subsidiaries could likewise negatively impact our operations, potentially resulting in lower or negative premium growth. In any such event, our financial performance could be materially adversely affected.
Our annual dividend policy willmay result in a variable paymentvarying amounts being paid to our common shareholders, each year, or no payment in some years,periods, and the dividend programpolicy ultimately may be changed in the discretion of the Board of Directors.
We have previously announced our intention to pay a dividend on our common shares on a quarterly basis and to shareholdersconsider paying a variable dividend on at least an annual basis under a formula that multiplies our annual after-tax underwriting income by a percentage factor set by the Boardbasis. The amount of Directors (33-1/3% for 2016 and 2017) and then by the Gainshare factor (determined under our Gainsharing (cash bonus) plans for most of our employees and based on the operating performance of our vehicle insurance businesses for 2016, and our vehicle and our Property businesses, with minor exclusions, for 2017). If our Gainshare factor for the year is zero or after-tax comprehensive income (which includes the change in unrealized investment gains and losses, among other items) is less than after-tax underwriting income, no dividend will be paid under our annual variable dividend policy.
Because the dividend calculation is performance-based, the amount (if any) to be paid individends, if any, particular year may not be subject to accurate prediction and will likely vary, perhaps significantly, from the amounts paid in the preceding year(s). As a result, the amount paid may be inconsistent with some shareholders’ expectations.periods. In addition, although we have announced our intent to repeat the annual variable dividend in 2017 (to be paid early in 2018), the dividend, if any, would not be declared by the Board until late 2017 or early 2018, and the Board retains the discretion at any time, to alter our policy or not to pay the annual dividend for 2017 or future years.such dividends at any time. Such an action by the Board could result from, among other reasons, changes in the insurance marketplace, changes in our performance or capital needs, changes in U.S. federal income tax laws, disruptions of national or international capital markets, or other events affecting our liquidity, financial position or prospects, as described above under “Market Risks.”above. Any such change could adversely affect investors’ perceptions of the company and the value of, or the total return of an investment in, our common shares.
Our investments in certain tax-advantaged projects may not generate the anticipated tax benefits and related returns.
We may invest in certain projects that we believe are entitled to tax-advantaged treatment under applicable federal or state law, including renewable energy development, historic property rehabilitation, and affordable housing, and we may make other tax-advantaged investments from time to time. Our investments in these projects are designed to generate a return through the realization of tax credits and, in some cases, through other tax benefits and cash flows from the project. Certain of theseThese investments are subject to the risk that the underlying tax credits and related benefits may not be valid, and in some cases previously recorded tax credits can be challenged or are subject to recapture by the applicable taxing authorities if specific requirements are not satisfied. Many of the factors that could lead to athe invalidity, challenge, or recapture of tax credits are beyond our control. The inability to realize these tax credits and other tax benefits could have a material adverse impact on our financial condition.
We do not manage to short-term earnings expectations; our goal is to maximize the long-term value of the enterprise, which, at times, may adversely affect short-term results.
We believe that shareholder value will be increased in the long run if we meet or exceed the financial goals and policies that we establish each year. We do not manage our business to maximize short-term stock performance or the amount of theany dividend that may be paid under our annual variable dividend policy or otherwise.paid. We report earnings and other operating results on a monthly basis. We also do not provide earnings estimates to the market and do not comment on earnings estimates by analysts. As a result, our reported results for a particular period may vary, perhaps significantly, from investors’ expectations, which could result in significant volatility in the price of our common sharesequity or debt securities. The addition of ourOur Property business which includes the results of our homeowners business, beginning in April 2015, may introducecause additional volatility in our consolidated results compared to prior periods.results.
In addition, due to our focus on the long-term value of the enterprise, we may undertake business strategies and establish related financial goals for a specific year that are designed to enhance our longer-term performance, while understanding that such strategies may not always similarly benefit short-term results, such as our annual underwriting profit or earnings per share. Consequently, these strategies may adversely affect short-term performance or the amountpayment of our variable dividend for a given year,dividends, and may result in additional volatility in the price of our common sharesequity or debt securities.
ITEM 1B. UNRESOLVED STAFF COMMENTS
We currently do not have any unresolved comments from the SEC staff.
ITEM 2. PROPERTIES
All of our properties are owned or leased by subsidiaries of The Progressive Corporation and are used for office functions (corporate, claims, and business unit), as call centers, as data centers, for training, or for warehouse space, or as Service Centers.space.
We own 9388 buildings located throughout the United States. Nearly two-thirds of our ownedthese buildings are for our Service Centers, the majority of which are combined with a claims office.offices. Our owned facilities, which contain approximately 4.95.0 million square feet of space, are generally not segregated by industry segment. We own significant locations in Mayfield Village, Ohio and surrounding suburbs (including our corporate headquarters),; Colorado Springs, Colorado; St. Petersburg, Florida; and Tampa, Florida; and Tempe, Arizona.Florida.
We lease approximately 2.12.2 million square feet of space throughout the United States and one location in Australia.States. These leases are generally short-term to medium-term leases of commercial space.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
INFORMATION ABOUT OUR 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 in Part III of this Form 10-K.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
(a) Market Information
Progressive’s Common Shares, $1.00 par value, are traded on the New York Stock Exchange (NYSE) under the symbol PGR. The high and low prices set forth below are as reported on the consolidated transaction reporting system.
|
| | | | | | | | | | | | | | | | | | | |
| Year | | Quarter | | High | | Low | | Close | | Dividends Declared Per Share |
| 2016 | | 1 |
| | $ | 35.27 |
| | $ | 29.32 |
| | $ | 35.14 |
| | $ | 0 |
|
| | | 2 |
| | 35.54 |
| | 31.14 |
| | 33.50 |
| | 0 |
|
| | | 3 |
| | 34.29 |
| | 30.54 |
| | 31.50 |
| | 0 |
|
| | | 4 |
| | 35.95 |
| | 30.66 |
| | 35.50 |
| | 0.6808 |
|
| | | | | $ | 35.95 |
| | $ | 29.32 |
| | $ | 35.50 |
| | $ | 0.6808 |
|
| | | | | | | | | | | |
| 2015 | | 1 |
| | $ | 27.90 |
| | $ | 25.23 |
| | $ | 27.20 |
| | $ | 0 |
|
| | | 2 |
| | 28.50 |
| | 26.44 |
| | 27.83 |
| | 0 |
|
| | | 3 |
| | 31.70 |
| | 27.23 |
| | 30.64 |
| | 0 |
|
| | | 4 |
| | 33.95 |
| | 30.09 |
| | 31.80 |
| | 0.8882 |
|
| | | | | $ | 33.95 |
| | $ | 25.23 |
| | $ | 31.80 |
| | $ | 0.8882 |
|
The closing price of our common shares on January 31, 2017, was $37.44.
(b) Holders
We had 2,1521,965 shareholders of record on December 31, 2016.2019.
(c) Dividends
We maintain a policy of paying an annual variable dividend that, if declared, would be payable shortly after the close of the year. This annual variable dividend is based on a target percentage of after-tax underwriting income multiplied by a companywide performance factor (“Gainshare factor”), subject to the limitations discussed below. The target percentage is determined by our Board of Directors on an annual basis and announced to shareholders and the public. In December 2015, the Board determined the target percentage for 2016 to be 33-1/3% of annual after-tax underwriting income, which is unchanged from the target percentage in both 2015 and 2014. The Board also determined that this target will remain at 33-1/3% for 2017.
The Gainshare factor can range from zero to two and is determined by comparing our operating performance for the vehicle businesses for the year to certain predetermined profitability and growth objectives, as approved by the Compensation Committee of the Board. Beginning in 2017, the operating performance of our Property business, with minor exclusions, will also be a component in determining the Gainshare factor. This Gainshare factor is also used in the annual cash incentive program currently in place for our employees (our “Gainsharing program”). If the Gainshare factor is zero or if our comprehensive income is less than after-tax underwriting income, no dividend would be payable under our annual variable dividend policy.
Although it is our intent to calculate an annual variable dividend based on the formula outlined above, the Board could decide to alter our policy, or not to pay the annual variable dividend for 2017 or future years, at any time prior to the declaration of the dividend for the year. Such an action by the Board could result from, among other reasons, changes in the insurance marketplace, changes in our performance or capital needs, changes in federal income tax laws, disruptions of national or international capital markets, or other events affecting our business, liquidity, or financial position.
Following is a summary of our shareholder dividends that were declared in the last three years: |
| | | | | | | | |
| (millions, except per share amounts) | | | Amount |
| Dividend Type | Declared | Paid | Per
Share |
| Total1 |
|
| Annual – Variable | December 2016 | February 2017 | $ | 0.6808 |
| $ | 395.4 |
|
| Annual – Variable | December 2015 | February 2016 | 0.8882 |
| 519.2 |
|
| Annual – Variable | December 2014 | February 2015 | 0.6862 |
| 404.1 |
|
1 Based on an estimate of shares outstanding as of the record date. For the dividends declared in December 2015 and 2014, we paid $519.0 million and $404.1 million, respectively.
