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SECURITIES AND EXCHANGE COMMISSION
Exchange Act of 1934 (Amendment No. )
Filed by a Party other than the Registranto
o | Preliminary Proxy Statement | |
o | Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2)) | |
þ | Definitive Proxy Statement | |
o | Definitive Additional Materials | |
o | Soliciting Material Pursuant to §240.14a-12 |
þ | No fee required. | |
o | Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11. |
(1) | Title of each class of securities to which transaction applies: | ||
(2) | Aggregate number of securities to which transaction applies: | ||
(3) | Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined): | ||
(4) | Proposed maximum aggregate value of transaction: | ||
(5) | Total fee paid: | ||
o | Fee paid previously with preliminary materials. | |
o | Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing. |
(1) | Amount Previously Paid: | ||
(2) | Form, Schedule or Registration Statement No.: | ||
(3) | Filing Party: | ||
(4) | Date Filed: | ||
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1. | To elect four directors, each to serve for a term of three years; | |
2. | To approve amendments to the Company’s Amended Articles of Incorporation and Code of Regulations to adopt a majority voting standard in uncontested elections of directors; | |
3. | To approve an amendment to the Company’s Code of Regulations to modify the definition of a director’s “term of office”; | |
4. | To approve an amendment to the Company’s Code of Regulations to increase the maximum number of director positions from 12 to 13 and to fix the number of directors at 13; | |
5. | To ratify the appointment of PricewaterhouseCoopers LLP as the Company’s independent registered public accounting firm for 2008; and |
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PROXY STATEMENT
• | Election of four directors, each to serve for a term of 3 years; | |
• | Approval of amendments to our Amended Articles of Incorporation and Code of Regulations to: |
— | Elect directors by majority vote in uncontested elections; |
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— | Modify the definition of a director’s “term of office”; | |
— | Increase the number of director positions on our Board of Directors from 12 to 13 and fix the size of the Board at 13; |
• | Ratification of the selection of PricewaterhouseCoopers LLP as our independent registered public accounting firm for 2008; and | |
• | Any other business that properly comes before the meeting. |
• | in certificate form (i.e., you hold paper share certificates as evidence of your ownership); and | |
• | in book-entry form (i.e., physical certificates are not issued; includes shares held in a direct registration program or shares of restricted stock held by some of our employees and former employees). |
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• | written notice to the Secretary of the company; | |
• | timely delivery of a valid, later-dated and signed proxy card or a later-dated vote by telephone or via the Internet; or | |
• | voting in person at the Annual Meeting. |
• | vote for all nominees (by marking your proxy card “WITH” authority to vote for the election of the nominees); | |
• | withhold votes as to all nominees (by marking your proxy card “WITHOUT” authority to vote for all nominees); or | |
• | vote for certain nominees, but withhold votes as to specified nominees (by marking your proxy card “WITH” authority to vote for the nominees, in general, and identifying in the space provided individual nominees as to whom you withhold your authority to vote). |
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• | vote FOR the proposal; | |
• | vote AGAINST the proposal; or | |
• | ABSTAIN from voting on the proposal. |
• | vote FOR the ratification; | |
• | vote AGAINST the ratification; or | |
• | ABSTAIN from voting on the ratification. |
• | FOR the election of all four director nominees, each for a term of 3 years; | |
• | FOR the proposal to approve amendments to the company’s Amended Articles of Incorporation and Code of Regulations to adopt a majority voting standard in uncontested elections of directors; | |
• | FOR the proposal to approve an amendment to the company’s Code of Regulations to modify the definition of a director’s “term of office”; |
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• | FOR the proposal to approve an amendment to the company’s Code of Regulations to increase the maximum number of director positions from 12 to 13 and to fix the number of directors at 13; and | |
• | FOR the proposal to ratify the appointment of PricewaterhouseCoopers LLP as the company’s independent registered public accounting firm for 2008. |
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Principal Occupation and | Director | Term | ||||||||||||||
Name | Age | Last Five Years Business Experience | Other Directorships | Since | Expires | |||||||||||
Charles A. Davis | 59 | Chief Executive Officer, Stone Point Capital LLC, Greenwich, Connecticut (global private equity firm) since June 2005; Chairman and CEO, MMC Capital, Inc., Greenwich, Connecticut (global private equity firm) prior to June 2005; Vice Chairman, Marsh & McLennan Companies, Inc., New York, New York (financial services) prior to December 2004 | AXIS Capital Holdings Limited, Media General, Inc., and The Hershey Company | 1996 | 2011 | |||||||||||
Bernadine P. Healy, M.D. | 63 | Health Editor and Medical Columnist, U.S. News & World Report, Washington, D.C. (publishing) | Ashland Inc., Invacare Corporation and National City Corporation | 2002 | 2011 | |||||||||||
Jeffrey D. Kelly | 54 | Chief Financial Officer, National City Corporation (“NCC”), Cleveland, Ohio (commercial banking); Vice Chairman of NCC since December 2004; Executive Vice President of NCC prior to December 2004 | National City Corporation | 2000 | 2011 | |||||||||||
Abby F. Kohnstamm | 54 | President and Chief Executive Officer, Abby F. Kohnstamm & Associates, Inc., New York, New York (marketing consulting firm) since January 2006; Senior Vice President of Marketing, IBM Corporation, Armonk, New York (information technology) prior to December 2005 | Tiffany & Co. | 2006 | 2011 |
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Principal Occupation and | Director | Term | ||||||||||||||
Name | Age | Last Five Years Business Experience | Other Directorships | Since | Expires | |||||||||||
Stephen R. Hardis | 72 | Non-Executive Chairman of the Board, Marsh & McLennan Companies, Inc., New York, New York (financial services) since May 2006; Lead Director, Axcelis Technologies, Inc., Beverly, Massachusetts (semiconductor equipment manufacturing) since May 2005; Chairman of the Board, Axcelis Technologies, Inc. prior to May 2005 | American Greetings Corporation, Axcelis Technologies, Inc., Lexmark International, Inc., Marsh & McLennan Companies, Inc. and Nordson Corporation | 1988 | 2009 | |||||||||||
Norman S. Matthews | 75 | Consultant, New York, New York | Finlay Enterprises, Inc. and Henry Schein, Inc. | 1981 | 2009 | |||||||||||
Bradley T. Sheares, Ph.D. | 51 | Formerly Chief Executive Officer, Reliant Pharmaceuticals, Inc., Liberty Corner, New Jersey (pharmaceutical products) from January 2007 to December 2007; President, U.S. Human Health Division of Merck & Co., Inc., Whitehouse Station, New Jersey (pharmaceutical products and services) prior to July 2006 | Honeywell International, Inc. | 2003 | 2009 | |||||||||||
Peter B. Lewis | 74 | Non-Executive Chairman of the Board of The Progressive Corporation since March 2003; Executive Chairman of the Board prior to March 2003 | None | 1965 | 2010 | |||||||||||
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Principal Occupation and | Director | Term | ||||||||||||||
Name | Age | Last Five Years Business Experience | Other Directorships | Since | Expires | |||||||||||
Patrick H. Nettles, Ph.D. | 64 | Executive Chairman of the Board of Directors, Ciena Corporation, Linthicum, Maryland (telecommunications) | Axcelis Technologies, Inc. and Ciena Corporation | 2004 | 2010 | |||||||||||
Glenn M. Renwick | 52 | President and Chief Executive Officer of The Progressive Corporation; President, Chairman of the Board and Chief Executive Officer of Progressive Casualty Insurance Company (a Progressive subsidiary) prior to April 2004; officer and director of various other subsidiaries of Progressive | Fiserv, Inc. | 1999 | 2010 | |||||||||||
Donald B. Shackelford | 75 | Chairman of the Board, Fifth Third Bank, Central Ohio (successor to State Savings Bank), Columbus, Ohio (commercial banking) | Diamond Hill Investment Group, Inc. | 1976 | 2010 | |||||||||||
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• | He or she is not currently an officer or employee of The Progressive Corporation or any of its subsidiaries, and has not been an officer or employee of Progressive or any of its subsidiaries at any time during the past three years. For purposes of this requirement, “officer” does not include a non-executive Chairman of the Board who is otherwise independent under these standards. | |
• | No member of his or her immediate family is an executive officer of Progressive or has been an executive officer of Progressive at any time during the past three years. | |
• | Neither he or she, nor any member of his or her immediate family, receives, or has received during any twelve-month period within the past three years, more than $100,000 in direct compensation from Progressive or any of its subsidiaries, other than (i) retainer and meeting fees and equity grants for service as a director, and (ii) pension or other forms of deferred compensation for prior service (provided such compensation is not contingent on continued service). For purposes of this requirement, compensation received by an immediate family member for service as an employee of Progressive (other than as an executive officer) will not be considered. | |
• | He or she (i) is not currently a partner or employee of a firm that is Progressive’s internal or external auditor, and (ii) was not at any time within the past three years a partner or employee of such a firm who personally worked on Progressive’s audit during that time. | |
• | No member of his or her immediate family (i) is currently a partner in a firm that is Progressive’s internal or external auditor, (ii) is currently an employee of such firm who participates in the firm’s audit, assurance or tax compliance (but not tax planning) practice, or (iii) was at any time within the past three years a partner or employee of such firm and personally worked on Progressive’s audit during that time. | |
• | Neither he or she, nor any member of his or her immediate family, is or has been at any time during the past three years, employed as an executive officer of another company where any of the present executive officers of Progressive at the same time serves or served on the compensation committee of such other company. | |
• | Neither he or she, nor any member of his or her immediate family, has a direct business or other relationship with Progressive or any of its subsidiaries (as a lawyer, consultant or otherwise), other than as a director of Progressive, or has had any such business or other relationship with Progressive at any time during the past three years. For purposes of this requirement, service by an immediate family member as an employee of Progressive (other than as an executive officer) will not compromise the director’s independence. | |
• | Neither he or she, nor any member of his or her immediate family, is a member of or counsel to any law firm that Progressive has retained during the last fiscal year or proposes to retain during the current fiscal year. | |
• | Neither he or she, nor any member of his or her immediate family, is a partner or executive officer of any investment banking firm that has performed services for Progressive (other than as a participating underwriter in a syndicate) during the last fiscal year or that Progressive proposes to have perform such services during the current fiscal year. | |
• | He or she is not a current employee of, and no member of his or her immediate family is a current executive officer of, and neither he or she nor any member of his or her immediate family holds a one percent or greater equity interest in, any other company or organization that has, or has had at any time within the past three years, a material business or other relationship with Progressive or any of its subsidiaries. For purposes of this standard, a relationship will be deemed to be material if the total amount of the payments made or received by Progressive or any of its subsidiaries in connection with such business or other relationship during the relevant fiscal year was, or for the current fiscal year is expected to be, more than the greater of (i) $1 million or (ii) two percent of the consolidated gross revenues of such other entity. |
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• | An understanding of accounting principles generally accepted in the United States of America and financial statements; | |
• | The ability to assess the general application of such principles in connection with the accounting for estimates, accruals and reserves; | |
• | Experience preparing, auditing, analyzing or evaluating financial statements that present a breadth and level of complexity of accounting issues that are generally comparable to the breadth and level of complexity that can reasonably be expected to be raised by Progressive’s financial statements, or experience actively supervising one or more persons engaged in such activities; | |
• | An understanding of internal control over financial reporting; and | |
• | An understanding of audit committee functions. |
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• | Peter B. Lewis, Chairman of the Board, The Progressive Corporation, 6300 Wilson Mills Road, Mayfield Village, Ohio 44143 ore-mail: peter_lewis@progressive.com. | |
• | Charles E. Jarrett, Secretary, The Progressive Corporation, 6300 Wilson Mills Road, Mayfield Village, Ohio 44143 ore-mail: chuck_jarrett@progressive.com. |
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• | Mr. Jeffrey D. Kelly, a director of Progressive, is the Vice Chairman and Chief Financial Officer of National City Corporation, the parent company of National City Bank (“NCB”). Dr. Bernadine P. Healy, a director of Progressive, is also a director of National City Corporation. NCB is the Transfer Agent and Registrar for our common shares and received fees of $81,572 for such services for 2007. Additionally, we use NCB for commercial banking services and paid $1,303,367 to NCB in service charges during 2007. In each case, these charges represented NCB’s customary rates. |
• | Mr. Stephen R. Hardis, a director of Progressive, is also a director and non-executive chairman of Marsh & McLennan Companies, Inc. (“Marsh”). Progressive pays commissions to various subsidiaries of Marsh for brokerage services in the ordinary course of our auto and non-auto insurance businesses, at customary rates for the services rendered. During 2007, we paid $1,057,506 for these services. |
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• | Mr. Charles A. Davis, a director of Progressive, serves as a director of AXIS Capital Holdings Limited (“AXIS”). During 2007, AXIS reinsured part of the risk we have under the policies we wrote for directors’ and officers’ liability insurance, trust errors and omissions insurance and bond products. AXIS provides reinsurance coverage of $2.8 million on policy limits of $15 million, for losses incurred in excess of the first $1 million. During 2007, we paid $2,839,028 in premiums to AXIS, and collected $1,678,881 on paid losses related to, this coverage. At December 31, 2007, we had $2,797,757 of reinsurance recoverables on unpaid losses under this arrangement. AXIS is one of several companies that we use to reinsure this non-auto line of business. The terms of this reinsurance arrangement with AXIS are consistent with those between us and the other reinsurers. | |
• | Mr. Philip A. Laskawy, a former director of Progressive, who left the Board in December 2007, is also a director of Cap Gemini, S.A., a French public company. In 2007, we paid $7,504,456 to Cap Gemini, S.A., for information technology consulting fees. These charges represent the customary rates for services provided. | |
• | Mr. Glenn M. Renwick, President, Chief Executive Officer and a director of Progressive, is also a director of Fiserv, Inc. We paid $35,847 to Fiserv, Inc., or its subsidiaries, for comparative rating software during 2007. These charges represent the customary rates for the products purchased. | |
• | In 2006, a subsidiary of Progressive and a company owned by Mr. Peter B. Lewis, Chairman of the Board, entered into a sublease for space at an airplane hangar leased by the subsidiary, to house the airplane owned by Mr. Lewis’s company and related personnel and equipment. The sublease has a5-year term that commenced in October 2006, and Mr. Lewis’s company has options to extend the sublease for three additional5-year terms. Under the sublease, Mr. Lewis’s company rents approximately two-thirds of the hangar space and one-half of the office space at the facility, and it further reimburses one-half of other occupancy costs (such as common area maintenance, insurance, taxes, etc.) and one-half of certain construction and capital expenses. In addition, Mr. Lewis’s company reimburses Progressive for fuel for its aircraft, based on actual fuel used, plus one-half of the fuel flow fee incurred by us under our lease for the hangar. During 2007, Mr. Lewis’s company paid Progressive’s subsidiary a total of $468,146 for rent and other occupancy expenses in accordance with the terms of the sublease, including its one-half share of the construction costs associated with tenant improvements. | |
• | The following relatives of executive officers and directors worked for Progressive in 2007: the son of Mr. Forrester (retired CFO), Ian Forrester, as a product manager; the brother of Brian Domeck (CFO), John Domeck, as an attorney; and theson-in-law of Mr. Hardis (director), Stephen Ware, who works in our information technology area. The dollar value of each of these employment relationships for 2007 was less than $175,000. In determining the dollar value of these relationships, we used the same methodology that is used to determine compensation for named executive officers in the Summary Compensation Table below, under which total compensation includes, to the extent applicable to each individual, salary paid in 2007, Gainsharing and other bonuses earned in 2007, restricted stock expense recognized by Progressive during the year, company-matching contributions to retirement security (401k) accounts and other compensation, but excludes health and welfare benefits that are available generally to all salaried employees, as contemplated by the applicable regulations. In each case, we believe that the level of compensation is appropriate in view of the individual’s position, responsibilities and experience and is consistent with our companywide compensation structure. |
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BENEFICIAL OWNERS AND MANAGEMENT
Name and Address | Amount and Nature of | Percent | ||||||
of Beneficial Owner | Beneficial Ownership1 | of Class | ||||||
Davis Selected Advisers, L.P. | 78,680,531 | 2 | 11.6 | % | ||||
2949 East Elvira Road, Suite 101 | ||||||||
Tucson, Arizona 85706 | ||||||||
Peter B. Lewis | 49,033,333 | 3 | 7.2 | % | ||||
6300 Wilson Mills Road | ||||||||
Mayfield Village, Ohio 44143 | ||||||||
Ruane, Cunniff & Goldfarb Inc. | 34,452,567 | 4 | 5.1 | % | ||||
767 Fifth Avenue, Suite 4701 | ||||||||
New York, New York10153-4798 | ||||||||
1 | Except as otherwise indicated, the persons listed as beneficial owners of the common shares have sole voting and investment power with respect to those shares. Certain of the information contained in this table, including related footnotes, is based on the Schedule 13G filings made by the beneficial owners identified herein. |
2 | The common shares are held in investment accounts maintained with Davis Selected Advisers, L.P., as of December 31, 2007, and it disclaims any beneficial interest in such shares. Davis Selected Advisers, L.P. has advised that it has sole voting power as to 73,675,577 of these shares, no voting power as to the balance of these shares, and sole investment power as to all of these shares. Mr. Charles A. Davis, a director of Progressive, has no affiliation with Davis Selected Advisers, L.P. |
3 | Includes 220,019 common shares held for Mr. Lewis by a trustee under Progressive’s Retirement Security Program, 888,338 common shares subject to currently exercisable stock options and 8,548 restricted common shares granted to Mr. Lewis in his capacity as Chairman of the Board. Also includes 1,048,705 shares held by two charitable corporations which Mr. Lewis controls, but as to which he has no pecuniary interest. |
4 | The common shares are held in investment accounts maintained with Ruane, Cunniff & Goldfarb Inc., as of December 31, 2007, and it disclaims any beneficial interest in such shares. Ruane, Cunniff & Goldfarb Inc. has advised that it has sole voting power as to 21,807,850 of these shares, no voting power as to the balance of these shares, and sole investment power as to all of these shares. |
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Common | Common | Beneficially | Total | ||||||||||||||||||||||||||||||
Shares | Shares | Owned | Other | Total | Interest | ||||||||||||||||||||||||||||
Subject to | Subject to | Common | Common | Common | Units | in Common | |||||||||||||||||||||||||||
Restricted | Currently | Share | Shares | Shares | Equivalent | Shares | |||||||||||||||||||||||||||
Stock | Exercisable | Equivalent | Beneficially | Beneficially | Percent | to Common | and Unit | ||||||||||||||||||||||||||
Name | Awards1 | Options2 | Units3 | Owned4 | Owned | of Class5 | Shares6 | Equivalents | |||||||||||||||||||||||||
Charles A. Davis | 7,052 | 99,945 | 11,877 | 147,837 | 266,711 | * | 13,429 | 280,140 | |||||||||||||||||||||||||
Brian C. Domeck | 57,495 | 96,992 | 0 | 4,282 | 158,769 | * | 0 | 158,769 | |||||||||||||||||||||||||
W. Thomas Forrester7 | 74,740 | 864,790 | 71,644 | 228,687 | 1,239,861 | * | 20,580 | 1,260,441 | |||||||||||||||||||||||||
Stephen R. Hardis | 6,838 | 82,337 | 6,086 | 179,163 | 274,424 | * | 151,021 | 425,445 | |||||||||||||||||||||||||
Bernadine P. Healy, M.D. | 6,624 | 0 | 0 | 44,611 | 51,235 | * | 4,011 | 55,246 | |||||||||||||||||||||||||
Charles E. Jarrett | 132,527 | 289,938 | 43,324 | 4,068 | 469,857 | * | 0 | 469,857 | |||||||||||||||||||||||||
Jeffrey D. Kelly | 6,624 | 65,493 | 6,421 | 50,820 | 129,358 | * | 15,227 | 144,585 | |||||||||||||||||||||||||
Abby F. Kohnstamm | 6,411 | 0 | 5,102 | 0 | 11,513 | * | 0 | 11,513 | |||||||||||||||||||||||||
Peter B. Lewis | 8,548 | 888,338 | 0 | 48,136,447 | 8 | 49,033,333 | 7.2 | % | 0 | 49,033,333 | |||||||||||||||||||||||
Norman S. Matthews | 7,052 | 99,945 | 16,795 | 188,212 | 312,004 | * | 22,882 | 334,886 | |||||||||||||||||||||||||
Patrick H. Nettles, Ph.D. | 6,624 | 0 | 11,462 | 0 | 18,086 | * | 0 | 18,086 | |||||||||||||||||||||||||
Brian J. Passell | 152,101 | 494,401 | 0 | 33,543 | 9 | 680,045 | * | 0 | 680,045 | ||||||||||||||||||||||||
Glenn M. Renwick | 1,316,034 | 2,110,042 | 443,880 | 896,971 | 4,766,927 | * | 0 | 4,766,927 | |||||||||||||||||||||||||
Donald B. Shackelford | 6,411 | 99,945 | 7,853 | 748,108 | 862,317 | * | 24,181 | 886,498 | |||||||||||||||||||||||||
Bradley T. Sheares, Ph.D. | 6,411 | 0 | 3,276 | 0 | 9,687 | * | 13,105 | 22,792 | |||||||||||||||||||||||||
Raymond M. Voelker | 114,120 | 43,817 | 0 | 26,513 | 184,450 | * | 0 | 184,450 | |||||||||||||||||||||||||
All 22 Executive Officers and Directors as a Group | 2,310,089 | 5,630,534 | 675,313 | 50,939,938 | 59,555,874 | 8.7 | % | 264,436 | 59,820,310 | ||||||||||||||||||||||||
1 | Includes common shares held for executive officers and directors pursuant to unvested restricted stock awards issued under various incentive plans we maintain. The beneficial owner has sole voting power and no investment power with respect to these shares during the restriction period. |
2 | The beneficial owner has no voting power or investment power with respect to these shares prior to exercising the options. |
3 | These units have been credited to the individual’s account under certain of our deferred compensation plans and are included in shares beneficially owned due to the plan features described below. Each unit is equal in value to one Progressive common share. |
• | For non-employee directors, the number represents units that have been credited to his or her account under The Progressive Corporation Directors Restricted Stock Deferral Plan, as amended and restated (the “Directors Equity Deferral Plan”), under which each director has the right to defer restricted stock awards. Distributions from the Directors Equity Deferral Plan will be made in Progressive common shares at the expiration of the deferral period under the plan. Upon the termination of a director’s service as a director, the plan provides that certain shares would be distributed to the director promptly thereafter. As to the number of shares that would be distributed promptly upon a director’s termination of service, the director is considered to have investment power over those shares (although not voting power), and those shares are deemed beneficially owned. See page 50 for a description of the Directors Equity Deferral Plan. | |
• | For executive officers, the number represents units that have been credited to the participant’s account under The Progressive Corporation Executive Deferred Compensation Plan (the “EDCP”), upon the deferral of cash bonus awards and restricted stock awards. As to these units, the participant has sole investment power but no voting power. In this case, the participant has investment power due to his or her ability to instruct the plan trustee to liquidate his or her deemed investment in Progressive stock and re-allocate those amounts into one of the other deemed investments that are available under the plan. See a description of the EDCP beginning on page 44. |