Consolidated statutory surplus was $8.6 billion on December 31, 2016, and $7.6 billion on December 31, 2015. At December 31, 2016, $722.7 million of consolidated statutory surplus represented net admitted assets of Progressive’s insurance subsidiaries and affiliate that are required to meet minimum statutory surplus requirements in such entities’ states of domicile. The companies may be licensed in states other than their states of domicile, however, which may have higher minimum statutory surplus requirements. Generally, the net admitted assets of insurance companies 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 companies are licensed. Based on the dividend laws currently in effect, the insurance subsidiaries could pay aggregate dividends of $1,161.5 million in 2017 without prior approval from regulatory authorities, provided the dividend payments are not made within 12 months of previous dividends paid by the applicable subsidiary.
In connection with the acquisition of a controlling interest in ARX, The Progressive Corporation entered into a stockholders’ agreement with the other ARX stockholders. Among other provisions, the stockholders’ agreement prohibits ARX from taking a number of actions, including the payment of dividends, without the consent of The Progressive Corporation and two other stockholders.
(d) Securities Authorized for Issuance Under Equity Compensation Plans
See Part III, Item 12, “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters”Matters,” for information about securities authorized for issuance under our equity compensation plans.
(e) Performance Graph
See the Performance Graph section in our Annual Report.
(f) Recent Sales of Unregistered Securities
None.
(g) Share Repurchases
| | ISSUER PURCHASES OF EQUITY SECURITIES | | 2016 Calendar Month | Total Number of Shares Purchased |
| | Average Price Paid per Share |
| | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs |
| | Maximum Number of Shares That May Yet Be Purchased Under the Plans or Programs |
| |
| 2019 Calendar Month | | Total Number of Shares Purchased |
| | Average Price Paid per Share |
| | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs |
| | Maximum Number of Shares That May Yet Be Purchased Under the Plans or Programs |
|
| October | 502,507 |
| | $ | 31.91 |
| | 68,026,454 |
| | 6,973,546 |
| 41,459 |
| | $ | 76.79 |
| | 784,239 |
| | 24,215,761 |
|
| November | 406,145 |
| | 31.28 |
| | 68,432,599 |
| | 6,567,401 |
| 89 |
| | 69.67 |
| | 784,328 |
| | 24,215,672 |
|
| December | 3,817 |
| | 33.49 |
| | 68,436,416 |
| | 6,563,584 |
| 0 |
| | 0 |
| | 784,328 |
| | 24,215,672 |
|
| Total | 912,469 |
| | $ | 31.64 |
| | | | | 41,548 |
| | $ | 76.77 |
| | | | |
In June 2011,May 2019, the Board of Directors approved an authorization for the Company to repurchase up to 7525 million of ourits common shares; this Boardshares. This authorization does not have an expiration date. Share repurchases under this authorization may be accomplished through open market purchases, through privately negotiated transactions, pursuant to our equity incentive plans, or otherwise, and may include trading plans entered into with one or more brokerage firms in accordance with Rule 10b5-1 under the Securities Exchange Act
of 1934. InDuring the fourth quarter 2016,2019, all repurchases were accomplished through the open market or in conjunction with our incentive compensation plans at the then-current market prices.prices; there were no open market purchases during the quarter.
Progressive’s financial policies state that we will repurchase shares to neutralize dilution from equity-based compensation in the year of issuance and as an option to effectively use underleveraged capital. See Note 9 – Employee Benefit Plans, “Incentive Compensation Plans” in our Annual Report, for a summary of our restricted equity grants.
ITEM 6.SELECTED FINANCIAL DATA
(millions - except per share amounts)
| | | | For the years ended December 31, | For the years ended December 31, |
| | 2016 |
| | 2015 |
| | 2014 |
| | 2013 |
| | 2012 |
| 2019 |
| | 2018 |
| | 2017 |
| | 2016 |
| | 2015 |
|
| Total revenues | $ | 23,441.4 |
| | $ | 20,853.8 |
| | $ | 19,391.4 |
| | $ | 18,170.9 |
| | $ | 17,083.9 |
| $ | 39,022.3 |
| | $ | 31,979.0 |
| | $ | 26,839.0 |
| | $ | 23,441.4 |
| | $ | 20,853.8 |
|
| Net income attributable to Progressive | 1,031.0 |
| | 1,267.6 |
| | 1,281.0 |
| | 1,165.4 |
| | 902.3 |
| 3,970.3 |
| | 2,615.3 |
| | 1,592.2 |
| | 1,031.0 |
| | 1,267.6 |
|
| Per share: | | | | | | | | | | |
| Net income attributable to Progressive | 1.76 |
| | 2.15 |
| | 2.15 |
| | 1.93 |
| | 1.48 |
| |
| Dividends declared | 0.6808 |
| | 0.8882 |
| | 0.6862 |
| | 1.4929 |
| | 1.2845 |
| |
| Per common share: | | | | | | | | | | |
| Net income attributable to Progressive - diluted | | 6.72 |
| | 4.42 |
| | 2.72 |
| | 1.76 |
| | 2.15 |
|
| Dividends declared per common share | | 2.65 |
| | 2.5140 |
| | 1.1247 |
| | 0.6808 |
| | 0.8882 |
|
| Comprehensive income attributable to Progressive | 1,164.0 |
| | 1,044.9 |
| | 1,352.4 |
| | 1,246.1 |
| | 1,080.8 |
| 4,432.9 |
| | 2,520.1 |
| | 1,941.0 |
| | 1,164.0 |
| | 1,044.9 |
|
| Total assets | 33,427.5 |
| | 29,819.3 |
| | 25,787.6 |
| | 24,408.2 |
| | 22,694.7 |
| 54,895.3 |
| | 46,575.0 |
| | 38,701.2 |
| | 33,427.5 |
| | 29,819.3 |
|
| Debt outstanding | 3,148.2 |
| | 2,707.9 |
| | 2,164.7 |
| | 1,860.9 |
| | 2,063.1 |
| 4,407.1 |
| | 4,404.9 |
| | 3,306.3 |
| | 3,148.2 |
| | 2,707.9 |
|
| Total shareholders’ equity | 7,957.1 |
| | 7,289.4 |
|
| 6,928.6 |
| | 6,189.5 |
| | 6,007.0 |
| 13,673.2 |
| | 10,821.8 |
|
| 9,284.8 |
| | 7,957.1 |
| | 7,289.4 |
|
| Redeemable noncontrolling interest | 483.7 |
| | 464.9 |
| | -- |
| | -- |
| | -- |
| 225.6 |
| | 214.5 |
| | 503.7 |
| | 483.7 |
| | 464.9 |
|
See Note 15 – Redeemable Noncontrolling Interest and Note 17 – Subsequent Eventin the Annual Report, for aadditional discussion of the acquisition of a controlling interest in ARX on April 1, 2015.ARX.
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Incorporated by reference from Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The quantitative and qualitative disclosures about market risk are incorporated by reference from section “IV. Results of Operations – Investments” in our Management’s Discussion and Analysis of Financial Condition and Results of Operations, as described in Item 7 above, and from the Quantitative Market Risk Disclosures section sections in our Annual Report.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements of Progressive, along with the related Notes, Supplemental Information, and Report of the Independent Registered Public Accounting Firm, are incorporated by reference from our Annual Report.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS AND PROCEDURES
Progressive, underUnder the direction of our Chief Executive Officer and our Chief Financial Officer, haswe have established disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. The disclosure controls and procedures are also intended to ensure that such information is accumulated and communicated to our management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.
Our Chief Executive Officer and our Chief Financial Officer reviewed and evaluated Progressive’s disclosure controls and procedures as of the end of the period covered by this report. Based on that review and evaluation, the Chief Executive Officer and Chief Financial Officer concluded that Progressive’s disclosure controls and procedures are effectively serving the stated purposes as of the end of the period covered by this report.
Management’s Report on Internal Control over Financial Reporting and the attestation of the independent registered public accounting firm are incorporated by reference from our Annual Report.
We areThere have not aware ofbeen any material changechanges in Progressive’sour internal control over financial reporting during our most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information relating to our directors is incorporated herein by reference from the section entitled “Item 1: Election of Directors” in The Progressive Corporation'sCorporation’s Proxy Statement for the Annual Meeting of Shareholders to be held on May 12, 20178, 2020 (the "Proxy Statement"“Proxy Statement”).