4 | Includes, among other shares, common shares held for executive officers (or, in certain cases, their spouses who are former employees) under The Progressive Retirement Security Program. Unless otherwise indicated below, beneficial ownership of the common shares reported in the table includes both sole voting power and sole investment power, or voting power and investment power that is shared with the spouse and/or minor children of the director or executive officer. |
5 | Percentage based solely on “Total Common Shares Beneficially Owned.” |
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6 | The units disclosed are in addition to common shares beneficially owned and have been credited to the individual’s account under one or more of our deferred compensation plans, as discussed below. Each unit is equal in value to one Progressive common share. |
• | For non-employee directors, the number represents units that have been credited under The Progressive Corporation Directors Deferral Plan, as amended and restated (“Directors Deferral Plan”) and certain amounts credited under the Directors Equity Deferral Plan. Each of our directors who is not an employee of Progressive (other than Mr. Peter B. Lewis) and was a director prior to April 2006 participates in Directors Deferral Plan, under which cash retainer and meeting fees were deferred. The amounts deferred under the Directors Deferral Plan are deemed invested in Progressive shares for the entire deferral period, and distributions from the plan will be made only in cash at the time selected by the participant or as otherwise required by the plan. As such, the investor has neither investment power or voting power over those units. See page 50 for a description of the Directors Deferral Plan. Deferrals of restricted stock under the Directors Restricted Stock Deferral Plan are included in this column to the extent that Progressive common shares would not be distributed promptly after the termination of the director’s service, in which case the director is not considered to have investment power or voting power over those shares (for example, distributions that would be made in future years under an installment distribution plan selected by the director in accordance with the plan); and | |
• | For executive officers, the number represents units that have been credited to the executive officer under the EDCP upon the deferral of restricted shares that were awarded in or after March 2005. These deferral amounts are deemed to be invested in Progressive shares during the entire deferral, and no other deemed investments are available to the participant. In addition, the distribution of Progressive common shares to the executive under the EDCP would not be made until six months after the termination of his or her employment. As a result, the executive has neither investment power or voting power during the deferral period. |
7 | Mr. Forrester, our former CFO, retired in March 2007. Included in “Other Common Shares Beneficially Owned” are 72,000 common shares held by Mr. Forrester as trustee for two trusts established for the benefit of his children. |
8 | See Footnote 3 on page 19. |
9 | Includes 3,660 common shares held by Mr. Passell as trustee for a trust established for the benefit of his daughter. Mr. Passell’s employment with the Company terminated in February 2008. |
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• | Attract and retain outstanding executives with the leadership skills and expertise necessary to drive results and build long-term shareholder value; | |
• | Motivate executives to achieve the strategic goals of Progressive and their assigned business units; | |
• | Reward and differentiate executive performance based on the achievement of challenging performance goals; and | |
• | Align the interests of our executives with those of shareholders. |
II. | OUR EXECUTIVE COMPENSATION PROGRAM |
A. | Overview |
• | Base salaries; | |
• | Annual cash bonus potential, the amount of which is determined under our “Gainsharing” programs for our executives and employees, based on the performance of Progressive or a specificbusiness-unit; and | |
• | Equity-based compensation, which is currently awarded to executives in the form of both time-based and performance-based restricted stock. |
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Paid Salary | X | Target Percentage | X | Performance Factor | = | Annual Bonus |
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3. | Equity Awards |
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4. | 2007 Compensation Decisions and Results |
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2001 | 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | ||||||||||||||||||||||
Base Salary | $ | 676,923 | $ | 744,231 | $ | 750,000 | $ | 750,000 | $ | 750,000 | $ | 750,000 | $ | 750,000 | ||||||||||||||
Gainsharing Target1 | 150% | 150% | 150% | 150% | 150% | 150% | 150% | |||||||||||||||||||||
Time-Based Equity Target2 | 230% | 300% | 300% | 500% | 500% | 500% | 500% | |||||||||||||||||||||
Performance-Based Equity Target2 | 120% | 200% | 300% | 500% | 500% | 500% | 500% |
2 | Percent of base salary. In 2003, we began awarding restricted stock as our equity form of compensation. Prior to 2003, equity awards were made in the form of stock options. |
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GAAP | Growth of | |||
Combined | Policies in Force | |||
Business | Ratio1 | Increase (Decrease) | ||
Agency Auto | 93.5 | (1)%2 | ||
Direct Auto | 92.2 | 7%2 | ||
Special Lines | — | 8% | ||
Commercial Auto | 89.9 | 7% |
1 | Consistent with the presentation of underwriting results (i.e., combined ratio) of our Personal Lines segment in our monthly earnings releases and quarterly and annual reports, the combined ratio results for our Special Lines business unit are not presented separately and, instead, are included in either the Agency or Direct results in the table above, depending on whether the underlying policy is written through agents/brokers or directly by Progressive. See Note 9, “Segment Information,” in the 2007 Annual Report to Shareholders, which is attached as an appendix to this Proxy Statement, for how the combined ratio is calculated. |
Weighted | |||
Performance | |||
Business | Score | ||
Agency Auto | .21 | ||
Direct Auto | .33 | ||
Special Lines | .08 | ||
Commercial Auto | .12 | ||
Performance Factor | .74 | ||
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C. | Elements Of Compensation — Other |
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A. | Section 162(m) of the Internal Revenue Code |
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• | Salary; | |
• | Bonuses earned under plans other than the 2004 and 2007 Executive Bonus Plans; | |
• | The income recognized upon the vesting of time-based restricted stock awards (unless the executive defers the receipt of such awards under our executive deferral plan, described above); | |
• | Income arising from perquisites; | |
• | Dividends paid to Covered Executives on account of unvested restricted shares that have been awarded under our equity incentive plans; and | |
• | Certain distributions made to a Covered Executive in the current year from our executive deferral plan (described above) arising from the executive’s deferral elections in prior years. |
B. | Section 409A of the Internal Revenue Code |
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• | The definition of “change in control” (the occurrence of which would trigger certain distributions under the plan) was modified to comply with the requirements of Section 409A. Significant aspects of this change included: |
— | a change in control will occur if 30% of our shares are acquired, as opposed to the 20% standard in our prior plan; | |
— | a change in control will occur if the majority of our Board of Directors is replaced during a12-month period, instead of the24-month period imposed by the prior plan; | |
— | The Board has no discretion to overridechange-in-control events under the revised plan, whereas it did have such discretion under the prior plan; and | |
— | The concept of “potential change in control,” which under the prior plan could include shareholders’ approval of certain transaction or the Board’s determination that the acquisition of 5% ownership by a third party constituted a potential change in control, has been removed from the plan; |
• | The definition of “disability” was conformed to Section 409A’s definition, which is somewhat more strict than the prior definition; | |
• | Early withdrawals (which were permitted under the prior plan, with a 10% penalty) are no longer allowed; | |
• | Unscheduled withdrawals are permitted in the event of certain unforeseeable emergencies; | |
• | Participants are permitted to change certain distribution schedules if they do so with at least 12 months notice and delay distributions for at least 5 years; and | |
• | Distributions made on account of termination of employment will not be made until 6 months after the date of termination. |
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Non-Equity | ||||||||||||||||||||||
Incentive | ||||||||||||||||||||||
Stock | Option | Plan | All Other | |||||||||||||||||||
Name and | Salary | Awards1 | Awards2 | Compensation3 | Compensation4 | Total | ||||||||||||||||
Principal Position | Year | ($) | ($) | ($) | ($) | ($) | ($) | |||||||||||||||
Glenn M. Renwick | 2007 | $ | 750,000 | $ | 3,309,221 | $ | — | $ | 832,500 | $ | 102,400 | $ | 4,994,121 | |||||||||
President and Chief | 2006 | 750,000 | 3,144,318 | 132,052 | 1,327,500 | 81,009 | 5,434,879 | |||||||||||||||
Executive Officer | ||||||||||||||||||||||
Brian C. Domeck | 2007 | $ | 317,693 | $ | 229,395 | $ | — | $ | 235,092 | $ | 11,625 | $ | 793,805 | |||||||||
Vice President and | 2006 | 259,655 | 126,691 | 6,288 | 216,095 | 10,660 | 619,389 | |||||||||||||||
Chief Financial Officer | ||||||||||||||||||||||
W. Thomas Forrester5 | 2007 | $ | 197,013 | $ | (23,228 | ) | $ | — | $ | — | $ | 10,785 | $ | 184,570 | ||||||||
Former Vice President and | 2006 | 500,002 | 384,734 | 13,166 | 590,002 | 11,310 | 1,499,214 | |||||||||||||||
Chief Financial Officer | ||||||||||||||||||||||
Brian J. Passell6 | 2007 | $ | 438,270 | $ | 523,435 | $ | — | $ | 324,319 | $ | 12,059 | $ | 1,298,083 | |||||||||
Claims Group President | 2006 | 422,693 | 465,021 | 21,121 | 498,777 | 11,310 | 1,418,922 | |||||||||||||||
Raymond M. Voelker | 2007 | $ | 347,692 | $ | 400,972 | $ | — | $ | 268,071 | $ | 11,625 | $ | 1,028,360 | |||||||||
Chief Information Officer | 2006 | 328,269 | 352,715 | 16,143 | 398,190 | 11,310 | 1,106,627 | |||||||||||||||
Charles E. Jarrett | 2007 | $ | 393,269 | $ | 332,225 | $ | — | $ | 291,019 | $ | 8,700 | $ | 1,025,213 | |||||||||
Vice President, Secretary and | 2006 | 378,269 | 318,337 | 19,083 | 446,358 | 8,484 | 1,170,531 | |||||||||||||||
Chief Legal Officer | ||||||||||||||||||||||
1 | Represents expense recognized with respect to restricted stock awards granted from 2003 through 2007, in accordance with Statement of Financial Accounting Standards 123 (revised 2004) (SFAS 123(R)), “Share-Based Payment.” For awards granted in 2007, see the “Grants of Plan-Based Awards” table below. |
2 | Represents expense recognized in accordance with SFAS 123(R) for nonqualified stock option awards granted in 2002. In 2003, we began granting restricted stock awards in lieu of stock options. All remaining stock options vested on January 1, 2007. Unless there is a modification to the unexercised stock option awards, we will not incur any additional expense relating to currently outstanding stock options in years subsequent to 2006. |
3 | 2007 amounts were earned under The Progressive Corporation 2007 Executive Bonus Plan (the “2007 Executive Plan”), except that for Mr. Voelker, a portion was earned under The Progressive Corporation 2007 Information Technology Incentive Plan (the “2007 IT Bonus Plan”). As discussed in more detail below, Mr. Voelker’s opportunity to earn non-equity incentive compensation was allocated between the 2007 Executive Plan (90%) and the 2007 IT Bonus Plan (10%). |
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Employer | Anniversary | Total All Other | ||||||||||
Name | Contributionsa | Awardsb | Perquisitesc | Compensation | ||||||||
Glenn M. Renwick | $ | 11,625 | $ | — | $ | 90,775 | d | $102,400 | ||||
Brian C. Domeck | 11,625 | — | — | 11,625 | ||||||||
W. Thomas Forrester | 10,785 | — | — | 10,785 | ||||||||
Brian J. Passell | 11,625 | 434 | — | 12,059 | ||||||||
Raymond M. Voelker | 11,625 | — | — | 11,625 | ||||||||
Charles E. Jarrett | 8,700 | — | — | 8,700 |
a | Represents employer contributions made during 2007 under our Retirement Security Program. Amounts contributed vary based on level of employee contribution and years of service, with a maximum annual employer contribution of $11,625. | |
b | Represents service anniversary awards paid to all employees upon every five-year anniversary of employment with Progressive. The maximum service anniversary award is $300, on a post-tax basis, for 25 years of service and each 5-year increment thereafter. | |
c | For further information on the limited perquisites we offered to our NEOs, see the “Perquisites” discussion in “Compensation and Discussion Analysis” on page 31. | |