Information relating to executive officers of Progressive follows. Unless otherwise indicated, the executive officer has held the position(s) indicated for at least the last five years.
|
| | | | |
| Name | | Age | | Offices Held and Last Five Years’ Business Experience |
| Susan Patricia Griffith | | 5255 | | President and Chief Executive Officer since July 2016; Vice President from May 2015 to June 2016; Personal Lines Chief Operating Officer from April 2015 to June 2016; President of Customer Operations from April 2014 to March 2015; Claims Group President prior to April 20142015 |
| John P. Sauerland | | 5255 | | Vice President since May 2015; Chief Financial Officer since April 2015; Personal Lines Group President prior to April 2015 |
John F. Auer | | 62 | | President, Chief Executive Officer, and Treasurer of ARX Holding Corp. |
John A. Barbagallo | | 5760 | | Commercial Lines President;President since May 2015; Commercial Lines Group President, including Agency Operations prior to May 2015 |
Jeffrey W. BaschJonathan S. Bauer | | 5842 | | Vice President and Chief AccountingInvestment Officer since January 2020; Portfolio Manager prior to January 2020 |
| Steven A. Broz | | 4649 | | Chief Information Officer since February 2016; Claims Process General Manager from March 2015 to January 2016; Enterprise Project Management Office Leader prior to March 2015 |
| Patrick K. Callahan | | 4649 | | Personal Lines President since April 2015; Direct Acquisition Business Leader from March 2013 to March 2015; Special Lines General Manager prior to March 2013April 2015 |
| M. Jeffrey Charney | | 5760 | | Chief Marketing Officer |
William M. CodyMariann Wojtkun Marshall | | 5457 | | Assistant Secretary; Vice President and Chief InvestmentAccounting Officer since March 2019; Director of Financial Reporting - GAAP prior to March 2019 |
| Daniel P. Mascaro | | 5356 | | Vice President, Secretary, and Chief Legal Officer beginningsince March 1, 2017; Claims Legal business leader from January 2013 to February 2017; Personal Lines General ManagerBusiness Leader prior to January 2013March 2017 |
| John Murphy | | 4750 | | Customer Relationship Management President since January 2016; Customer Relationship Management Business Leader from February 2015prior to January 2016; Corporate Process Business Leader prior to February 20152016 |
| Lori Niederst | | 4346 | | Chief Human Resource Officer since November 2016; Senior Human Resource Business Leader prior to November 2016 |
| Andrew J. Quigg | | 40 | | Chief Strategy Officer since July 2018; Customer Experience General Manager from May 2015 to June 2018; Direct Media Business Leader prior to May 2015 |
| Michael D. Sieger | | 5558 | | Claims President since January 2015; Claims Process General Manager prior to January 2015 |
Glenn M. Renwick | | 61 | | Executive Chairman of the Board since July 2016; Chairman of the Board from November 2013 to June 2016; President and Chief Executive Officer prior to July 2016 |
Delinquent Section 16(a) Beneficial Ownership Reporting ComplianceReports. IncorporatedDelinquent filings will be incorporated by reference from the "Section"Delinquent Section 16(a) Beneficial Ownership Reporting Compliance"Reports" section of the Proxy Statement, (which can be found in "Security Ownership of Certain Beneficial Owners and Management").if applicable.
Code of Ethics. Progressive has a Code of Ethics for the Chief Executive Officer, Chief Financial Officer, and other senior financial officers. This Code of Ethics is available at: progressive.com/governance. We intend to continue to satisfy the disclosure requirements under Item 5.05 of Form 8-K regarding amendments to, and waivers from, the provisions of the foregoing Code of Ethics by posting such information on our Internet website at: progressive.com/governance.ethics.
Shareholder-Proposed Candidate Procedures. There were no material changes during 20162019 to Progressive’s procedures by which a shareholder can recommend a director candidate during 2016.candidate. The description of those procedures is incorporated by reference from the “To Recommend a Candidate for our Board of Directors” section of the Proxy Statement (which can be found in “Procedures for Recommendations and Nominations of Directors and Shareholder Proposals”).
Audit Committee. Incorporated by reference from the “Audit“Other Board of Director Information - Board Committees - Audit Committee” section of the Proxy Statement.
Financial Expert. Incorporated by reference from the “Audit Committee Financial Experts”“Other Board of Director Information - Board Committees - Audit Committee” section of the Proxy Statement (which can be found in “Audit Committee”).Statement.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference from the sections of the Proxy Statement entitled “Compensation Discussion and Analysis,” “Executive Compensation,” “Other Board of Directors Information: Compensation Committee Interlocks and Insider Participation,” “Compensation Committee Report,” and “Compensation Programs and Risk Management.”
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Information regarding ownership of Common Shares by certain beneficial owners and management is incorporated by reference from the section of the Proxy Statement entitled “Security Ownership of Certain Beneficial Owners and Management.”
The following information is set forth with respect to our equity compensation plans at December 31, 2016.2019.
|
| | | | | | | | | |
| EQUITY COMPENSATION PLAN INFORMATION | |
| Plan Category | | Number of Securities to be Issued upon Exercise of Outstanding Options, Warrants and Rights | | Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights | | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans | |
| Equity compensation plans approved by security holders: | | | | | | | |
Employee Plans: | | | | | | | |
| 2015 Equity Incentive Plan | | 3,536,391 |
| 1,2 | NA | | 9,993,099 |
| 3 |
| 2010 Equity Incentive Plan | | 342,686 |
| 1 | NA | | 97,929 |
| 4 |
| Subtotal Employee Plans | | 3,879,077 |
| | NA | | 10,091,028 |
| |
Director Plans: | | | | | | | |
| 2017 Directors Equity Incentive Plan | | 38,451 |
| | NA | | 366,559 |
| |
| Equity compensation plans not approved by security holders: | | | | | | | |
| None | | | | | | | |
| Total | | 3,917,528 |
| | NA | | 10,457,587 |
| |
|
| | | | | | | | | |
| EQUITY COMPENSATION PLAN INFORMATION | |
| Plan Category | | Number of Securities to be Issued upon Exercise of Outstanding Options, Warrants and Rights | | Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights | | Number of Securities Remaining Available for Future Issuance Under Equity Compensation Plans | |
| Equity compensation plans approved by security holders: | | | | | | | |
Employee Plans: | | | | | | | |
| 2015 Equity Incentive Plan | | 1,736,643 |
| 1,2 | NA | | 10,253,079 |
| 3 |
| 2010 Equity Incentive Plan | | 5,214,730 |
| 1,2 | NA | | 3,885,005 |
| 3 |
| Subtotal Employee Plans | | 6,951,373 |
| | NA | | 14,138,084 |
| |
Director Plans: | | | | | | | |
| 2003 Directors Equity Incentive Plan | | 55,839 |
| | NA | | 250,039 |
| |
| Subtotal Director Plans | | 55,839 |
| | NA | | 250,039 |
| |
| Equity compensation plans not approved by security holders: | | | | | | | |
| None | | | | | | | |
| Total | | 7,007,212 |
| | NA | | 14,388,123 |
| |
NA = Not applicable because restricted stock unit awards do not have an exercise price.
1 Reflects restricted stock unit awards, including reinvested dividend equivalents, under which, upon vesting, the holder has the right to receive common shares on a one-to-one basis. As of January 1, 2020, all outstanding awards made from the 2010 Plan have vested.
2 Performance-based restricted stock unit awards, including dividend equivalents, if applicable, of 1,228,597 and 664,327726,712 units are included under the 2010 Equity Incentive Plan and the 2015 Equity Incentive Plan respectively, at their target value. Maximum potential payout for the performance awards outstanding under the 2010 Equity Incentive Plan and the 2015 Equity Incentive Plan were 3,004,906 and 1,543,343, respectively.was 1,778,315. For a description of the performance-based awards, including the performance measurement and vesting ranges, see Note 9 — Employee Benefit Plans in our Annual Report.
3 Gives effect to reservation of common shares subject to performance-based awards at maximum potential payout.
4 As of January 31, 2020, no new awards can be made from this plan and during January 2020 no awards were made under this plan.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Incorporated by reference from the section of the Proxy Statement entitled “Other Board of Directors Information,” subsections “Board of Directors Independence Determinations”Determinations,” and “Transactions with Related Parties.Persons.”
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
Incorporated by reference from the section of the Proxy Statement entitled “Other Independent Registered Public Accounting Firm Information.”
PART IV
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a)(1) Listing of Financial Statements
The following consolidated financial statements are included in our Annual Report and are incorporated by reference in Item 8:
Report of Independent Registered Public Accounting Firm
Consolidated Statements of Comprehensive Income - For the Years Ended December 31, 2016, 2015, and 2014
Consolidated Balance Sheets - December 31, 2016 and 2015
| |
| • | Consolidated Statements of Comprehensive Income - For the Years Ended December 31, 2019, 2018, and 2017 |
| |
| • | Consolidated Balance Sheets - December 31, 2019 and 2018 |
Consolidated Statements of Changes in Shareholders’ Equity - For the Years Ended December 31, 2016, 2015,2019, 2018, and 20142017
Consolidated Statements of Cash Flows - For the Years Ended December 31, 2016, 2015, and 2014
| |
| • | Consolidated Statements of Cash Flows - For the Years Ended December 31, 2019, 2018, and 2017 |
Notes to Consolidated Financial Statements
Supplemental Information (Unaudited)
(a)(2) Listing of Financial Statement Schedules
The following financial statement schedules, Report of Independent Registered Public Accounting Firm and Consent of Independent Registered Public Accounting Firm are included in Item 15(c):
Schedule I - Summary of Investments - Other than Investments in Related Parties
Schedule II - Condensed Financial Information of Registrant
Schedule III - Supplementary Insurance Information
Schedule IV - Reinsurance
Report of Independent Registered Public Accounting Firm on Financial Statement Schedules
Consent of Independent Registered Public Accounting Firm
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 beginning at page 40.41. Management contracts and compensatory plans and arrangements are identified in the Exhibit Index as Exhibit Nos. 10.210.3 through 10.100.10.49.
(b) Exhibits
The exhibits in response to this portion of Item 15 are submitted concurrently with this report.
(c) Financial Statement Schedules
SCHEDULE I — SUMMARY OF INVESTMENTS — OTHER THAN INVESTMENTS IN RELATED PARTIES
THE PROGRESSIVE CORPORATION AND SUBSIDIARIES
(millions)
|
| | | | | | | | | | | |
| | December 31, 2019 |
| Type of Investment | Cost | | Fair Value | | Amount At Which Shown In The Balance Sheet |
| Fixed maturities: | | | | | |
| Bonds: | | | | | |
| United States Government and government agencies and authorities | $ | 13,100.7 |
| | $ | 13,251.1 |
| | $ | 13,251.1 |
|
| States, municipalities, and political subdivisions | 1,686.0 |
| | 1,713.3 |
| | 1,713.3 |
|
| Public utilities | 303.8 |
| | 314.1 |
| | 314.1 |
|
| Corporate and other debt securities | 6,556.5 |
| | 6,753.6 |
| | 6,753.6 |
|
| Asset-backed securities | 10,810.4 |
| | 10,883.2 |
| | 10,883.2 |
|
| Redeemable preferred stocks | 185.7 |
| | 195.0 |
| | 195.0 |
|
| Total fixed maturities | 32,643.1 |
| | 33,110.3 |
| | 33,110.3 |
|
| Equity securities: | | | | | |
| Common stocks: | | | | | |
| Public utilities | 81.6 |
| | 172.7 |
| | 172.7 |
|
| Banks, trusts, and insurance companies | 220.9 |
| | 664.9 |
| | 664.9 |
|
| Industrial, miscellaneous, and all other | 823.0 |
| | 2,468.7 |
| | 2,468.7 |
|
| Nonredeemable preferred stocks | 971.3 |
| | 1,038.9 |
| | 1,038.9 |
|
| Total equity securities | 2,096.8 |
| | 4,345.2 |
| | 4,345.2 |
|
| Short-term investments | $ | 1,798.8 |
| | $ | 1,798.8 |
| | $ | 1,798.8 |
|
| Total investments | $ | 36,538.7 |
| | $ | 39,254.3 |
| | $ | 39,254.3 |
|
|
| | | | | | | | | | | |
| | December 31, 2016 |
| Type of Investment | Cost | | Fair Value | | Amount At Which Shown In The Balance Sheet |
| Available-for-sale | | | | | |
| Fixed maturities: | | | | | |
| Bonds: | | | | | |
| United States Government and government agencies and authorities | $ | 2,899.2 |
| | $ | 2,870.1 |
| | $ | 2,870.1 |
|
| States, municipalities, and political subdivisions | 2,509.5 |
| | 2,502.6 |
| | 2,502.6 |
|
| Foreign government obligations | 24.5 |
| | 24.5 |
| | 24.5 |
|
| Public utilities | 135.6 |
| | 135.1 |
| | 135.1 |
|
| Corporate and other debt securities | 4,422.2 |
| | 4,415.8 |
| | 4,415.8 |
|
| Asset-backed securities | 6,107.3 |
| | 6,103.8 |
| | 6,103.8 |
|
| Redeemable preferred stocks | 188.8 |
| | 191.9 |
| | 191.9 |
|
| Total fixed maturities | 16,287.1 |
| | 16,243.8 |
| | 16,243.8 |
|
| Equity securities: | | | | | |
| Common stocks: | | | | | |
| Public utilities | 106.7 |
| | 168.6 |
| | 168.6 |
|
| Banks, trusts, and insurance companies | 265.5 |
| | 558.2 |
| | 558.2 |
|
| Industrial, miscellaneous, and all other | 1,065.3 |
| | 2,085.6 |
| | 2,085.6 |
|
| Nonredeemable preferred stocks | 734.2 |
| | 853.5 |
| | 853.5 |
|
| Total equity securities | 2,171.7 |
| | 3,665.9 |
| | 3,665.9 |
|
| Short-term investments | 3,572.9 |
| | 3,572.9 |
| | 3,572.9 |
|
| Total investments | $ | 22,031.7 |
| | $ | 23,482.6 |
| | $ | 23,482.6 |
|
Progressive did not have any securities of any one issuer, excluding U.S. government obligations, with an aggregate cost or fair value exceeding 10% of total shareholders’ equity at December 31, 2016.2019.
SCHEDULE II — CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF COMPREHENSIVE INCOME
THE PROGRESSIVE CORPORATION (PARENT COMPANY)
(millions)
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2019 | | 2018 | | 2017 |
| Revenues | | | | | |
| Dividends from subsidiaries | $ | 2,277.9 |
| | $ | 939.1 |
| | $ | 867.3 |
|
| Undistributed income (loss) from subsidiaries | 1,821.3 |
| | 1,770.7 |
| | 866.3 |
|
| Equity in net income of subsidiaries | 4,099.2 |
| | 2,709.8 |
| | 1,733.6 |
|
| Intercompany investment income | 31.1 |
| | 39.4 |
| | 11.3 |
|
| Gains (losses) on extinguishment of debt | 0 |
| | 0 |
| | 0.2 |
|
| Total revenues | 4,130.3 |
| | 2,749.2 |
| | 1,745.1 |
|
| Expenses | | | | | |
| Interest expense | 190.4 |
| | 166.8 |
| | 151.1 |
|
Deferred compensation1 | 16.6 |
| | 7.5 |
| | 23.2 |
|
| Other operating costs and expenses | 5.5 |
| | 5.1 |
| | 4.6 |
|
| Total expenses | 212.5 |
| | 179.4 |
| | 178.9 |
|
| Income before income taxes | 3,917.8 |
| | 2,569.8 |
| | 1,566.2 |
|
| Benefit for income taxes | 52.5 |
| | 45.5 |
| | 26.0 |
|
| Net income attributable to Progressive | 3,970.3 |
| | 2,615.3 |
| | 1,592.2 |
|
| Other comprehensive income (loss) | 462.6 |
| | (95.2 | ) | | 348.8 |
|
| Comprehensive income attributable to Progressive | $ | 4,432.9 |
| | $ | 2,520.1 |
| | $ | 1,941.0 |
|
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2016 | | 2015 | | 2014 |
| Revenues | | | | | |
| Dividends from subsidiaries | $ | 375.5 |
| | $ | 852.5 |
| | $ | 1,000.2 |
|
| Undistributed income (loss) from subsidiaries | 741.9 |
| | 500.0 |
| | 358.3 |
|
| Equity in net income of subsidiaries* | 1,117.4 |
| | 1,352.5 |
| | 1,358.5 |
|
| Intercompany investment income* | 5.5 |
| | 3.9 |
| | 2.4 |
|
| Gains (losses) on extinguishment of debt | 1.6 |
| | (0.9 | ) | | (4.8 | ) |
| Total revenues | 1,124.5 |
| | 1,355.5 |
| | 1,356.1 |
|
| Expenses | | | | | |
| Interest expense | 140.4 |
| | 136.1 |
| | 120.2 |
|
Deferred compensation1 | 5.3 |
| | 5.3 |
| | 2.8 |
|
| Other operating costs and expenses | 4.2 |
| | 5.4 |
| | 4.4 |
|
| Total expenses | 149.9 |
| | 146.8 |
| | 127.4 |
|
| Income before income taxes | 974.6 |
| | 1,208.7 |
| | 1,228.7 |
|
| Benefit for income taxes | 56.4 |
| | 58.9 |
| | 52.3 |
|
| Net income attributable to Progressive | 1,031.0 |
| | 1,267.6 |
| | 1,281.0 |
|
| Other comprehensive income (loss) | 133.0 |
| | (222.7 | ) | | 71.4 |
|
| Comprehensive income attributable to Progressive | $ | 1,164.0 |
| | $ | 1,044.9 |
| | $ | 1,352.4 |
|
* Eliminated in consolidation.
1 See Note 4 – Employee Benefit Plans in these condensed financial statements.
See notes to condensed financial statements.