d | Includes $86,713 in incremental costs for his personal use of our company airplane. We calculate incremental costs to include the cost of fuel and oil per flight; trip related inspections, repairs and maintenance; crew travel expenses; on-board catering; trip related flight planning services; landing, parking and hangar fees; supplies; passenger ground transportation; and other variable costs. Since the airplane is used primarily for business travel, we do not include the fixed costs that do not change based on personal usage, such as pilots’ salaries, the depreciation of the airplane and the cost of maintenance not related to personal trips. In addition, the perquisite amount includes the incremental costs attributable to: (i) Mr. Renwick’s personal use of a company car, which is primarily limited to commuting to and from work; and (ii) non-business related activities associated with an annual retreat attended by the Board of Directors and senior executives in 2007, including the NEOs (e.g., meals for his spouse and other activities). |
5 | W. Thomas Forrester, our former CFO, retired in March 2007 and was eligible for the Rule of 70 benefits contained in our equity incentive plans. See “Potential Payments upon Termination or Change in Control; Qualified Retirement Provisions under Equity Plans,” beginning on page 47, for a discussion of the Rule of 70 benefits. Accordingly, when he retired, Mr. Forrester received 50% of his unvested time-based restricted shares (33,128 shares, valued at $756,147 as of his retirement date), and the other 50% were forfeited, which resulted in a reversal of prior expense recognized by the company and accounted for the negative “stock award” value for 2007 in the Summary Compensation Table to the extent such amounts were previously reported as an expense in the Summary Compensation Table in 2006. In addition, he retained 100% of his unvested performance-based restricted shares (74,740 shares), which are valued at approximately $1.4 million as of December 31, 2007, but each of which will vest (if at all) only when we achieve the required performance objectives for each outstanding award. Further, pursuant to the provisions of our stock option plan, Mr. Forrester will be allowed to retain his outstanding stock options, all of which had previously vested, until their scheduled expiration. At retirement, Mr. Forrester held options covering 900,756 shares, with an average exercise price of $8.40 per share; the options are scheduled to expire in annual increments between December 31, 2007 and December 31, 2011, unless exercised before their scheduled expiration dates. |
6 | Mr. Passell’s employment terminated in February 2008. |
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Estimated Future | |||||||||||||||||||
Payouts Under | |||||||||||||||||||
Estimated Possible Payouts Under Non-Equity | Equity Incentive | Grant Date Fair | |||||||||||||||||
Incentive Plan Awards1 | Plan Awards | Value of Stock | |||||||||||||||||
Threshold | Target | Maximum | Target | Awards2 | |||||||||||||||
Name | Grant Date | ($) | ($) | ($) | (#) | ($) | |||||||||||||
Glenn M. Renwick | N/A | $ | 0 | $ | 1,125,000 | $ | 2,250,000 | ||||||||||||
3/15/2007 | 178,659 | 3 | $ | 3,750,052 | |||||||||||||||
3/15/2007 | 178,655 | 4 | 3,749,968 | ||||||||||||||||
Brian C. Domeck | N/A | $ | 0 | $ | 317,693 | $ | 635,386 | ||||||||||||
3/15/2007 | 15,246 | 3 | $ | 320,014 | |||||||||||||||
3/15/2007 | 15,245 | 4 | 319,993 | ||||||||||||||||
W. Thomas Forrester5 | N/A | — | — | — | — | — | |||||||||||||
Brian J. Passell | N/A | $ | 0 | $ | 438,270 | $ | 876,540 | ||||||||||||
3/15/2007 | 20,964 | 3 | $ | 440,034 | |||||||||||||||
3/15/2007 | 20,965 | 4 | 440,055 | ||||||||||||||||
Raymond M. Voelker | N/A | $ | 0 | $ | 347,692 | $ | 695,384 | ||||||||||||
3/15/2007 | 16,677 | 3 | $ | 350,050 | |||||||||||||||
3/15/2007 | 16,675 | 4 | 350,008 | ||||||||||||||||
Charles E. Jarrett | N/A | $ | 0 | $ | 393,269 | $ | 786,538 | ||||||||||||
3/15/2007 | 18,819 | 3 | $ | 395,011 | |||||||||||||||
3/15/2007 | 18,820 | 4 | 395,032 | ||||||||||||||||
1 | Non-equity incentive plan awards were earned in 2007 under The 2007 Executive Bonus Plan for all executives except Mr. Voelker, 90% of whose potential bonus derived from this plan and the remaining 10% derived from the 2007 IT Bonus Plan. Payments under these plans can range from 0.0 to 2.0 times the targeted amount. The targeted amount represents the product of the executive’s salary and his target percentage, both of which are set by the Compensation Committee at the beginning of the plan year. The actual amount of non-equity incentive plan compensation earned by the NEOs during 2007 is included in the Summary Compensation Table on page 37. Further description of these plans is provided in the “Compensation Discussion and Analysis” beginning on page 22 and the accompanying Narrative Disclosure. |
5 | Mr. Forrester retired on March 2, 2007. As a result, he did not earn, nor was he awarded, any plan-based awards during 2007. |
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Paid Salary | X | Target Percentage | X | Performance Factor | = | Annual Bonus |
• | Separate “Gainsharing matrices” were established for the Agency, Direct, Commercial Auto and Special Lines business units (or an applicablesub-unit) by the Committee in the first quarter of 2007. Each matrix assigned a performance score between 0.0 and 2.0 to various combinations of growth and profitability in the applicable business unit orsub-unit, as follows: |
— | For the Agency and Special Lines units, growth was measured by the change in policies in force for the business unit as compared with the prior year, and profitability was measured by the calendar year combined ratio determined in accordance with accounting principles generally accepted in the United States of America (“GAAP”). | |
— | For the Direct business, two matrices were used. One was based on new policy growth and the GAAP combined ratio (Direct-New), and the other was based on the retention rate for policies in existence at the beginning of the year and the GAAP combined ratio (Direct-Renewal). | |
— | For the Commercial Auto business, two matrices also were used, one for the Light Local market and one for the Specialty business, in each case measuring growth in policies in force over the prior year and the GAAP combined ratio. |
• | Actual growth and profitability performance results for each business unit were determined after year-end and then compared to the applicable matrix to produce a performance score for the business unit. Where more than one matrix was used for a business unit, the results were combined based on a formulapre-established by the Committee to calculate the overall score for the applicable business unit. | |
• | The performance scores achieved by each of the business units were weighted, based on the percentage of net premiums earned in the respective business unit during the year as compared to the Core Business as a whole. | |
• | The weighted scores for the business units were then added together to produce a performance factor for the Core Business as a whole. |
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Option Awards1 | Stock Awards | ||||||||||||||||
Equity | Equity | ||||||||||||||||
Incentive Plan | Incentive Plan | ||||||||||||||||
Number of | Awards: | Awards: Market | |||||||||||||||
Securities | Number of | Value of | |||||||||||||||
Underlying | Unearned | Unearned | |||||||||||||||
Unexercised | Option | Shares That | Shares That | ||||||||||||||
Options | Exercise | Option | Have Not | Have Not | |||||||||||||
(#) | Price | Expiration | Vested | Vested | |||||||||||||
Name | Exercisable | ($) | Date | (#) | ($) | ||||||||||||
Glenn M. Renwick | 147,505 | $ | 10.78 | 12/31/2008 | 651,199 | 3 | $ | 12,476,973 | |||||||||
653,029 | 4.38 | 12/31/2009 | 664,835 | 4 | 12,738,239 | ||||||||||||
712,123 | 6.99 | 12/31/2010 | |||||||||||||||
597,385 | 11.86 | 12/31/2011 | |||||||||||||||
Brian C. Domeck | 33,329 | 4.38 | 12/31/2009 | 34,330 | 3 | 657,763 | |||||||||||
41,986 | 6.99 | 12/31/2010 | 23,165 | 4 | 443,841 | ||||||||||||
21,677 | 11.86 | 12/31/2011 | |||||||||||||||
W. Thomas Forrester | 138,286 | 10.78 | 12/31/2008 | 0 | 3 | — | |||||||||||
332,441 | 4.38 | 12/31/2009 | 74,740 | 4 | 1,432,018 | ||||||||||||
249,956 | 6.99 | 12/31/2010 | |||||||||||||||
144,107 | 11.86 | 12/31/2011 | |||||||||||||||
Brian J. Passell2 | 205,450 | 4.38 | 12/31/2009 | 74,976 | 3 | 1,436,540 | |||||||||||
185,527 | 6.99 | 12/31/2010 | 77,125 | 4 | 1,477,715 | ||||||||||||
103,424 | 11.86 | 12/31/2011 | |||||||||||||||
Raymond M. Voelker | 43,817 | 11.86 | 12/31/2011 | 58,525 | 3 | 1,121,339 | |||||||||||
55,595 | 4 | 1,065,200 | |||||||||||||||
Charles E. Jarrett | 52,140 | 7.22 | 12/31/2009 | 67,387 | 3 | 1,291,135 | |||||||||||
139,905 | 6.99 | 12/31/2010 | 65,140 | 4 | 1,248,082 | ||||||||||||
97,893 | 11.86 | 12/31/2011 | |||||||||||||||
1 | All awards are exercisable at December 31, 2007. We stopped issuing stock option awards after December 31, 2002. In conjunction with the $2.00 per common share special dividend paid in September 2007 and pursuant to the antidilution provisions of our incentive plans, we were required to increase the number of shares and reduce the exercise price of any of the then outstanding stock option awards. |
2 | All of Mr. Passell’s unvested restricted stock awards were forfeited upon his termination of employment in February 2008. |
3 | Represents time-based restricted stock awards. In conjunction with the qualified retirement provisions of the incentive plans, Mr. Forrester’s time-based restricted stock awards either vested or were forfeited upon his retirement in March 2007. Following are the applicable vesting dates for the other NEO awards: |
Name | 1/1/2008 | 1/1/2009 | 1/1/2010 | 1/1/2011 | 1/1/2012 | Total | ||||||||||||||||||
Glenn M. Renwick | 160,616 | 162,064 | 162,197 | 106,769 | 59,553 | 651,199 | ||||||||||||||||||
Brian C. Domeck | 5,928 | 6,212 | 9,450 | 7,658 | 5,082 | 34,330 | ||||||||||||||||||
Brian J. Passell | 19,800 | 17,520 | 18,328 | 12,340 | 6,988 | 74,976 | ||||||||||||||||||
Raymond M. Voelker | 15,312 | 13,568 | 14,371 | 9,715 | 5,559 | 58,525 | ||||||||||||||||||
Charles E. Jarrett | 17,864 | 15,732 | 16,457 | 11,061 | 6,273 | 67,387 |
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4 | Represents performance-based restricted stock awards. Performance-based restricted stock awards vest upon Progressive’s insurance subsidiaries achieving both a minimum level of net premiums earned (NPE) and a predetermined combined ratio (CR) over the same period of 12 consecutive months. Following are the performance criteria that must be achieved to enable the performance-based restricted stock awards to vest for the year of grant indicated: |
• | 2004 — NPE of $15.0 billion and CR of 97 | |
• | 2005 — NPE of $17.5 billion and CR of 96 | |
• | 2006 — NPE of $20.0 billion and CR of 96 | |
• | 2007 — NPE of $19.0 billion and CR of 96 |
Name | 2004 | 2005 | 2006 | 2007 | Total | |||||||||||||||
Glenn M. Renwick | 178,260 | 166,280 | 141,640 | 178,655 | 664,835 | |||||||||||||||
Brian C. Domeck | 2,760 | 2,800 | 2,360 | 15,245 | 23,165 | |||||||||||||||
W. Thomas Forrestera | 25,640 | 25,500 | 23,600 | 0 | 74,740 | |||||||||||||||
Brian J. Passell | 18,740 | 19,760 | 17,660 | 20,965 | 77,125 | |||||||||||||||
Raymond M. Voelker | 13,820 | 13,260 | 11,840 | 16,675 | 55,595 | |||||||||||||||
Charles E. Jarrett | 15,780 | 16,180 | 14,360 | 18,820 | 65,140 |
a | Pursuant to the retirement provisions under the incentive plans, Mr. Forrester retained his performance-based restricted stock awards upon his qualified retirement, which remain subject to the same vesting provisions as the other executive’s awards. |
OPTION EXERCISES AND STOCK VESTED DURING 2007 | ||||||||||||||
Option Awards | Restricted Stock Awards | |||||||||||||
Number of | Number of | |||||||||||||
Shares | Value | Shares | Value | |||||||||||
Acquired on | Realized on | Acquired on | Realized on | |||||||||||
Exercise | Exercise | Vesting | Vesting | |||||||||||
Name | (#) | ($) | (#) | ($) | ||||||||||
Glenn M. Renwick | 123,799 | $ | 1,057,838 | 105,188 | 1 | $ | 2,558,172 | |||||||
Brian C. Domeck | — | — | 4,136 | 100,588 | ||||||||||
W. Thomas Forrester | 112,800 | 1,507,967 | 50,556 | 1 | 1,179,996 | |||||||||
Brian J. Passell | — | — | 13,812 | 335,908 | ||||||||||
Raymond M. Voelker | — | — | 10,656 | 259,154 | ||||||||||
Charles E. Jarrett | — | — | 12,468 | 1 | 303,222 |
1 | Represents restricted stock awards that were deferred in their entirety pursuant to the EDCP immediately prior to the vesting event. These deferred awards are deemed invested in one or more investment funds, including Progressive’s common shares, as recommended by the NEO, and are eligible to be transferred among the funds in the EDCP, except that deferrals of restricted stock awarded in March 2005 or thereafter are automatically deemed invested in Progressive common shares and are not eligible to be transferred to other investments. Distribution of these deferred awards will be made in cash, based on the election of the participant, except that distributions attributable to restricted stock awards made in or after March 2005 will be made in Progressive common shares. Mr. Renwick elected to receive payment of this deferred award in a lump sum upon separation from Progressive. Mr. Forrester elected to receive payment in 10 installments on the earlier of reaching age 59 or the date he separated from Progressive. Mr. Jarrett elected to receive payment of this deferred award in 10 installments upon separation from Progressive. The deferred amounts are included in the Nonqualified Deferred Compensation table below. |