SCHEDULE II — CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
CONDENSED BALANCE SHEETS
THE PROGRESSIVE CORPORATION (PARENT COMPANY)
(millions)
| | | | December 31, | December 31, |
| | 2016 | | 2015 | 2019 | | 2018 |
| Assets | | | | | | |
| Investment in affiliate | $ | 5.0 |
| | $ | 5.0 |
| $ | 5.0 |
| | $ | 5.0 |
|
| Investment in subsidiaries* | 10,280.9 |
| | 9,192.3 |
| |
| Receivable from investment subsidiary* | 1,121.9 |
| | 1,200.5 |
| |
| Intercompany receivable* | 443.3 |
| | 406.0 |
| |
| Investment in subsidiaries | | 16,186.8 |
| | 13,652.2 |
|
| Receivable from investment subsidiary | | 2,912.0 |
| | 2,658.9 |
|
| Intercompany receivable | | 678.6 |
| | 651.1 |
|
| Net deferred income taxes | 97.1 |
| | 90.6 |
| 70.3 |
| | 68.2 |
|
| Other assets | 137.3 |
| | 124.8 |
| 303.8 |
| | 124.2 |
|
| Total assets | $ | 12,085.5 |
| | $ | 11,019.2 |
| $ | 20,156.5 |
| | $ | 17,159.6 |
|
| Liabilities and Shareholders’ Equity | | | | |
| Liabilities | | | | |
| Accounts payable, accrued expenses, and other liabilities | $ | 228.4 |
| | $ | 202.7 |
| $ | 475.2 |
| | $ | 250.5 |
|
| Dividend payable | 395.4 |
| | 519.2 |
| 1,375.4 |
| | 1,467.9 |
|
| Debt | 3,020.9 |
| | 2,543.0 |
| 4,407.1 |
| | 4,404.9 |
|
| Total liabilities | 3,644.7 |
| | 3,264.9 |
| 6,257.7 |
| | 6,123.3 |
|
| Redeemable noncontrolling interest (NCI) | 483.7 |
| | 464.9 |
| 225.6 |
| | 214.5 |
|
| Shareholders' Equity | | | | |
| Common shares, $1.00 par value (authorized 900.0; issued 797.5 and 797.6 including treasury shares of 217.6 and 214.0) | 579.9 |
| | 583.6 |
| |
| Shareholders’ Equity | | | | |
| Serial Preferred Shares (authorized 20.0) | | | | |
| Serial Preferred Shares, Series B, no par value (cumulative, liquidation preference $1,000 per share) (authorized, issued, and outstanding 0.5) | | 493.9 |
| | 493.9 |
|
| Common shares, $1.00 par value (authorized 900.0; issued 797.5, including treasury shares of 212.9 and 214.3) | | 584.6 |
| | 583.2 |
|
| Paid-in capital | 1,303.4 |
| | 1,218.8 |
| 1,573.4 |
| | 1,479.0 |
|
| Retained earnings | 5,140.4 |
| | 4,686.6 |
| 10,679.6 |
| | 8,386.6 |
|
| Total accumulated other comprehensive income attributable to Progressive | 933.4 |
| | 800.4 |
| 341.7 |
| | (120.9 | ) |
| Total shareholders’ equity | 7,957.1 |
| | 7,289.4 |
| 13,673.2 |
| | 10,821.8 |
|
| Total liabilities, redeemable NCI, and shareholders’ equity | $ | 12,085.5 |
| | $ | 11,019.2 |
| $ | 20,156.5 |
| | $ | 17,159.6 |
|
*Eliminated in consolidation.
See notes to condensed financial statements.
SCHEDULE II — CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
CONDENSED STATEMENTS OF CASH FLOWS
THE PROGRESSIVE CORPORATION (PARENT COMPANY)
(millions)
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2019 | | 2018 | | 2017 |
| Cash Flows From Operating Activities: | | | | | |
| Net income attributable to Progressive | $ | 3,970.3 |
| | $ | 2,615.3 |
| | $ | 1,592.2 |
|
| Adjustments to reconcile net income attributable to Progressive to net cash provided by operating activities: | | | | | |
| Undistributed (income) loss from subsidiaries | (1,821.3 | ) | | (1,770.7 | ) | | (866.3 | ) |
| Amortization of equity-based compensation | 2.9 |
| | 2.4 |
| | 2.1 |
|
| (Gains) losses on extinguishment of debt | 0 |
| | 0 |
| | (0.2 | ) |
| Changes in: | | | | | |
| Intercompany receivable | (14.1 | ) | | 77.5 |
| | (71.3 | ) |
| Accounts payable, accrued expenses, and other liabilities | 47.1 |
| | (29.6 | ) | | 53.6 |
|
| Income taxes | 175.5 |
| | (14.2 | ) | | 37.3 |
|
| Other, net | (179.8 | ) | | 47.8 |
| | (22.6 | ) |
| Net cash provided by operating activities | 2,180.6 |
| | 928.5 |
| | 724.8 |
|
| Cash Flows From Investing Activities: | | | | | |
| Additional investments in equity securities of consolidated subsidiaries | (152.8 | ) | | (178.3 | ) | | (86.7 | ) |
| Acquisition of additional shares - ARX | (5.4 | ) | | (287.9 | ) | | 0 |
|
| Acquisition of an insurance company | 0 |
| | 0 |
| | (18.7 | ) |
| (Paid to) received from investment subsidiary | (253.1 | ) | | (1,192.8 | ) | | (344.2 | ) |
| Net cash used in investing activities | (411.3 | ) | | (1,659.0 | ) | | (449.6 | ) |
| Cash Flows From Financing Activities: | | | | | |
| Net proceeds from debt issuance | 0 |
| | 1,134.0 |
| | 841.1 |
|
| Net proceeds from preferred stock issuance | 0 |
| | 493.9 |
| | 0 |
|
| Reacquisitions of debt | 0 |
| | 0 |
| | (594.4 | ) |
| Dividends paid to common shareholders | (1,643.2 | ) | | (654.9 | ) | | (395.4 | ) |
| Dividends paid to preferred shareholders | (26.8 | ) | | (13.5 | ) | | 0 |
|
| Acquisition of treasury shares for restricted stock tax liabilities | (84.4 | ) | | (78.6 | ) | | (57.6 | ) |
Acquisition of treasury shares acquired in open market
| (6.9 | ) | | (0.4 | ) | | (4.9 | ) |
| Loan to ARX Holding Corp. | (8.0 | ) | | (150.0 | ) | | (64.0 | ) |
| Net cash provided by (used in) financing activities | (1,769.3 | ) | | 730.5 |
| | (275.2 | ) |
| Change in cash, cash equivalents, and restricted cash | 0 |
| | 0 |
| | 0 |
|
| Cash, cash equivalents, restricted cash - Beginning of year | 0 |
| | 0 |
| | 0 |
|
| Cash, cash equivalents, restricted cash - End of year | $ | 0 |
| | $ | 0 |
| | $ | 0 |
|
|
| | | | | | | | | | | |
| | Years Ended December 31, |
| | 2016 | | 2015 | | 2014 |
| Cash Flows From Operating Activities: | | | | | |
| Net income attributable to Progressive | $ | 1,031.0 |
| | $ | 1,267.6 |
| | $ | 1,281.0 |
|
| Adjustments to reconcile net income attributable to Progressive to net cash provided by operating activities: | | | | | |
| Undistributed (income) loss from subsidiaries | (741.9 | ) | | (500.0 | ) | | (358.3 | ) |
| Amortization of equity-based compensation | 2.2 |
| | 2.4 |
| | 2.2 |
|
| (Gains) losses on extinguishment of debt | (1.6 | ) | | 0.9 |
| | 4.8 |
|
| Changes in: | | | | | |
| Intercompany receivable | (37.3 | ) | | 7.0 |
| | (105.4 | ) |
| Accounts payable, accrued expenses, and other liabilities | 24.2 |
| | (46.2 | ) | | 18.2 |
|
| Income taxes | (5.0 | ) | | 12.3 |
| | 61.1 |
|
| Other, net | (13.3 | ) | | (3.1 | ) | | 0.4 |
|
| Net cash provided by operating activities | 258.3 |
| | 740.9 |
| | 904.0 |
|
| Cash Flows From Investing Activities: | | | | | |
| Additional investments in equity securities of consolidated subsidiaries | (112.0 | ) | | (40.2 | ) | | (21.1 | ) |
| Acquisition of ARX | 0 |
| | (890.1 | ) | | 0 |
|
| (Paid to) received from investment subsidiary | 78.6 |
| | 409.1 |
| | (29.1 | ) |
| Net cash used in investing activities | (33.4 | ) | | (521.2 | ) | | (50.2 | ) |
| Cash Flows From Financing Activities: | | | | | |
| Tax benefit from vesting of equity-based compensation | 9.2 |
| | 16.8 |
| | 12.8 |
|
| Net proceeds from debt issuance | 495.6 |
| | 394.9 |
| | 346.3 |
|
| Reacquisitions of debt | (18.2 | ) | | (19.3 | ) | | (48.9 | ) |
| Dividends paid to shareholders | (519.0 | ) | | (403.6 | ) | | (892.6 | ) |
| Acquisition of treasury shares | (192.5 | ) | | (208.5 | ) | | (271.4 | ) |
| Net cash used in financing activities | (224.9 | ) | | (219.7 | ) | | (853.8 | ) |
| Change in cash | 0 |
| | 0 |
| | 0 |
|
| Cash, beginning of year | 0 |
| | 0 |
| | 0 |
|
| Cash, end of year | $ | 0 |
| | $ | 0 |
| | $ | 0 |
|
See notes to condensed financial statements.
SCHEDULE II — CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
NOTES TO CONDENSED FINANCIAL STATEMENTS
The accompanying condensed financial statements of The Progressive Corporation (parent company) should be read in conjunction with the consolidated financial statements and notes thereto in the Annual Report to Shareholders of The Progressive Corporation and its subsidiaries, which is included as Exhibit 13 to this Form 10-K.
Note 1. Statements of Cash Flows — For the purpose of the Statements of Cash Flows, cash includes only bank demand deposits. The Progressive Corporation does not hold any cash but has unrestricted access to funds maintained in a non-insurance investment subsidiary to meet its holding company obligations; at both year-end 2016December 31, 2019, 2018, and 2015, $1.32017, $3.2 billion, $2.9 billion, and $1.6 billion, respectively, of marketable securities were available in this subsidiary. Non-cash activity includes declared but unpaid dividends, the transfer of the previous 5% ownership interest in ARX to The Progressive Corporation from an investment subsidiary in 2015, and the change in redemption value of the redeemable NCI. For the years ended December 31, The Progressive Corporation paid the following:
|
| | | | | | | | | | | |
| (millions) | 2019 | | 2018 | | 2017 |
| Income taxes | $ | 925.0 |
| | $ | 679.2 |
| | $ | 669.7 |
|
| Interest | 184.9 |
| | 153.6 |
| | 142.2 |
|
|
| | | | | | | | | |
| (millions) | 2016 | 2015 | 2014 |
| Income taxes | $ | 450.2 |
| $ | 625.0 |
| $ | 515.0 |
|
| Interest | 134.2 |
| 128.2 |
| 116.0 |
|
Note 2. Income Taxes — The Progressive Corporation files a consolidated federal income tax return with allits eligible subsidiaries and acts as an agent for the consolidated tax group when making payments to the Internal Revenue Service. SinceEffective April 2018, The Progressive Corporation owns less thanacquired additional shares of ARX to increase its ownership above 80% of ARX's outstanding stock,. As a result, ARX and its subsidiaries are not eligible to file on a consolidated basis withwere included in The Progressive Corporation.Corporation consolidated federal income tax return for the period from April to December 31, 2018. The Progressive Corporation consolidated group’s net income taxes currently payable/recoverable are included in other liabilities/assets, respectively, in the accompanying Condensed Balance Sheets based on the balance at the end of the year. The Progressive Corporation and its eligible subsidiaries have adopted, pursuant to a written agreement, a method of allocating consolidated federal income taxes. Amounts allocated to the eligible subsidiaries under the written agreement are included in “Intercompany Receivable” in the accompanying Condensed Balance Sheets.
On December 22, 2017, legislation commonly known as the Tax Cuts and Jobs Act of 2017 (the “2017 Tax Act”) was signed into law. One of the provisions of the 2017 Tax Act reduced the corporate federal income tax rate from 35% to 21% effective January 1, 2018. Pursuant to current accounting guidance, all deferred tax assets and liabilities were revalued at December 31, 2017, to recognize the tax rate that is expected to apply when the tax effects are ultimately recognized in future periods. The impact of revaluing the deferred tax assets and liabilities from 35% to 21% was a net increase to The Progressive Corporation’s income tax expense of $44.7 million in 2017.
Note 3. Debt — The information relating to debt is incorporated by reference from Note 4 – Debt in our Annual Report.
Note 4. Employee Benefit Plans — The information relating to incentive compensation plans and deferred compensation plans is incorporated by reference from Note 9 – Employee Benefit Plans in our Annual Report.
Note 5. Other Comprehensive Income — On the condensed Statements of Comprehensive Income, other comprehensive income represents activity of the subsidiaries of The Progressive Corporation and includes net unrealized gains (losses) on securities, net unrealized gains on forecasted transactions, and foreign currency translation adjustments.
Note 6. Dividends — The information relating to our dividend policy is incorporated by reference from Note 14 – Dividends in our Annual Report.
SCHEDULE III — SUPPLEMENTARY INSURANCE INFORMATION
THE PROGRESSIVE CORPORATION AND SUBSIDIARIES
(millions)
| | | Segment | Deferred
policy
acquisition costs1 | | Future
policy
benefits,
losses,
claims,
and
loss expenses1 | | Unearned premiums1 | | Other
policy
claims
and
benefits payable1 | | Premium revenue | | Net
investment income1,2 | | Benefits,
claims,
losses, and
settlement expenses | | Amortization
of deferred
policy
acquisition costs | | Other
operating expenses | | Net
premiums written | Deferred
policy
acquisition costs1 | | Future
policy
benefits,
losses,
claims,
and
loss expenses1 | | Unearned premiums1 | | Other
policy
claims
and
benefits payable1 | | Premium revenue | | Net
investment income1,2 | | Benefits,
claims,
losses, and
settlement expenses | | Amortization
of deferred
policy
acquisition costs | | Other
operating expenses1 | | Net premiums written |
| Year ended December 31, 2016: | | | | | | | | | | | | | | | | | | | | |
| Year ended December 31, 2019: | | | | | | | | | | | | | | | | | | | | |
| Personal Lines | | | | | | | | | $ | 19,188.2 |
| | | | $ | 14,591.1 |
| | $ | 1,446.6 |
| | $ | 2,549.2 |
| | $ | 19,819.5 |
| | | | | | | | | $ | 30,210.0 |
| | | | $ | 21,329.7 |
| | $ | 2,273.6 |
| | $ | 4,227.6 |
| | $ | 31,102.2 |
|
| Commercial Lines | | | | | | | | | 2,421.3 |
| | | | 1,741.0 |
| | 266.7 |
| | 285.4 |
| | 2,598.3 |
| | | | | | | | | 4,427.6 |
| | | | 3,034.8 |
| | 481.2 |
| | 523.5 |
| | 4,791.8 |
|
| Property | | | | | | | | | 864.5 |
| | | | 546.1 |
| | 150.5 |
| | 137.2 |
| | 935.7 |
| | | | | | | | | 1,554.8 |
| | | | 1,106.0 |
| | 268.4 |
| | 224.0 |
| | 1,683.9 |
|
| Other indemnity | | | | | | | | | 0 |
| | | | 1.4 |
| | 0 |
| | 0.2 |
| | 0 |
| | | | | | | | | 0 |
| | | | 0 |
| | 0 |
| | 0 |
| | 0 |
|
| Total | $ | 651.2 |
| | $ | 11,368.0 |
| | $ | 7,468.3 |
| | $ | 0 |
| | $ | 22,474.0 |
| | $ | 456.5 |
| | $ | 16,879.6 |
| | $ | 1,863.8 |
| | $ | 2,972.0 |
| | $ | 23,353.5 |
| $ | 1,056.5 |
| | $ | 18,105.4 |
| | $ | 12,388.8 |
| | $ | 0 |
| | $ | 36,192.4 |
| | $ | 1,017.4 |
| | $ | 25,470.5 |
| | $ | 3,023.2 |
| | $ | 4,975.1 |
| | $ | 37,577.9 |
|
| Year ended December 31, 2015: | | | | | | | | | | | | | | | | | | | | |
| Year ended December 31, 2018: | | | | | | | | | | | | | | | | | | | | |
| Personal Lines | | | | | | | | | $ | 17,294.5 |
| | | | $ | 12,748.7 |
| | $ | 1,331.3 |
| | $ | 2,379.9 |
| | $ | 17,703.6 |
| | | | | | | | | $ | 26,034.7 |
| | | | $ | 18,389.8 |
| | $ | 1,964.4 |
| | $ | 3,563.3 |
| | $ | 27,157.6 |
|
| Commercial Lines | | | | | | | | | 1,995.9 |
| | | | 1,244.5 |
| | 219.4 |
| | 232.6 |
| | 2,171.2 |
| | | | | | | | | 3,610.9 |
| | | | 2,394.0 |
| | 396.0 |
| | 396.0 |
| | 3,996.4 |
|
| Property | | | | | | | | | 609.1 |
| | | | 349.0 |
| | 101.1 |
| | 98.8 |
| | 689.6 |
| | | | | | | | | 1,287.7 |
| | | | 937.0 |
| | 213.3 |
| | 237.2 |
| | 1,455.9 |
|
| Other indemnity | | | | | | | | | (0.4 | ) | | | | (0.2 | ) | | 0 |
| | 0.8 |
| | (0.4 | ) | | | | | | | | | 0 |
| | | | 0.2 |
| | 0 |
| | (0.7 | ) | | 0 |
|
| Total | $ | 564.1 |
| | $ | 10,039.0 |
| | $ | 6,621.8 |
| | $ | 0 |
| | $ | 19,899.1 |
| | $ | 431.8 |
| | $ | 14,342.0 |
| | $ | 1,651.8 |
| | $ | 2,712.1 |
| | $ | 20,564.0 |
| $ | 951.6 |
| | $ | 15,400.8 |
| | $ | 10,686.5 |
| | $ | 0 |
| | $ | 30,933.3 |
| | $ | 796.2 |
| | $ | 21,721.0 |
| | $ | 2,573.7 |
| | $ | 4,195.8 |
| | $ | 32,609.9 |
|
| Year ended December 31, 2014: | | | | | | | | | | | | | | | | | | | | |
| Year ended December 31, 2017: | | | | | | | | | | | | | | | | | | | | |
| Personal Lines | | | | | | | | | $ | 16,561.0 |
| | | | $ | 12,161.2 |
| | $ | 1,322.9 |
| | $ | 2,262.6 |
| | $ | 16,759.2 |
| | | | | | | | | $ | 21,947.2 |
| | | | $ | 16,141.4 |
| | $ | 1,656.4 |
| | $ | 2,954.8 |
| | $ | 22,928.4 |
|
| Commercial Lines | | | | | | | | | 1,837.5 |
| | | | 1,133.4 |
| | 201.1 |
| | 204.2 |
| | 1,895.4 |
| | | | | | | | | 2,793.9 |
| | | | 1,966.4 |
| | 309.3 |
| | 335.3 |
| | 3,112.7 |
|
| Property | | | | | | | | | — |
| | | | — |
| | — |
| | — |
| | — |
| | | | | | | | | 988.8 |
| | | | 700.2 |
| | 159.2 |
| | 190.4 |
| | 1,091.0 |
|
| Other indemnity | | | | | | | | | 0 |
| | | | 11.6 |
| | 0 |
| | 0.3 |
| | 0 |
| | | | | | | | | 0 |
| | | | 0 |
| | 0 |
| | 0.2 |
| | 0 |
|
| Total | $ | 457.2 |
| | $ | 8,857.4 |
| | $ | 5,440.1 |
| | $ | 0 |
| | $ | 18,398.5 |
| | $ | 389.5 |
| | $ | 13,306.2 |
| | $ | 1,524.0 |
| | $ | 2,467.1 |
| | $ | 18,654.6 |
| $ | 780.5 |
| | $ | 13,086.9 |
| | $ | 8,903.5 |
| | $ | 0 |
| | $ | 25,729.9 |
| | $ | 539.2 |
| | $ | 18,808.0 |
| | $ | 2,124.9 |
| | $ | 3,480.7 |
| | $ | 27,132.1 |
|
1 Progressive does not allocate assets, liabilities, or investment income to operating segments. Expense allocations are based on certain assumptions and estimates primarily related to revenue and volume; stated segment operating results would change if different methods were applied.