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Executive | Registrant | Aggregate | Aggregate | |||||||||||||
Contributions | Contributions | Earnings in | Aggregate | Balance at | ||||||||||||
in Last Fiscal | in Last Fiscal | Last Fiscal | Withdrawals/ | Last Fiscal | ||||||||||||
Year1 | Year2 | Year | Distributions3 | Year-end1 | ||||||||||||
Name | ($) | ($) | ($) | ($) | ($) | |||||||||||
Glenn M. Renwick | $ | 3,885,672 | $ | 0 | $ | (571,554 | ) | $ | 165,986 | $ | 24,155,129 | |||||
Brian C. Domeck | 50,877 | 0 | 97,522 | 0 | 1,451,427 | |||||||||||
W. Thomas Forrester | 1,769,998 | 0 | 340,466 | 1,035,912 | 9,835,314 | |||||||||||
Brian J. Passell | 0 | 0 | 33,593 | 0 | 487,084 | |||||||||||
Raymond M. Voelker | 0 | 0 | 0 | 0 | 0 | |||||||||||
Charles E. Jarrett | 390,224 | 0 | 73,826 | 0 | 3,549,621 |
1 | The table below identifies amounts of deferred compensation reported as compensation for the 2007 fiscal year in the Summary Compensation Table in this Proxy Statement, as well as the aggregate amount of deferred compensation reported in the Summary Compensation Tables in our proxy statements for all prior years, including this Proxy Statement. Prior to 2007, non-equity incentive compensation awards were disclosed as “Bonus” in the Annual Compensation Section of the Summary Compensation Table. Under our plans, the non-equity incentive plan compensation that was earned in 2007 (which is shown in the Summary Compensation Table in this Proxy Statement) will not be paid until 2008. As a result, the deferral of the amounts earned in 2007 also will not occur until 2008, and no amounts are shown below as “Contributions Reported in Current Summary Compensation Table Earned in Last Fiscal Year.” |
Contributions | ||||||
Reported in | Aggregate Balance | |||||
Current Summary | (Contributions | |||||
Compensation | Reported in Prior Years | |||||
Table Earned | Summary Compensation | |||||
Name | in 2007 | Tables) | ||||
Glenn M. Renwicka | $ | — | $ | 12,680,334 | ||
W. Thomas Forresterb | — | 6,345,152 | ||||
Brian J. Passellc | — | 333,806 | ||||
Charles E. Jarrettd | — | 357,086 |
a | Mr. Renwick has deferred receipt of his non-equity incentive plan awards in their entirety since 1995, the year the EDCP began. All awards have been disclosed when earned in the applicable Summary Compensation Tables for prior years. |
b | Mr. Forrester has deferred receipt of his non-equity incentive plan awards in their entirety since 1995, the year the EDCP began. All awards have been disclosed when earned in the applicable Summary Compensation Tables for prior years. |
c | Mr. Passell has deferred a portion of his non-equity compensation at various times since 1995. All deferred awards since 2000 have been disclosed in the applicable Summary Compensation Tables for prior years. |
d | Mr. Jarrett has deferred a portion of his non-equity compensation at various times since 2001. All deferred awards since 2006 have been disclosed in the applicable Summary Compensation Tables for prior years. |
2 | Progressive makes no supplemental contributions to the EDCP in the year of deferral or in subsequent years. |
3 | Represents scheduled distributions based on the executives’ elections in prior years, except that as to Mr. Forrester, distributions resulted from his retirement in March 2007. |
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One-Year | ||||
Performance | ||||
As of 12/31/07 | ||||
Fund | (%) | |||
American Advantage Small Cap Value | (6.64 | ) | ||
Fidelity Diversified International Fund | 16.03 | |||
Fidelity Dividend Growth Fund | 1.11 | |||
Fidelity Mid-Cap Stock Fund | 8.20 | |||
Fidelity Retirement Money Market | 5.12 | |||
FMA Small Company Portfolio | .61 | |||
Janus Worldwide Fund | 9.23 | |||
Oakmark Equity and Income Fund | 11.97 | |||
PIMCO Total Return Fund | 8.81 | |||
Templeton World Fund — Class A | 8.50 | |||
The Progressive Corporation | (12.60 | ) | ||
Vanguard Growth Index Fund — Institutional Class | 12.73 | |||
Vanguard Institutional Index Fund | 5.47 | |||
Vanguard Mid-Cap Index Fund — Institutional Class | 6.22 | |||
Vanguard Small-Cap Index Fund — Institutional Class | 1.29 | |||
Vanguard Total International Stock Fund — Investor Class | 15.52 | |||
Vanguard Value Index Fund — Institutional Class | .21 | |||
Wasatch Small Cap Growth Fund | 8.36 | |||
Washington Mutual Investors Fund — Class A | 3.97 |
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Amount of | Estimated Value of | |||||
Name | Severance Payment | Health Benefits | ||||
Glenn M. Renwick | $ | 2,250,000 | $ | 13,817 | ||
Brian C. Domeck | 960,000 | 19,158 | ||||
Brian J. Passell | 1,320,000 | 13,816 | ||||
Raymond M. Voelker | 1,095,000 | 19,159 | ||||
Charles E. Jarrett | 1,185,000 | 19,159 |
• | Acquisition of 20% or more of the voting power of our outstanding shares, with certain exceptions including acquisitions by a passive investor with only an investment intent; | |
• | Turnover of a majority of the Board of Directors during a24-month period, without the approval of the prior Board members; or | |
• | Occurrence of a transaction requiring shareholder approval for the acquisition of Progressive, or any portion of our shares, through purchase of shares or assets, by merger or otherwise. |
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• | The approval by shareholders of an agreement, the consummation of which would constitute a Change in Control (as described above), unless the Board approved such change prior to the commencement thereof; or | |
• | Acquisition of 5% or more of Progressive’s voting power, together with a resolution by the Board of Directors that a Potential Change in Control has occurred. |
Payments on Unvested | Payments on | ||||||||
Restricted Stock | Outstanding Stock | ||||||||
Name | Awards1 | Options2 | Total Payments | ||||||
Glenn M. Renwick | $ | 25,993,312 | $ | 23,915,308 | $ | 49,908,620 | |||
Brian C. Domeck | 1,168,003 | 1,161,814 | 2,329,817 | ||||||
W. Thomas Forrester | 1,432,018 | 10,166,260 | 11,598,278 | ||||||
Brian J. Passell | 3,005,561 | 6,049,410 | 9,054,971 | ||||||
Raymond M. Voelker | 2,259,168 | 319,864 | 2,579,032 | ||||||
Charles E. Jarrett | 2,621,182 | 3,039,814 | 5,660,996 |
1 | Includes, with respect to restricted stock awards made in or after March 2007, amount equal to dividends paid on common shares, plus accrued interest, which amounts will be paid under the plan only upon the vesting of the underlying restricted stock awards. |
2 | As of January 1, 2007, all stock options are vested. |
• | directly or indirectly being an owner, officer, employee, advisor or consultant to a company that competes with Progressive or its subsidiaries or affiliates to an extent deemed material by the Committee; |
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• | disclosure to third parties or misuse of any confidential information or trade secrets of Progressive, its subsidiaries or affiliates; | |
• | any material violation of Progressive’s Code of Business Conduct and Ethics or any other agreement between Progressive and the executive; or | |
• | failing in any material respect to perform the executive’s assigned responsibilities as an employee of Progressive or any of its subsidiaries or affiliates, as determined by the Committee, in its sole judgment, after consulting with the Chief Executive Officer. |
Year ended December 31, 2007
Restricted Stock | |||||||||
Awards1 | Option Awards1 | Total | |||||||
Name | ($) | ($) | ($) | ||||||
Charles A. Davis | $ | 164,646 | $ | — | $ | 164,646 | |||
Stephen R. Hardis | 159,651 | — | 159,651 | ||||||
Bernadine P. Healy, M.D. | 154,967 | — | 154,967 | ||||||
Jeffrey D. Kelly | 154,656 | — | 154,656 | ||||||
Abby F. Kohnstamm | 158,831 | — | 158,831 | ||||||
Philip A. Laskawy2 | 43,363 | — | 43,363 | ||||||
Peter B. Lewis | 199,579 | — | 199,579 | ||||||
Norman S. Matthews | 164,646 | — | 164,646 | ||||||
Patrick H. Nettles, Ph.D. | 154,656 | — | 154,656 | ||||||
Donald B. Shackelford | 149,678 | — | 149,678 | ||||||
Bradley T. Sheares, Ph.D. | 150,917 | — | 150,917 |
1 | Represents expense recognized with respect to restricted stock awards in accordance with SFAS 123(R). |
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Aggregate Number of | ||||||||||||||
Shares at December 31, | ||||||||||||||
Awarded in 2007 | 2007 | |||||||||||||
Restricted | Restricted | |||||||||||||
Stock | Grant Date | Stock | Option | |||||||||||
Awards | Fair Value | Awards | Awardsa | |||||||||||
Name | (#) | ($) | (#) | (#) | ||||||||||
Charles A. Davis | 7,052 | $ | 165,017 | 7,052 | 99,945 | |||||||||
Stephen R. Hardis | 6,838 | 160,009 | 6,838 | 82,337 | ||||||||||
Bernadine P. Healy, M.D. | 6,624 | 155,002 | 6,624 | — | ||||||||||
Jeffrey D. Kelly | 6,624 | 155,002 | 6,624 | 65,493 | ||||||||||
Abby F. Kohnstamm | 6,411 | 150,017 | 6,411 | — | ||||||||||
Philip A. Laskawy | 7,479 | 175,009 | — | 11,497 | ||||||||||
Peter B. Lewis | 8,548 | 200,023 | 8,548 | — | b | |||||||||
Norman S. Matthews | 7,052 | 165,017 | 7,052 | 99,945 | ||||||||||
Patrick H. Nettles, Ph.D. | 6,624 | 155,002 | 6,624 | — | ||||||||||
Donald B. Shackelford | 6,411 | 150,017 | 6,411 | 99,945 | ||||||||||
Bradley T. Sheares, Ph.D. | 6,411 | 150,017 | 6,411 | — |
a | Reflects an increase in the number of shares subject to options outstanding under the antidilution provisions of the 1998 Directors Incentive Plan in conjunction with the $2.00 per common share special dividend that was paid in September 2007. A corresponding decrease in the exercise price for each option was also made. | |
b | Mr. Lewis did not receive stock options as a director of Progressive. His option awards were granted prior to February 2003 when he was an executive officer of Progressive. His outstanding option awards are set forth in Note 3 on page 19. |
2 | Mr. Laskawy resigned from our Board in December 2007. |
Compensation Component | Dollar Value | |||
Board Retainer | $ | 110,000 | ||
Audit Committee Chair Retainer | 65,000 | |||
Audit Committee Member Retainer | 45,000 | |||
Compensation Committee Chair Retainer | 45,000 | |||
Compensation Committee Member Retainer | 40,000 | |||
Investment Committee Chair Retainer | 45,000 | |||
Investment Committee Member Retainer | 40,000 | |||
Additional Committee Chair Retainer1 | 15,000 | |||
Additional Committee Member Retainer1 | 10,000 | |||
Chairman of the Board | 200,000 |
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51
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• | if a director is nominated for re-election in an election in which a majority voting standard applies,and | |
• | he or she fails to achieve a majority of votes cast but does not tender his or her resignation within 10 days after the election in accordance with the Board-established procedures,then | |
• | that director’s term will end on the earlier of the date on which a successor is elected or the expiration of the10-day period. |
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Fees | 2007 | 2006 | ||||||
Audit | $ | 1,481,160 | $ | 1,760,955 | ||||
Audit-related | 83,827 | 27,261 | ||||||
Tax | 61,915 | 50,093 | ||||||
All other | 0 | 0 | ||||||
Total | $ | 1,626,902 | $ | 1,838,309 | ||||
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A-1
Table of Contents
B-1
Table of Contents
C-1
Table of Contents
App.-A-1
Table of Contents
Consolidated Statements of Income
For the years ended December 31,
(millions — except per share amounts) | 2007 | 2006 | 2005 | |||||||||
Revenues | ||||||||||||
Net premiums earned | $ | 13,877.4 | $ | 14,117.9 | $ | 13,764.4 | ||||||
Investment income | 680.8 | 647.8 | 536.7 | |||||||||
Net realized gains (losses) on securities | 106.3 | (9.7 | ) | (37.9 | ) | |||||||
Service revenues | 22.3 | 30.4 | 40.2 | |||||||||
Total revenues | 14,686.8 | 14,786.4 | 14,303.4 | |||||||||
Expenses | ||||||||||||
Losses and loss adjustment expenses | 9,926.2 | 9,394.9 | 9,364.8 | |||||||||
Policy acquisition costs | 1,399.9 | 1,441.9 | 1,448.2 | |||||||||
Other underwriting expenses | 1,526.2 | 1,402.8 | 1,312.2 | |||||||||
Investment expenses | 12.4 | 11.9 | 12.1 | |||||||||
Service expenses | 20.5 | 24.4 | 24.6 | |||||||||
Interest expense | 108.6 | 77.3 | 82.6 | |||||||||
Total expenses | 12,993.8 | 12,353.2 | 12,244.5 | |||||||||
Net Income | ||||||||||||
Income before income taxes | 1,693.0 | 2,433.2 | 2,058.9 | |||||||||
Provision for income taxes | 510.5 | 785.7 | 665.0 | |||||||||
Net income | $ | 1,182.5 | $ | 1,647.5 | $ | 1,393.9 | ||||||
Computation of Earnings Per Share | ||||||||||||
Basic: | ||||||||||||
Average shares outstanding | 710.4 | 774.3 | 787.7 | |||||||||
Per share | $ | 1.66 | $ | 2.13 | $ | 1.77 | ||||||
Diluted: | ||||||||||||
Average shares outstanding | 710.4 | 774.3 | 787.7 | |||||||||
Net effect of dilutive stock-based compensation | 8.1 | 9.5 | 11.6 | |||||||||
Total equivalent shares | 718.5 | 783.8 | 799.3 | |||||||||
Per share | $ | 1.65 | $ | 2.10 | $ | 1.74 | ||||||
App.-A-2
Table of Contents
Consolidated Balance Sheets