2 Excludes total net realized gains (losses) on securities.
SCHEDULE IV — REINSURANCE
THE PROGRESSIVE CORPORATION AND SUBSIDIARIES
(millions)
|
| | | | | | | | | | | | | | | | | | |
| Year Ended: | Gross Amount | | Ceded to
Other Companies | | Assumed
From
Other Companies | | Net Amount | | Percentage
of Amount
Assumed to Net |
| December 31, 2019 | | | | | | | | | |
| Premiums earned: | | | | | | | | | |
| Property and liability insurance | $ | 37,519.7 |
| | $ | 1,327.3 |
| | $ | 0 |
| | $ | 36,192.4 |
| | 0 | % |
| December 31, 2018 | | | | | | | | | |
| Premiums earned: | | | | | | | | | |
| Property and liability insurance | $ | 31,970.2 |
| | $ | 1,036.9 |
| | $ | 0 |
| | $ | 30,933.3 |
| | 0 | % |
| December 31, 2017 | | | | | | | | | |
| Premiums earned: | | | | | | | | | |
| Property and liability insurance | $ | 26,425.7 |
| | $ | 695.8 |
| | $ | 0 |
| | $ | 25,729.9 |
| | 0 | % |
|
| | | | | | | | | | | | | | | | | | |
| Year Ended: | Gross Amount | | Ceded to
Other Companies | | Assumed
From
Other Companies | | Net Amount | | Percentage
of Amount
Assumed to Net |
| December 31, 2016 | | | | | | | | | |
| Premiums earned: | | | | | | | | | |
| Property and liability insurance | $ | 23,111.2 |
| | $ | 637.2 |
| | $ | 0 |
| | $ | 22,474.0 |
| | 0 |
|
| December 31, 2015 | | | | | | | | | |
| Premiums earned: | | | | | | | | | |
| Property and liability insurance | $ | 20,454.1 |
| | $ | 555.0 |
| | $ | 0 |
| | $ | 19,899.1 |
| | 0 |
|
| December 31, 2014 | | | | | | | | | |
| Premiums earned: | | | | | | | | | |
| Property and liability insurance | $ | 18,648.4 |
| | $ | 249.9 |
| | $ | 0 |
| | $ | 18,398.5 |
| | 0 |
|
Report of Independent Registered Public Accounting Firm on Financial Statement Schedules
To the Board of Directors and Shareholders of The Progressive Corporation
Our audits of the consolidated financial statements and of the effectiveness of internal control over financial reporting referred to in our report dated March 1, 20172, 2020 appearing in the 20162019 Annual Report to Shareholders of The Progressive Corporation (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the schedule of summary of investments - other than investments in related parties as of December 31, 2019, the schedule of condensed financial information of registrant which includes the condensed balance sheets as of December 31, 2019 and 2018 and the condensed statements of comprehensive income and of cash flows for each of the three years in the period ended December 31, 2019, and the related notes to the condensed financial statements, the schedule of supplementary insurance information for each of the three years in the period ended December 31, 2019, and the schedule of reinsurance for each of the three years in the period ended December 31, 2019 (collectively “the financial statement schedules listed inschedules”) appearing under Item 15(a)(2) of this Form 10-K. In our opinion, these financial statement schedules present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.
/s/ PricewaterhouseCoopers LLP
Cleveland, Ohio
March 1, 20172, 2020
Consent of Independent Registered Public Accounting Firm
We hereby consent to the incorporation by reference in the Registration Statements on Forms:
|
| | | | |
| | | | |
Form | | Filing No. | | Filing Date |
S-8 | | 333-204406 | | May 22, 2015 |
S-8 | | 333-185704 | | December 27, 2012 |
S-8 | | 333-185703 | | December 27, 2012 |
S-8 | | 333-172663 | | March 8, 2011 |
S-8 | | 333-104653 | | April 21, 2003 |
S-8 | | 333-41238 | | July 12, 2000 |
S-8 | | 33-57121 | | December 29, 1994 |
S-8 | | 33-51034 | | August 20, 1992 |
S-8 | | 33-16509 | | August 14, 1987 |
of The Progressive Corporation of our report dated March 1, 2017 relating to the financial statements and the effectiveness of internal control over financial reporting, which appears in the 2016 Annual Report to Shareholders, which is incorporated by reference in The Progressive Corporation’s Annual Report on Form 10‑K. We also consent to the incorporation by reference of our report dated March 1, 2017 relating to the financial statement schedules, which appears in this Form 10‑K.
/s/ PricewaterhouseCoopers LLP
Cleveland, Ohio
March 1, 2017
ITEM 16. FORM 10-K SUMMARY
We have elected not to include a summary of information as permitted under this item.
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 1, 20172, 2020 | By: | /s/ Susan Patricia Griffith |
| | | Susan Patricia Griffith |
| | | 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 and in the capacities and on the dates indicated.
|
| | | | |
| /s/ Susan Patricia Griffith | | Director, President and Chief Executive Officer | | March 1, 20172, 2020 |
| | | | | |
| Susan Patricia Griffith | | | | |
| | | | | |
| /s/ John P. Sauerland | | Vice President and Chief Financial Officer | | March 1, 20172, 2020 |
| | | | | |
| John P. Sauerland | | | | |
| | | | | |
/s/ Jeffrey W. BaschMariann Wojtkun Marshall | | Vice President and Chief Accounting Officer | | March 1, 20172, 2020 |
| | | | | |
Jeffrey W. BaschMariann Wojtkun Marshall | | | | |
| | | | | |
| * | | Executive ChairmanChairperson of the Board | | March 1, 2017 |
Glenn M. Renwick | | | | |
* | | Lead Independent Director | | March 1, 20172, 2020 |
| Lawton W. Fitt | | | | |
| | | | | |
| * | | Director | | March 1, 20172, 2020 |
| Philip Bleser | | | | |
| | | | |
| * | | Director | | March 2, 2020 |
| Stuart B. Burgdoerfer | | | | |
| | | | | |
| * | | Director | | March 1, 20172, 2020 |
| Pamela J. Craig | | | | |
| | | | |
| * | | Director | | March 2, 2020 |
| Charles A. Davis | | | | |
| | | | | |
| * | | Director | | March 1, 20172, 2020 |
| Roger N. Farah | | | | |
| | | | | |
| * | | Director | | March 1, 20172, 2020 |
| Jeffrey D. Kelly | | | | |
| | | | | |
| * | | Director | | March 1, 20172, 2020 |
| Patrick H. Nettles, Ph.D. | | | | |
| | | | | |
| * | | Director | | March 1, 20172, 2020 |
Bradley T. Sheares, Ph.D.Barbara R. Snyder | | | | |
| | | | | |
| * | | Director | | March 1, 20172, 2020 |
Barbara R. SnyderJan E. Tighe | | | | |
| | | | |
| * | | Director | | March 2, 2020 |
| Kahina Van Dyke | | | | |
* JohnDaniel P. Sauerland,Mascaro, by signing his name hereto, does sign this document on behalf of the persons indicated above pursuant to powers of attorney duly executed by such persons.