December 31,
(millions) | 2007 | 2006 | ||||||
Assets | ||||||||
Investments - Available-for-sale, at fair value: | ||||||||
Fixed maturities (amortized cost: $9,135.6 and $9,959.6) | $ | 9,184.9 | $ | 9,958.9 | ||||
Equity securities: | ||||||||
Preferred stocks (cost: $2,578.1 and $1,761.4) | 2,270.3 | 1,781.0 | ||||||
Common equities (cost: $1,361.0 and $1,469.0) | 2,327.5 | 2,368.1 | ||||||
Short-term investments (amortized cost: $382.4 and $581.0) | 382.4 | 581.2 | ||||||
Total investments | 14,165.1 | 14,689.2 | ||||||
Cash | 5.8 | 5.6 | ||||||
Accrued investment income | 142.1 | 134.4 | ||||||
Premiums receivable, net of allowance for doubtful accounts of $118.1 and $122.0 | 2,395.1 | 2,498.2 | ||||||
Reinsurance recoverables, including $47.6 and $72.4 on paid losses | 335.1 | 433.8 | ||||||
Prepaid reinsurance premiums | 69.8 | 89.5 | ||||||
Deferred acquisition costs | 426.3 | 441.0 | ||||||
Income taxes | 106.0 | 16.8 | ||||||
Property and equipment, net of accumulated depreciation of $605.7 and $557.0 | 1,000.4 | 973.4 | ||||||
Other assets | 197.4 | 200.2 | ||||||
Total assets | $ | 18,843.1 | $ | 19,482.1 | ||||
Liabilities and Shareholders’ Equity | ||||||||
Unearned premiums | $ | 4,210.4 | $ | 4,335.0 | ||||
Loss and loss adjustment expense reserves | 5,942.7 | 5,725.0 | ||||||
Accounts payable, accrued expenses and other liabilities1 | 1,580.6 | 1,390.0 | ||||||
Debt2 | 2,173.9 | 1,185.5 | ||||||
Total liabilities | 13,907.6 | 12,635.5 | ||||||
Shareholders’ equity: | ||||||||
Common Shares, $1.00 par value (authorized 900.0; issued 798.1 and 798.7, including treasury shares of 117.9 and 50.7) | 680.2 | 748.0 | ||||||
Paid-in capital | 834.8 | 847.4 | ||||||
Accumulated other comprehensive income: | ||||||||
Net unrealized gains on securities | 465.0 | 596.8 | ||||||
Net unrealized gains on forecasted transactions | 27.8 | 7.5 | ||||||
Retained earnings | 2,927.7 | 4,646.9 | ||||||
Total shareholders’ equity | 4,935.5 | 6,846.6 | ||||||
Total liabilities and shareholders’ equity | $ | 18,843.1 | $ | 19,482.1 | ||||
App.-A-3
Table of Contents
Consolidated Statements of Changes in Shareholders’ Equity
For the years ended December 31,
(millions — except per share amounts) | 2007 | 2006 | 2005 | |||||||||||||||||||||
Retained Earnings | ||||||||||||||||||||||||
Balance, Beginning of year | $ | 4,646.9 | $ | 4,726.0 | $ | 3,812.9 | ||||||||||||||||||
Net income | 1,182.5 | $ | 1,182.5 | 1,647.5 | $ | 1,647.5 | 1,393.9 | $ | 1,393.9 | |||||||||||||||
Cash dividends declared on Common Shares ($2.1450, $.0325 and $.0300 per share)1 | (1,507.6 | ) | (25.0 | ) | (23.7 | ) | ||||||||||||||||||
Treasury shares purchased2 | (1,388.4 | ) | (1,111.6 | ) | (457.0 | ) | ||||||||||||||||||
Capitalization of stock split | — | (585.9 | ) | — | ||||||||||||||||||||
Other, net3 | (5.7 | ) | (4.1 | ) | (.1 | ) | ||||||||||||||||||
Balance, End of year | $ | 2,927.7 | $ | 4,646.9 | $ | 4,726.0 | ||||||||||||||||||
Accumulated Other Comprehensive Income (Loss), Net of Tax | ||||||||||||||||||||||||
Balance, Beginning of year | $ | 604.3 | $ | 398.7 | $ | 444.8 | ||||||||||||||||||
Changes in: | ||||||||||||||||||||||||
Net unrealized gains on securities | (131.8 | ) | 206.7 | (45.0 | ) | |||||||||||||||||||
Net unrealized gains on forecasted transactions | 20.3 | (1.1 | ) | (1.1 | ) | |||||||||||||||||||
Other comprehensive income | (111.5 | ) | (111.5 | ) | 205.6 | 205.6 | (46.1 | ) | (46.1 | ) | ||||||||||||||
Balance, End of year | $ | 492.8 | $ | 604.3 | $ | 398.7 | ||||||||||||||||||
Comprehensive Income | $ | 1,071.0 | $ | 1,853.1 | $ | 1,347.8 | ||||||||||||||||||
Common Shares, $1.00 Par Value | ||||||||||||||||||||||||
Balance, Beginning of year | $ | 748.0 | $ | 197.3 | $ | 200.4 | ||||||||||||||||||
Stock options exercised | 3.4 | 3.7 | 1.6 | |||||||||||||||||||||
Treasury shares purchased2 | (72.9 | ) | (39.1 | ) | (5.2 | ) | ||||||||||||||||||
Restricted stock issued, net of forfeitures | 1.7 | .2 | .5 | |||||||||||||||||||||
Capitalization of stock split | — | 585.9 | — | |||||||||||||||||||||
Balance, End of year | $ | 680.2 | $ | 748.0 | $ | 197.3 | ||||||||||||||||||
Paid-In Capital | ||||||||||||||||||||||||
Balance, Beginning of year | $ | 847.4 | $ | 848.2 | $ | 743.3 | ||||||||||||||||||
Stock options exercised | 27.4 | 39.6 | 42.6 | |||||||||||||||||||||
Tax benefits from exercise/vesting of stock-based compensation | 15.5 | 38.8 | 41.2 | |||||||||||||||||||||
Treasury shares purchased2 | (87.1 | ) | (63.8 | ) | (20.6 | ) | ||||||||||||||||||
Restricted stock issued, net of forfeitures | (1.7 | ) | (.2 | ) | 41.7 | |||||||||||||||||||
Amortization of stock-based compensation | 28.0 | 27.8 | — | |||||||||||||||||||||
SFAS 123(R) reclass4 | — | (51.5 | ) | — | ||||||||||||||||||||
Other3 | 5.3 | 8.5 | — | |||||||||||||||||||||
Balance, End of year | $ | 834.8 | $ | 847.4 | $ | 848.2 | ||||||||||||||||||
Unamortized Restricted Stock | ||||||||||||||||||||||||
Balance, Beginning of year | $ | — | $ | (62.7 | ) | $ | (46.0 | ) | ||||||||||||||||
Restricted stock issued, net of forfeitures | — | — | (42.2 | ) | ||||||||||||||||||||
Restricted stock market value adjustment | — | — | (8.2 | ) | ||||||||||||||||||||
Amortization of restricted stock | — | — | 33.7 | |||||||||||||||||||||
SFAS 123(R) reclass4 | — | 62.7 | — | |||||||||||||||||||||
Balance, End of year | $ | — | $ | — | $ | (62.7 | ) | |||||||||||||||||
Total Shareholders’ Equity | $ | 4,935.5 | $ | 6,846.6 | $ | 6,107.5 | ||||||||||||||||||
4 | Upon adoption of SFAS 123(R), companies were required to eliminate any unearned compensation (i.e., contra-equity) accounts against the appropriate equity accounts. As a result, as of January 1, 2006, we were required to reclassify $62.7 million of “Unamortized restricted stock,” of which $51.5 million related to equity awards and $11.2 million related to liability awards. |
App.-A-4
Table of Contents
Consolidated Statements of Cash Flows
For the years ended December 31,
(millions) | 2007 | 2006 | 2005 | |||||||||
Cash Flows From Operating Activities | ||||||||||||
Net income | $ | 1,182.5 | $ | 1,647.5 | $ | 1,393.9 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: | ||||||||||||
Depreciation | 106.9 | 103.4 | 92.4 | |||||||||
Amortization of fixed maturities | 284.1 | 225.6 | 189.6 | |||||||||
Amortization of stock-based compensation | 26.5 | 27.6 | 33.7 | |||||||||
Net realized (gains) losses on securities | (106.3 | ) | 9.7 | 37.9 | ||||||||
Net loss on disposition of property and equipment | .4 | .9 | — | |||||||||
Changes in: | ||||||||||||
Premiums receivable | 103.1 | 2.5 | (213.5 | ) | ||||||||
Reinsurance recoverables | 98.7 | (28.1 | ) | (24.1 | ) | |||||||
Prepaid reinsurance premiums | 19.7 | 14.2 | 16.1 | |||||||||
Deferred acquisition costs | 14.7 | 3.8 | (12.6 | ) | ||||||||
Income taxes | (30.3 | ) | 10.1 | (140.0 | ) | |||||||
Unearned premiums | (124.6 | ) | (.1 | ) | 227.1 | |||||||
Loss and loss adjustment expense reserves | 217.7 | 64.7 | 374.7 | |||||||||
Accounts payable, accrued expenses and other liabilities | 2.4 | 7.1 | 49.5 | |||||||||
Tax benefits from exercise/vesting of stock-based compensation1 | — | — | 41.2 | |||||||||
Other, net | (4.5 | ) | (64.3 | ) | (71.9 | ) | ||||||
Net cash provided by operating activities | 1,791.0 | 2,024.6 | 1,994.0 | |||||||||
Cash Flows From Investing Activities | ||||||||||||
Purchases: | ||||||||||||
Fixed maturities | (8,184.6 | ) | (6,294.9 | ) | (9,154.4 | ) | ||||||
Equity securities | (1,490.3 | ) | (1,131.6 | ) | (852.9 | ) | ||||||
Short-term investments — auction rate securities | (7,156.6 | ) | (2,999.3 | ) | (7,935.3 | ) | ||||||
Sales: | ||||||||||||
Fixed maturities | 8,327.6 | 5,668.2 | 7,068.6 | |||||||||
Equity securities | 775.2 | 323.1 | 152.3 | |||||||||
Short-term investments — auction rate securities | 7,325.4 | 3,215.5 | 8,053.4 | |||||||||
Maturities, paydowns, calls and other: | ||||||||||||
Fixed maturities | 557.9 | 686.1 | 572.6 | |||||||||
Equity securities | 10.7 | 223.5 | 114.4 | |||||||||
Net sales (purchases) of short-term investments — other | 30.0 | (22.3 | ) | 491.8 | ||||||||
Net unsettled security transactions | 35.1 | (116.6 | ) | 126.6 | ||||||||
Purchases of property and equipment | (136.3 | ) | (334.3 | ) | (219.3 | ) | ||||||
Sale of property and equipment | 2.0 | 15.4 | 36.1 | |||||||||
Net cash provided by (used in) investing activities | 96.1 | (767.2 | ) | (1,546.1 | ) | |||||||
Cash Flows From Financing Activities | ||||||||||||
Proceeds from exercise of stock options | 30.8 | 43.3 | 44.2 | |||||||||
Tax benefits from exercise/vesting of stock-based compensation1 | 15.5 | 38.8 | — | |||||||||
Proceeds from debt2 | 1,021.7 | — | — | |||||||||
Payment of debt | — | (100.0 | ) | — | ||||||||
Dividends paid to shareholders | (1,406.5 | ) | (25.0 | ) | (23.7 | ) | ||||||
Acquisition of treasury shares | (1,548.4 | ) | (1,214.5 | ) | (482.8 | ) | ||||||
Net cash used in financing activities | (1,886.9 | ) | (1,257.4 | ) | (462.3 | ) | ||||||
Increase (decrease) in cash | .2 | — | (14.4 | ) | ||||||||
Cash, Beginning of year | 5.6 | 5.6 | 20.0 | |||||||||
Cash, End of year | $ | 5.8 | $ | 5.6 | $ | 5.6 | ||||||
App.-A-5
Table of Contents
• | Changes in fair value of an asset or liability (fair value hedge); |
App.-A-6
Table of Contents
• | Foreign currency of an investment in a foreign operation (foreign currency hedge); or |
• | Variable cash flows of a forecasted transaction (cash flow hedge). |
• | Fair value hedge: changes in fair value of the hedge, as well as the hedged item, would be recognized in income in the period of change while the hedge was in effect. |
• | Foreign currency hedge: changes in fair value of the hedge, as well as the hedged item, would be reflected as a change in translation adjustment as part of accumulated other comprehensive income. Gains and losses on the foreign currency hedge would offset the foreign exchange gains and losses on the foreign investment as they are recognized into income. |
• | Cash flow hedge: changes in fair value of the hedge would be reported as a component of accumulated other comprehensive income and subsequently amortized into earnings over the life of the hedged transaction. |
• | Fair value hedge: the derivative instrument would continue to be adjusted through income, while the adjustment in the change in value of the hedged item would be reflected as a change in unrealized gains (losses) as part of accumulated other comprehensive income. |
• | Foreign currency hedge: changes in the value of the hedged item would continue to be reflected as a change in translation adjustment as part of accumulated other comprehensive income, but the derivative instrument would be adjusted through income for the current period. |
• | Cash flow hedge: changes in fair value of the derivative instrument would be reported in income for the current period. |
App.-A-7
Table of Contents
App.-A-8
Table of Contents
(millions, except per share amounts) | 2005 | |||
Net income, as reported | $ | 1,393.9 | ||
Deduct: Total stock-based employee compensation expense determined under the fair value based method for all stock option awards, net of related tax effects | (2.6 | ) | ||
Net income, pro forma | $ | 1,391.3 | ||
Earnings per share | ||||
Basic — as reported | $ | 1.77 | ||
Basic — pro forma | 1.77 | |||
Diluted — as reported | $ | 1.74 | ||
Diluted — pro forma | 1.74 |
App.-A-9
Table of Contents
App.-A-10
Table of Contents
2. | INVESTMENTS |
Gross | Gross | % of | ||||||||||||||||||
Unrealized | Unrealized | Fair | Total | |||||||||||||||||
(millions) | Cost | Gains | Losses | Value | Portfolio | |||||||||||||||
2007 | ||||||||||||||||||||
Fixed maturities: | ||||||||||||||||||||
U.S. government obligations1 | $ | 1,166.7 | $ | 40.4 | $ | — | $ | 1,207.1 | 8.5 | % | ||||||||||
State and local government obligations | 3,706.3 | 44.0 | (5.2 | ) | 3,745.1 | 26.5 | ||||||||||||||
Foreign government obligations | 29.9 | .3 | — | 30.2 | .2 | |||||||||||||||
Corporate and U.S. agency debt securities | 1,075.0 | 12.1 | (8.7 | ) | 1,078.4 | 7.6 | ||||||||||||||
Asset-backed securities | 2,503.6 | 35.9 | (27.9 | ) | 2,511.6 | 17.7 | ||||||||||||||
Redeemable preferred stock | 654.1 | 4.4 | (46.0 | ) | 612.5 | 4.3 | ||||||||||||||
Total fixed maturities | 9,135.6 | 137.1 | (87.8 | ) | 9,184.9 | 64.8 | ||||||||||||||
Short-term investments: | ||||||||||||||||||||
Other short-term investments | 382.4 | — | — | 382.4 | 2.7 | |||||||||||||||
Preferred stocks2 | 2,578.1 | 6.0 | (306.4 | ) | 2,270.3 | 16.0 | ||||||||||||||
Common equities | 1,361.0 | 986.8 | (20.3 | ) | 2,327.5 | 16.5 | ||||||||||||||
Total portfolio2, 3 | $ | 13,457.1 | $ | 1,129.9 | $ | (414.5 | ) | $ | 14,165.1 | 100.0 | % | |||||||||
2006 | ||||||||||||||||||||
Fixed maturities: | ||||||||||||||||||||
U.S. government obligations | $ | 3,195.1 | $ | 23.3 | $ | (15.0 | ) | $ | 3,203.4 | 21.8 | % | |||||||||
State and local government obligations | 3,124.2 | 18.4 | (22.9 | ) | 3,119.7 | 21.2 | ||||||||||||||
Foreign government obligations | 29.8 | .1 | (.1 | ) | 29.8 | .2 | ||||||||||||||
Corporate and U.S. agency debt securities | 1,125.0 | 5.6 | (13.8 | ) | 1,116.8 | 7.6 | ||||||||||||||
Asset-backed securities | 2,387.4 | 24.0 | (21.3 | ) | 2,390.1 | 16.3 | ||||||||||||||
Redeemable preferred stock | 98.1 | 3.4 | (2.4 | ) | 99.1 | .7 | ||||||||||||||
Total fixed maturities | 9,959.6 | 74.8 | (75.5 | ) | 9,958.9 | 67.8 | ||||||||||||||
Short-term investments: | ||||||||||||||||||||
Auction rate municipal obligations | 99.4 | — | — | 99.4 | .7 | |||||||||||||||
Auction rate preferred stocks | 69.2 | .2 | — | 69.4 | .5 | |||||||||||||||
Other short-term investments | 412.4 | — | — | 412.4 | 2.8 | |||||||||||||||
Total short-term investments | 581.0 | .2 | — | 581.2 | 4.0 | |||||||||||||||
Preferred stocks | 1,761.4 | 31.5 | (11.9 | ) | 1,781.0 | 12.1 | ||||||||||||||
Common equities | 1,469.0 | 904.0 | (4.9 | ) | 2,368.1 | 16.1 | ||||||||||||||
Total portfolio3 | $ | 13,771.0 | $ | 1,010.5 | $ | (92.3 | ) | $ | 14,689.2 | 100.0 | % | |||||||||
1 | Includes $53.8 million of gains on our open interest rate swap positions. Also includes $34.1 million of collateral, in the form of Treasury Notes that were delivered to the counterparty on our open credit default swaps. See theDerivative Instrumentssection below for further discussion. |
2 | At December 31, 2007, the fair value included a $7.4 million change in certain hybrid securities that was recognized as a realized loss. |
App.-A-11
Table of Contents
(millions) | 2007 | 2006 | 2005 | |||||||||
Fixed maturities | $ | 478.6 | $ | 481.7 | $ | 399.0 | ||||||
Preferred stocks | 126.9 | 84.4 | 61.5 | |||||||||
Common equities | 46.2 | 43.1 | 37.2 | |||||||||
Short-term investments: | ||||||||||||
Auction rate municipal obligations | 2.6 | 1.8 | 5.4 | |||||||||
Auction rate preferred stocks | .8 | 5.8 | 6.8 | |||||||||
Other short-term investments | 25.7 | 31.0 | 26.8 | |||||||||
Investment income | 680.8 | 647.8 | 536.7 | |||||||||
Investment expenses | (12.4 | ) | (11.9 | ) | (12.1 | ) | ||||||
Net investment income | $ | 668.4 | $ | 635.9 | $ | 524.6 | ||||||
(millions) | 2007 | 2006 | 2005 | |||||||||
Fixed maturities | $ | 113.3 | $ | 37.9 | $ | 47.4 | ||||||
Preferred stocks | 3.1 | .6 | — | |||||||||
Common equities | 55.4 | 24.7 | 15.6 | |||||||||
Short-term investments: | ||||||||||||
Auction rate municipal obligations | .1 | .1 | .1 | |||||||||
Derivatives | 63.1 | 10.0 | — | |||||||||
Total gross realized gains | 235.0 | 73.3 | 63.1 | |||||||||
Fixed maturities | (23.6 | ) | (62.4 | ) | (68.6 | ) | ||||||
Preferred stocks | (28.0 | ) | (11.1 | ) | (2.3 | ) | ||||||
Common equities | (33.7 | ) | (9.2 | ) | (22.5 | ) | ||||||
Short-term investments: | ||||||||||||
Auction rate municipal obligations | — | (.1 | ) | — | ||||||||
Auction rate preferred stocks | — | (.2 | ) | — | ||||||||
Derivatives | (43.4 | ) | — | (7.6 | ) | |||||||
Total gross realized losses | (128.7 | ) | (83.0 | ) | (101.0 | ) | ||||||
Fixed maturities | 89.7 | (24.5 | ) | (21.2 | ) | |||||||
Preferred stocks | (24.9 | ) | (10.5 | ) | (2.3 | ) | ||||||
Common equities | 21.7 | 15.5 | (6.9 | ) | ||||||||
Short-term investments: | ||||||||||||
Auction rate municipal obligations | .1 | — | .1 | |||||||||
Auction rate preferred stocks | — | (.2 | ) | — | ||||||||
Derivatives | 19.7 | 10.0 | (7.6 | ) | ||||||||
Total net realized gains (losses) on securities | $ | 106.3 | $ | (9.7 | ) | $ | (37.9 | ) | ||||
Per share (diluted basis) | $ | .10 | $ | (.01 | ) | $ | (.03 | ) | ||||
App.-A-12
Table of Contents
Total | Unrealized Losses | |||||||||||||||
Fair | Less than 12 | 12 Months or | ||||||||||||||
(millions) | Value | Total | Months | Greater1 | ||||||||||||
2007 | ||||||||||||||||
Fixed maturities | $ | 2,509.3 | $ | (87.8 | ) | $ | (51.4 | ) | $ | (36.4 | ) | |||||
Preferred stocks | 1,975.3 | (306.4 | ) | (245.3 | ) | (61.1 | ) | |||||||||
Common equities | 160.5 | (20.3 | ) | (18.3 | ) | (2.0 | ) | |||||||||
Total | $ | 4,645.1 | $ | (414.5 | ) | $ | (315.0 | ) | $ | (99.5 | ) | |||||
2006 | ||||||||||||||||
Fixed maturities | $ | 6,128.4 | $ | (75.5 | ) | $ | (6.7 | ) | $ | (68.8 | ) | |||||
Preferred stocks | 494.3 | (11.9 | ) | (.4 | ) | (11.5 | ) | |||||||||
Common equities | 97.2 | (4.9 | ) | (4.3 | ) | (.6 | ) | |||||||||
Total | $ | 6,719.9 | $ | (92.3 | ) | $ | (11.4 | ) | $ | (80.9 | ) | |||||
1 | The fair value for securities in an unrealized loss position for 12 months or greater was $2,038.9 million at December 31, 2007 and $4,832.2 million at December 31, 2006. |
App.-A-13
Table of Contents
(millions) | Cost | Fair Value | ||||||
Less than one year | $ | 527.1 | $ | 529.0 | ||||
One to five years | 5,723.3 | 5,750.6 | ||||||
Five to ten years | 2,678.8 | 2,701.0 | ||||||
Ten years or greater | 152.6 | 150.5 | ||||||
Total | $ | 9,081.8 | $ | 9,131.1 | ||||
3. | INCOME TAXES |
(millions) | 2007 | 2006 | 2005 | |||||||||
Current tax provision | $ | 503.7 | $ | 798.6 | $ | 696.7 | ||||||
Deferred tax expense (benefit) | 6.8 | (12.9 | ) | (31.7 | ) | |||||||
Total income tax provision | $ | 510.5 | $ | 785.7 | $ | 665.0 | ||||||
($ in millions) | 2007 | 2006 | 2005 | |||||||||||||||||||||||||
Income before income taxes | $ | 1,693.0 | $ | 2,433.2 | $ | 2,058.9 | ||||||||||||||||||||||
Tax at statutory rate | $ | 592.6 | 35 | % | $ | 851.6 | 35 | % | $ | 720.6 | 35 | % | ||||||||||||||||
Tax effect of: | ||||||||||||||||||||||||||||
Exempt interest income | (40.3 | ) | (3 | ) | (35.9 | ) | (2 | ) | (34.8 | ) | (2 | ) | ||||||||||||||||
Dividends received deduction | (35.4 | ) | (2 | ) | (27.2 | ) | (1 | ) | (22.2 | ) | (1 | ) | ||||||||||||||||
Other items, net | (6.4 | ) | — | (2.8 | ) | — | 1.4 | — | ||||||||||||||||||||
Total income tax provision | $ | 510.5 | 30 | % | $ | 785.7 | 32 | % | $ | 665.0 | 32 | % | ||||||||||||||||
App.-A-14
Table of Contents
(millions) | 2007 | 2006 | ||||||
Deferred tax assets: | ||||||||
Unearned premiums reserve | $ | 293.2 | $ | 300.7 | ||||
Non-deductible accruals | 149.7 | 145.8 | ||||||
Loss reserves | 121.7 | 120.6 | ||||||
Write-downs on securities | 12.7 | 13.9 | ||||||
Other | 7.9 | 5.2 | ||||||
Deferred tax liabilities: | ||||||||
Deferred acquisition costs | (149.2 | ) | (154.4 | ) | ||||
Net unrealized gains on securities | (250.4 | ) | (321.4 | ) | ||||
Hedges on forecasted transactions | (15.0 | ) | (4.0 | ) | ||||
Depreciable assets | (63.7 | ) | (52.4 | ) | ||||
Other | (14.7 | ) | (15.0 | ) | ||||
Net deferred tax assets | 92.2 | 39.0 | ||||||
Net income taxes (payable) recoverable | 13.8 | (22.2 | ) | |||||
Income taxes | $ | 106.0 | $ | 16.8 | ||||
4. | DEBT |
2007 | 2006 | |||||||||||||||
Carrying | Fair | Carrying | Fair | |||||||||||||
(millions) | Value | Value | Value | Value | ||||||||||||
6.375% Senior Notes due 2012 (issued: $350.0, December 2001) | $ | 348.6 | $ | 367.8 | $ | 348.3 | $ | 365.4 | ||||||||
7% Notes due 2013 (issued: $150.0, October 1993) | 149.2 | 162.9 | 149.1 | 163.2 | ||||||||||||
65/8% Senior Notes due 2029 (issued: $300.0, March 1999) | 294.4 | 311.8 | 294.3 | 325.2 | ||||||||||||
6.25% Senior Notes due 2032 (issued: $400.0, November 2002) | 393.9 | 397.6 | 393.8 | 414.0 | ||||||||||||
6.70% Fixed-to-Floating Rate Junior Subordinated Debentures due 2067 (issued: $1,000.0, June 2007) | 987.8 | 936.5 | — | — | ||||||||||||
Total | $ | 2,173.9 | $ | 2,176.6 | $ | 1,185.5 | $ | 1,267.8 | ||||||||
App.-A-15
Table of Contents
App.-A-16
Table of Contents
5. | LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES |
(millions) | 2007 | 2006 | 2005 | |||||||||
Balance at January 1 | $ | 5,725.0 | $ | 5,660.3 | $ | 5,285.6 | ||||||
Less reinsurance recoverables on unpaid losses | 361.4 | 347.2 | 337.1 | |||||||||
Net balance at January 1 | 5,363.6 | 5,313.1 | 4,948.5 | |||||||||
Incurred related to: | ||||||||||||
Current year | 9,845.9 | 9,641.8 | 9,720.7 | |||||||||
Prior years | 80.3 | (246.9 | ) | (355.9 | ) | |||||||
Total incurred | 9,926.2 | 9,394.9 | 9,364.8 | |||||||||
Paid related to: | ||||||||||||
Current year | 6,737.2 | 6,682.3 | 6,644.7 | |||||||||
Prior years | 2,897.4 | 2,662.1 | 2,355.5 | |||||||||
Total paid | 9,634.6 | 9,344.4 | 9,000.2 | |||||||||
Net balance at December 31 | 5,655.2 | 5,363.6 | 5,313.1 | |||||||||
Plus reinsurance recoverables on unpaid losses | 287.5 | 361.4 | 347.2 | |||||||||
Balance at December 31 | $ | 5,942.7 | $ | 5,725.0 | $ | 5,660.3 | ||||||
6. | REINSURANCE |
2007 | 2006 | 2005 | ||||||||||||||||||||||
(millions) | Written | Earned | Written | Earned | Written | Earned | ||||||||||||||||||
Direct premiums | $ | 13,982.4 | $ | 14,107.0 | $ | 14,386.2 | $ | 14,386.3 | $ | 14,293.4 | $ | 14,066.2 | ||||||||||||
Ceded | (209.9 | ) | (229.6 | ) | (254.2 | ) | (268.4 | ) | (285.8 | ) | (301.8 | ) | ||||||||||||
Net premiums | $ | 13,772.5 | $ | 13,877.4 | $ | 14,132.0 | $ | 14,117.9 | $ | 14,007.6 | $ | 13,764.4 | ||||||||||||
App.-A-17
Table of Contents
7. | STATUTORY FINANCIAL INFORMATION (unaudited) |
8. | EMPLOYEE BENEFIT PLANS |
(millions) | 2007 | 2006 | 2005 | |||||||||
Cash | $ | 126.2 | $ | 197.7 | $ | 235.9 | ||||||
Stock-based | 26.5 | 27.6 | 33.7 |
App.-A-18
Table of Contents
2007 | 2006 | 2005 | ||||||||||||||||||||||
Weighted | Weighted | Weighted | ||||||||||||||||||||||
Number | Average | Number | Average | Number | Average | |||||||||||||||||||
of | Grant Date | of | Grant Date | of | Grant Date | |||||||||||||||||||
Restricted Shares | Shares | Fair Value | Shares | Fair Value | Shares | Fair Value | ||||||||||||||||||
Beginning of year | 6,232,522 | $ | 22.27 | 5,442,988 | $ | 20.21 | 3,663,364 | $ | 18.89 | |||||||||||||||
Add (deduct): | ||||||||||||||||||||||||
Granted | 2,318,637 | 21.01 | 1,828,198 | 26.50 | 1,942,784 | 22.62 | ||||||||||||||||||
Vested | (1,005,680 | ) | 18.80 | (567,824 | ) | 16.60 | (2,728 | ) | 18.45 | |||||||||||||||
Forfeited | (676,629 | ) | 22.44 | (470,840 | ) | 21.74 | (160,432 | ) | 19.37 | |||||||||||||||
End of year | 6,868,850 | $ | 22.33 | 6,232,522 | $ | 22.27 | 5,442,988 | $ | 20.21 | |||||||||||||||
Available, end of year1 | 11,287,225 | 13,448,514 | 15,276,712 | |||||||||||||||||||||
1 | Represents shares available under the 2003 Incentive Plan. The 1995 Incentive Plan expired in February 2005, and the remaining shares thereunder are no longer available for future issuance. |
App.-A-19
Table of Contents
2007 | 2006 | ||||||||||||||
Weighted | Weighted | ||||||||||||||
Number | Average | Number | Average | ||||||||||||
of | Grant Date | of | Grant Date | ||||||||||||
Nonvested Stock Options Outstanding | Shares | Fair Value | Shares | Fair Value | |||||||||||
Beginning of year | 1,087,866 | $ | 5.82 | 4,232,220 | $ | 4.76 | |||||||||
Deduct: | |||||||||||||||
Vested1 | (1,087,866 | ) | 5.82 | (3,053,352 | ) | 4.36 | |||||||||
Forfeited | — | — | (91,002 | ) | 5.81 | ||||||||||
End of year | — | $ | — | 1,087,866 | $ | 5.82 | |||||||||
1 | All remaining stock option awards vested on January 1, 2007. |
2007 | 2006 | 2005 | ||||||||||||||||||||||
Weighted | Weighted | Weighted | ||||||||||||||||||||||
Number | Average | Number | Average | Number | Average | |||||||||||||||||||
of | Exercise | of | Exercise | of | Exercise | |||||||||||||||||||
Options Outstanding | Shares | Price | Shares | Price | Shares | Price | ||||||||||||||||||
Beginning of year | 13,747,221 | $ | 8.75 | 19,621,476 | $ | 8.44 | 26,358,004 | $ | 8.01 | |||||||||||||||
Add: | ||||||||||||||||||||||||
Antidilution adjustment | 1,201,984 | NM | — | — | — | — | ||||||||||||||||||
Deduct: | ||||||||||||||||||||||||
Exercised | (3,208,873 | ) | 9.10 | (5,649,193 | ) | 7.55 | (6,581,264 | ) | 6.67 | |||||||||||||||
Forfeited | (1,830 | ) | 11.78 | (225,062 | ) | 12.09 | (155,264 | ) | 10.82 | |||||||||||||||
End of year | 11,738,502 | $ | 7.75 | 13,747,221 | $ | 8.75 | 19,621,476 | $ | 8.44 | |||||||||||||||
Exercisable, end of year | 11,738,502 | $ | 7.75 | 12,659,355 | $ | 8.38 | 15,389,256 | $ | 7.82 | |||||||||||||||
Weighted | ||||||||||||||
Weighted | Average | |||||||||||||
Number | Average | Aggregate | Remaining | |||||||||||
of | Exercise | Intrinsic Value | Contractual | |||||||||||
Shares | Price | (in millions) | Life | |||||||||||
11,738,502 | $ | 7.75 | $ | 133.9 | 2.74 years |
App.-A-20
Table of Contents
2007 | 2006 | 2005 | ||||||||||||||||||||||
Weighted | Weighted | Weighted | ||||||||||||||||||||||
Number | Average | Number | Average | Number | Average | |||||||||||||||||||
of | Grant Date | of | Grant Date | of | Grant Date | |||||||||||||||||||
Restricted Shares | Shares | Fair Value | Shares | Fair Value | Shares | Fair Value | ||||||||||||||||||
Beginning of year | 66,031 | $ | 26.64 | 50,244 | $ | 21.91 | 48,968 | $ | 22.47 | |||||||||||||||
Add (deduct): | ||||||||||||||||||||||||
Granted | 76,074 | 23.52 | 66,031 | 26.64 | 50,244 | 21.91 | ||||||||||||||||||
Vested | (66,031 | ) | 26.64 | (50,244 | ) | 21.91 | (48,968 | ) | 22.47 | |||||||||||||||
Forfeited | (7,479 | ) | 23.52 | — | — | — | — | |||||||||||||||||
End of year | 68,595 | $ | 23.52 | 66,031 | $ | 26.64 | 50,244 | $ | 21.91 | |||||||||||||||
Available, end of year1 | 1,094,275 | 1,170,349 | 1,236,380 | |||||||||||||||||||||
1 | Represents shares available under the 2003 Directors Equity Incentive Plan. |
2007 | 2006 | 2005 | ||||||||||||||||||||||
Weighted | Weighted | Weighted | ||||||||||||||||||||||
Number | Average | Number | Average | Number | Average | |||||||||||||||||||
of | Exercise | of | Exercise | of | Exercise | |||||||||||||||||||
Options Outstanding | Shares | Price | Shares | Price | Shares | Price | ||||||||||||||||||
Beginning of year | 772,664 | $ | 8.59 | 873,108 | $ | 8.20 | 969,108 | $ | 7.79 | |||||||||||||||