|
| | |
| By: | /s/ JohnDaniel P. SauerlandMascaro | March 1, 20172, 2020 |
| | JohnDaniel P. SauerlandMascaro | |
| | Attorney-in-fact | |
|
| | | | | | |
| EXHIBIT INDEX |
Exhibit No. Under Reg. S-K, Item 601 | | Form 10-K Exhibit No. | | Description of Exhibit | | If Incorporated by Reference, Documents with Which Exhibit was Previously Filed with SEC |
| 3(i) | | 3.1 | | Amended Articles of Incorporation of The Progressive Corporation (as amended May 16, 2016) | | Quarterly Report on Form 10-Q (filed on August 3, 2016; Exhibit 3.1 therein) |
| 3(ii) | | 3.2 | | Code of Regulations of The Progressive Corporation (as amended January 29, 2016) | | Current Report on Form 8-K (filed on February 2, 2016; Exhibit 3 therein) |
| 4 | | 4.1 | | Form of 3.75% Senior Notes due 2021, issued in the aggregate principal amount of $500,000,000 under the 1993 Senior Indenture (see exhibit 4.8 below), as amended and supplemented | | Filed herewith |
| 4 | | 4.2 | | Form of 6 5/8% Senior Notes due 2029, issued in the aggregate principal amount of $300,000,000 under the 1993 Senior Indenture, as amended and supplemented | | Annual Report on Form 10-K (filed on March 2, 2015; Exhibit 4.2 therein) |
| 4 | | 4.3 | | Form of 6.25% Senior Notes due 2032, issued in the aggregate principal amount of $400,000,000 under the 1993 Senior Indenture, as amended and supplemented | | Annual Report on Form 10-K (filed on February 26, 2013; Exhibit 4.4 therein) |
| 4 | | 4.4 | | Form of 6.70% Fixed-to-Floating Rate Junior Subordinated Debentures due 2067, issued in the original aggregate principal amount of $1,000,000,000 under the Junior Subordinated Indenture (see exhibit 4.17 below), as amended and supplemented | | Annual Report on Form 10-K (filed on February 26, 2013; Exhibit 4.5 therein) |
| 4 | | 4.5 | | Form of 4.35% Senior Notes due 2044, issued in the aggregate principal amount of $350,000,000 under the 1993 Senior Indenture, as amended and supplemented | | Current Report on Form 8-K (filed on April 25, 2014; Exhibit 4.2 therein) |
| 4 | | 4.6 | | Form of 3.70% Senior Notes due 2045, issued in the aggregate principal amount of $400,000,000 under the 1993 Senior Indenture, as amended and supplemented | | Current Report on Form 8-K (filed on January 26, 2015; Exhibit 4.2 therein) |
| 4 | | 4.7 | | Form of 2.45% Senior Notes due 2027, issued in the aggregate principal amount of $500,000,000 under the 1993 Senior Indenture, as amended and supplemented | | Current Report on Form 8-K (filed on August 25, 2016; Exhibit 4.2 therein) |
| 4 | | 4.8 | | Indenture dated as of September 15, 1993 between The Progressive Corporation and State Street Bank and Trust Company (successor in interest to The First National Bank of Boston), as Trustee (“1993 Senior Indenture”) (including table of contents and cross-reference sheet) | | Registration Statement No. 333-48935 (filed on March 31, 1998; Exhibit 4.1 therein) |
| 4 | | 4.9 | | First Supplemental Indenture dated March 15, 1996 to the 1993 Senior Indenture between The Progressive Corporation and State Street Bank and Trust Company | | Registration Statement No. 333-01745 (filed on March 15, 1996; Exhibit 4.2 therein) |
| 4 | | 4.10 | | Second Supplemental Indenture dated February 26, 1999 to the 1993 Senior Indenture between The Progressive Corporation and State Street Bank and Trust Company, as Trustee | | Registration Statement No. 333-100674 (filed on October 22, 2002; Exhibit 4.3 therein) |
| | EXHIBIT INDEX | Exhibit No. Under Reg. S-K, Item 601 | | Form 10-K Exhibit No. | | Description of Exhibit | | If Incorporated by Reference, Documents with Which Exhibit was Previously Filed with SEC | | Form 10-K Exhibit No. | | Description of Exhibit | | If Incorporated by Reference, Documents with Which Exhibit was Previously Filed with SEC |
| 3(i) | | | 3.1 | | | | Quarterly Report on Form 10-Q (filed on May 1, 2019; Exhibit 3.1 therein) |
| 3(ii) | | | 3.2 | | | | Quarterly Report on Form 10-Q (filed on May 1, 2019; Exhibit 3.2 therein) |
| 4 | | 4.11 | | Fourth Supplemental Indenture dated November 21, 2002 to the 1993 Senior Indenture between The Progressive Corporation and State Street Bank and Trust Company, as Trustee | | Registration Statement No. 333-143824 (filed on June 18, 2007; Exhibit 4.5 therein) | | 4.1 | | | | Annual Report on Form 10-K (filed on March 1, 2017; Exhibit 4.1 therein) |
| 4 | | 4.12 | | Fifth Supplemental Indenture dated June 13, 2007 to the 1993 Senior Indenture between The Progressive Corporation and U.S. Bank National Association, evidencing the designation of U.S. Bank National Association as successor Trustee under the 1993 Senior Indenture | | Registration Statement No. 333-143824 (filed on June 18, 2007; Exhibit 4.6 therein) | | 4.2 | | | | Annual Report on Form 10-K (filed on March 2, 2015; Exhibit 4.2 therein) |
| 4 | | 4.13 | | Sixth Supplemental Indenture dated August 22, 2011 to the 1993 Senior Indenture between The Progressive Corporation and U.S. Bank National Association, as Trustee | | Filed herewith | | 4.3 | | | | Annual Report on Form 10-K (filed on February 27, 2018; Exhibit 4.3 therein)
|
| 4 | | 4.14 | | Seventh Supplemental Indenture dated April 25, 2014 to the 1993 Senior Indenture between The Progressive Corporation and U.S. Bank National Association, as Trustee | | Current Report on Form 8-K (filed on April 25, 2014; Exhibit 4.1 therein) | | 4.4 | | | | Current Report on Form 8-K (filed on April 25, 2014; Exhibit 4.2 therein) |
| 4 | | 4.15 | | Eighth Supplemental Indenture dated January 26, 2015 to the 1993 Senior Indenture between The Progressive Corporation and U.S. Bank National Association, as Trustee
| | Current Report on Form 8-K (filed on January 26, 2015; Exhibit 4.1 therein) | | 4.5 | | | | Current Report on Form 8-K (filed on January 26, 2015; Exhibit 4.2 therein) |
| 4 | | 4.16 | | Ninth Supplemental Indenture dated August 25, 2016 to the 1993 Senior Indenture between The Progressive Corporation and U.S. Bank National Association, as Trustee | | Current Report on Form 8-K (filed on August 25, 2016; Exhibit 4.1 therein) | | 4.6 | | | | Current Report on Form 8-K (filed on August 25, 2016; Exhibit 4.2 therein) |
| 4 | | 4.17 | | Junior Subordinated Indenture dated as of June 21, 2007 between The Progressive Corporation and The Bank of New York Trust Company, N.A., Trustee (“Junior Subordinated Indenture”) (including table of contents and cross-reference sheet) | | Annual Report on Form 10-K (filed on February 26, 2013; Exhibit 4.12 therein) | | 4.7 | | | | Current Report on Form 8-K (filed on April 6, 2017; Exhibit 4.2 therein) |
| 4 | | 4.18 | | First Supplemental Indenture dated June 21, 2007 to the Junior Subordinated Indenture between The Progressive Corporation and The Bank of New York Trust Company, N.A., as Trustee | | Annual Report on Form 10-K (filed on February 26, 2013; Exhibit 4.13 therein) | | 4.8 | | | | Current Report on Form 8-K (filed on March 14, 2018; Exhibit 4.2 therein) |
| 4 | | 4.19 | | Second Supplemental Indenture dated September 2, 2011, to the Junior Subordinated Indenture dated June 21, 2007, between The Progressive Corporation and The Bank of New York Mellon Trust Company, N.A., as Trustee | | Filed herewith | | 4.9 | | | | Current Report on Form 8-K (filed on October 23, 2018; Exhibit 4.2 therein) |
| 4 | | 4.20 | | Replacement Capital Covenant dated June 21, 2007, of The Progressive Corporation | | Annual Report on Form 10-K (filed on February 26, 2013; Exhibit 4.15 therein) | | 4.10 | | | | Current Report on Form 8-K (filed on March 14, 2018; Exhibit 4.3 therein) |
| 4 | | 4.21 | | Termination of Replacement Capital Covenant, dated June 23, 2010 | | Annual Report on Form 10-K (filed on February 29, 2016; Exhibit 4.19 therein) | | 4.11 | | | | Registration Statement No. 333-227315 (filed on September 13, 2018; exhibit 4.2 therein) |
| 4 | | | 4.12 | | | | Current Report on Form 8-K (filed on October 23, 2018; Exhibit 4.1 therein) |