Add: | ||||||||||||||||||||||||
Antidilution adjustment | 55,851 | NM | — | — | — | — | ||||||||||||||||||
Deduct: | ||||||||||||||||||||||||
Exercised | (199,702 | ) | 8.16 | (100,444 | ) | 5.18 | (96,000 | ) | 4.06 | |||||||||||||||
End of year | 628,813 | $ | 7.97 | 772,664 | $ | 8.59 | 873,108 | $ | 8.20 | |||||||||||||||
Exercisable, end of year1 | 628,813 | $ | 7.97 | 772,664 | $ | 8.59 | 873,108 | $ | 8.20 | |||||||||||||||
1 | There are 1,730,708 shares available under the 1998 Directors’ Stock Option Plan. |
App.-A-21
Table of Contents
9. | SEGMENT INFORMATION |
Net premiums earned |
Less: Losses and loss adjustment expenses Policy acquisition costs Other underwriting expenses |
Pretax underwriting profit (loss) |
App.-A-22
Table of Contents
2007 | 2006 | 2005 | ||||||||||||||||||||||
Pretax | Pretax | Pretax | ||||||||||||||||||||||
Profit | Profit | Profit | ||||||||||||||||||||||
(millions) | Revenues | (Loss) | Revenues | (Loss) | Revenues | (Loss) | ||||||||||||||||||
Personal Lines | ||||||||||||||||||||||||
Agency | $ | 7,636.4 | $ | 500.2 | $ | 7,903.6 | $ | 936.7 | $ | 7,993.1 | $ | 857.6 | ||||||||||||
Direct | 4,372.6 | 339.9 | 4,337.4 | 568.6 | 4,076.2 | 475.7 | ||||||||||||||||||
Total Personal Lines1 | 12,009.0 | 840.1 | 12,241.0 | 1,505.3 | 12,069.3 | 1,333.3 | ||||||||||||||||||
Commercial Auto | 1,846.9 | 185.7 | 1,851.9 | 366.5 | 1,667.8 | 298.0 | ||||||||||||||||||
Other indemnity | 21.5 | (.7 | ) | 25.0 | 6.5 | 27.3 | 7.9 | |||||||||||||||||
Total underwriting operations | 13,877.4 | 1,025.1 | 14,117.9 | 1,878.3 | 13,764.4 | 1,639.2 | ||||||||||||||||||
Service businesses | 22.3 | 1.8 | 30.4 | 6.0 | 40.2 | 15.6 | ||||||||||||||||||
Investments2 | 787.1 | 774.7 | 638.1 | 626.2 | 498.8 | 486.7 | ||||||||||||||||||
Interest expense | — | (108.6 | ) | — | (77.3 | ) | — | (82.6 | ) | |||||||||||||||
Consolidated total | $ | 14,686.8 | $ | 1,693.0 | $ | 14,786.4 | $ | 2,433.2 | $ | 14,303.4 | $ | 2,058.9 | ||||||||||||
1 | Private passenger automobile insurance accounted for 91% of the total Personal Lines segment net premiums earned in both 2007 and 2006, and 92% in 2005; our special lines products accounted for the balance of the Personal Lines net premiums earned. |
2 | Revenues represent recurring investment income and net realized gains (losses) on securities; pretax profit is net of investment expenses. |
2007 | 2006 | 2005 | ||||||||||||||||||||||
Underwriting | Combined | Underwriting | Combined | Underwriting | Combined | |||||||||||||||||||
Margin | Ratio | Margin | Ratio | Margin | Ratio | |||||||||||||||||||
Personal Lines | ||||||||||||||||||||||||
Agency | 6.5 | % | 93.5 | 11.9 | % | 88.1 | 10.7 | % | 89.3 | |||||||||||||||
Direct | 7.8 | 92.2 | 13.1 | 86.9 | 11.7 | 88.3 | ||||||||||||||||||
Total Personal Lines | 7.0 | 93.0 | 12.3 | 87.7 | 11.0 | 89.0 | ||||||||||||||||||
Commercial Auto | 10.1 | 89.9 | 19.8 | 80.2 | 17.9 | 82.1 | ||||||||||||||||||
Other indemnity1 | NM | NM | NM | NM | NM | NM | ||||||||||||||||||
Total underwriting operations | 7.4 | 92.6 | 13.3 | 86.7 | 11.9 | 88.1 |
1 | Underwriting margins/combined ratios are not meaningful (NM) for our other indemnity businesses due to the low level of premiums earned by, and the variability of losses in, such businesses. |
App.-A-23
Table of Contents
10. | OTHER COMPREHENSIVE INCOME |
2007 | 2006 | 2005 | ||||||||||||||||||||||||||||||||||
Tax | Tax | Tax | ||||||||||||||||||||||||||||||||||
(Provision) | After | (Provision) | After | (Provision) | After | |||||||||||||||||||||||||||||||
(millions) | Pretax | Benefit | Tax | Pretax | Benefit | Tax | Pretax | Benefit | Tax | |||||||||||||||||||||||||||
Unrealized gains (losses) arising during period: | ||||||||||||||||||||||||||||||||||||
Fixed maturities | $ | 52.1 | $ | (18.2 | ) | $ | 33.9 | $ | 10.7 | $ | (3.7 | ) | $ | 7.0 | $ | (138.7 | ) | $ | 48.6 | $ | (90.1 | ) | ||||||||||||||
Equity securities | (189.2 | ) | 66.2 | (123.0 | ) | 292.3 | (102.3 | ) | 190.0 | 135.8 | (47.5 | ) | 88.3 | |||||||||||||||||||||||
Reclassification adjustment:1 | ||||||||||||||||||||||||||||||||||||
Fixed maturities | (2.3 | ) | .8 | (1.5 | ) | 27.5 | (9.7 | ) | 17.8 | (12.0 | ) | 4.2 | (7.8 | ) | ||||||||||||||||||||||
Equity securities | (63.4 | ) | 22.2 | (41.2 | ) | (12.4 | ) | 4.3 | (8.1 | ) | (54.4 | ) | 19.0 | (35.4 | ) | |||||||||||||||||||||
Change in unrealized gains | (202.8 | ) | 71.0 | (131.8 | ) | 318.1 | (111.4 | ) | 206.7 | (69.3 | ) | 24.3 | (45.0 | ) | ||||||||||||||||||||||
Net unrealized gains on forecasted transactions2 | 31.2 | (10.9 | ) | 20.3 | (1.8 | ) | .7 | (1.1 | ) | (1.7 | ) | .6 | (1.1 | ) | ||||||||||||||||||||||
Other comprehensive income | $ | (171.6 | ) | $ | 60.1 | $ | (111.5 | ) | $ | 316.3 | $ | (110.7 | ) | $ | 205.6 | $ | (71.0 | ) | $ | 24.9 | $ | (46.1 | ) | |||||||||||||
1 | Represents adjustments for gains (losses) realized in net income for securities held in the portfolio at December 31 of the preceding year. |
2 | Entered into for the purpose of managing interest rate risk associated with our debt issuances. SeeNote 4 — Debtfor further discussion. We expect to reclassify $4.6 million into income within the next 12 months. |
11. | LITIGATION |
App.-A-24
Table of Contents
App.-A-25
Table of Contents
12. | COMMITMENTS AND CONTINGENCIES |
Year | Commitment | |||
2008 | $ | 94.3 | ||
2009 | 69.0 | |||
2010 | 46.9 | |||
2011 | 25.2 | |||
2012 | 15.6 | |||
Thereafter | 25.3 | |||
Total | $ | 276.3 | ||
App.-A-26
Table of Contents
Year | Expense | |||
2007 | $ | 139.5 | ||
2006 | 138.8 | |||
2005 | 126.4 |
13. | FAIR VALUE OF FINANCIAL INSTRUMENTS |
2007 | 2006 | |||||||||||||||
Fair | Fair | |||||||||||||||
(millions) | Cost | Value | Cost | Value | ||||||||||||
Investments — Available-for-sale: | ||||||||||||||||
Fixed maturities | $ | 9,135.6 | $ | 9,184.9 | $ | 9,959.6 | $ | 9,958.9 | ||||||||
Preferred stocks | 2,578.1 | 2,270.3 | 1,761.4 | 1,781.0 | ||||||||||||
Common equities | 1,361.0 | 2,327.5 | 1,469.0 | 2,368.1 | ||||||||||||
Short-term investments | 382.4 | 382.4 | 581.0 | 581.2 | ||||||||||||
Debt | (2,173.9 | ) | (2,176.6 | ) | (1,185.5 | ) | (1,267.8 | ) |
App.-A-27
Table of Contents
App.-A-28
Table of Contents
of The Progressive Corporation:
Cleveland, Ohio
February 27, 2008
App.-A-29
Table of Contents
I. | OVERVIEW |
App.-A-30
Table of Contents
App.-A-31
Table of Contents
II. | FINANCIAL CONDITION |
A. | Holding Company |
B. | Capital Resources and Liquidity |
App.-A-32
Table of Contents
• | The payment of an extraordinary cash dividend of $2.00 per common share. This extraordinary cash dividend, which aggregated to $1.4 billion, was declared by the Board on June 13, 2007, and was paid on September 14, 2007, to shareholders of record at the close of business on August 31, 2007. | |
• | A new Board authorization for us to repurchase up to 100 million of our common shares over the course of the next 24 months, expiring June 30, 2009. This authorization was in addition to the approximately 4 million shares that remained available for repurchase at the end of the second quarter 2007 under the Board’s April 2006 share repurchase authorization. | |
• | The issuance of $1 billion of 6.70% Fixed-to-Floating Rate Junior Subordinated Debentures due 2067 (the “Debentures”) on June 18, 2007. The proceeds of the offering were $987.3 million, before $1.5 million of expenses related to the issuance. In addition, upon issuance of the Debentures, we closed a forecasted debt issuance hedge, which was entered into to hedge against a possible rise in interest rates, and recognized a $34.4 million pretax gain as part of shareholders’ equity; this gain is being recognized as an adjustment to interest expense and amortized over 10 years, which represents the fixed interest rate period of the Debentures. SeeNote 4 — Debtfor further discussion of the terms of the Debentures. |
C. | Commitments and Contingencies |
App.-A-33
Table of Contents
Payments due by period | ||||||||||||||||||||
Less than | 1-3 | 3-5 | More than | |||||||||||||||||
(millions) | Total | 1 Year | Years | Years | 5 Years | |||||||||||||||
Debt | $ | 2,200.0 | $ | — | $ | — | $ | 350.0 | $ | 1,850.0 | ||||||||||
Interest payments on debt | 1,852.2 | 144.7 | 289.4 | 278.2 | 1,139.9 | |||||||||||||||
Operating leases | 276.3 | 94.3 | 115.9 | 40.8 | 25.3 | |||||||||||||||
Purchase obligations | 94.5 | 65.7 | 28.7 | .1 | — | |||||||||||||||
Loss and loss adjustment expense reserves | 5,942.7 | 3,173.0 | 2,146.2 | 477.3 | 146.2 | |||||||||||||||
Total | $ | 10,365.7 | $ | 3,477.7 | $ | 2,580.2 | $ | 1,146.4 | $ | 3,161.4 | ||||||||||
App.-A-34
Table of Contents
III. | RESULTS OF OPERATIONS — UNDERWRITING |
A. | Growth |
(millions) | 2007 | 2006 | 2005 | |||||||||||||
NET PREMIUMS WRITTEN | ||||||||||||||||
Personal Lines | ||||||||||||||||
Agency | $ | 7,549.4 | $ | 7,854.3 | $ | 8,005.6 | ||||||||||
Direct | 4,371.8 | 4,354.5 | 4,177.3 | |||||||||||||
Total Personal Lines | 11,921.2 | 12,208.8 | 12,182.9 | |||||||||||||
Commercial Auto | 1,828.9 | 1,898.0 | 1,801.2 | |||||||||||||
Other indemnity | 22.4 | 25.2 | 23.5 | |||||||||||||
Total underwriting operations | $ | 13,772.5 | $ | 14,132.0 | $ | 14,007.6 | ||||||||||
Growth over prior years | (3 | )% | 1 | % | 5 | % | ||||||||||
NET PREMIUMS EARNED | ||||||||||||||||
Personal Lines | ||||||||||||||||
Agency | $ | 7,636.4 | $ | 7,903.6 | $ | 7,993.1 | ||||||||||
Direct | 4,372.6 | 4,337.4 | 4,076.2 | |||||||||||||
Total Personal Lines | 12,009.0 | 12,241.0 | 12,069.3 | |||||||||||||
Commercial Auto | 1,846.9 | 1,851.9 | 1,667.8 | |||||||||||||
Other indemnity | 21.5 | 25.0 | 27.3 | |||||||||||||
Total underwriting operations | $ | 13,877.4 | $ | 14,117.9 | $ | 13,764.4 | ||||||||||
Growth over prior years | (2 | )% | 3 | % | 5 | % | ||||||||||
(thousands) | 2007 | 2006 | 2005 | |||||||||||||
POLICIES IN FORCE | ||||||||||||||||
Personal Lines | ||||||||||||||||
Agency auto | 4,396.8 | 4,433.1 | 4,491.4 | |||||||||||||
Direct auto | 2,598.5 | 2,428.5 | 2,327.7 | |||||||||||||
Total auto | 6,995.3 | 6,861.6 | 6,819.1 | |||||||||||||
Special lines1 | 3,120.3 | 2,879.5 | 2,674.9 | |||||||||||||
Total Personal Lines | 10,115.6 | 9,741.1 | 9,494.0 | |||||||||||||
Growth over prior year | 4 | % | 3 | % | 9 | % | ||||||||||
Commercial Auto | 539.2 | 503.2 | 468.2 | |||||||||||||
Growth over prior year | 7 | % | 7 | % | 11 | % | ||||||||||
App.-A-35
Table of Contents
Growth Over Prior Year | ||||||||||||||||||||||||
Personal Lines | Commercial Auto | |||||||||||||||||||||||
2007 | 2006 | 2005 | 2007 | 2006 | 2005 | |||||||||||||||||||
New applications | 2 | % | (7 | )% | — | % | 3 | % | 1 | % | 3 | % | ||||||||||||
Renewal applications | 3 | % | 7 | % | 11 | % | 5 | % | 4 | % | 8 | % |
B. | Profitability |
2007 | 2006 | 2005 | ||||||||||||||||||||||||||
Underwriting Profit | Underwriting Profit | Underwriting Profit | ||||||||||||||||||||||||||
($ in millions) | $ | Margin | $ | Margin | $ | Margin | ||||||||||||||||||||||
Personal Lines Agency | $ | 500.2 | 6.5 | % | $ | 936.7 | 11.9 | % | $ | 857.6 | 10.7 | % | ||||||||||||||||
Direct | 339.9 | 7.8 | 568.6 | 13.1 | 475.7 | 11.7 | ||||||||||||||||||||||
Total Personal Lines | 840.1 | 7.0 | 1,505.3 | 12.3 | 1,333.3 | 11.0 | ||||||||||||||||||||||
Commercial Auto | 185.7 | 10.1 | 366.5 | 19.8 | 298.0 | 17.9 | ||||||||||||||||||||||
Other indemnity1 | (.7 | ) | NM | 6.5 | NM | 7.9 | NM | |||||||||||||||||||||
Total underwriting operations | $ | 1,025.1 | 7.4 | % | $ | 1,878.3 | 13.3 | % | $ | 1,639.2 | 11.9 | % | ||||||||||||||||
1 | Underwriting margins for our other indemnity businesses are not meaningful (NM) due to the low level of premiums earned by, and the variability of losses in, such businesses. |
App.-A-36
Table of Contents
Underwriting Performance1 | 2007 | 2006 | 2005 | |||||||||
Personal Lines — Agency | ||||||||||||
Loss & loss adjustment expense ratio | 72.1 | 67.8 | 69.1 | |||||||||
Underwriting expense ratio | 21.4 | 20.3 | 20.2 | |||||||||
Combined ratio | 93.5 | 88.1 | 89.3 | |||||||||
Personal Lines — Direct | ||||||||||||
Loss & loss adjustment expense ratio | 71.3 | 66.8 | 68.4 | |||||||||
Underwriting expense ratio | 20.9 | 20.1 | 19.9 | |||||||||
Combined ratio | 92.2 | 86.9 | 88.3 | |||||||||
Total Personal Lines | ||||||||||||
Loss & loss adjustment expense ratio | 71.8 | 67.4 | 68.9 | |||||||||
Underwriting expense ratio | 21.2 | 20.3 | 20.1 | |||||||||
Combined ratio | 93.0 | 87.7 | 89.0 | |||||||||
Commercial Auto | ||||||||||||
Loss & loss adjustment expense ratio | 69.7 | 61.0 | 62.4 | |||||||||
Underwriting expense ratio | 20.2 | 19.2 | 19.7 | |||||||||
Combined ratio | 89.9 | 80.2 | 82.1 | |||||||||
Total Underwriting Operations2 | ||||||||||||
Loss & loss adjustment expense ratio | 71.5 | 66.5 | 68.0 | |||||||||
Underwriting expense ratio | 21.1 | 20.2 | 20.1 | |||||||||
Combined ratio | 92.6 | 86.7 | 88.1 | |||||||||
Accident year — Loss & loss adjustment expense ratio | 70.9 | 68.2 | 70.6 | |||||||||
1 | Ratios are expressed as a percentage of net premiums earned. |
2 | Combined ratios for the other indemnity businesses are not presented separately due to the low level of premiums earned by, and the variability of losses in, such businesses. For the years ended December 31, 2007, 2006 and 2005, these businesses generated an underwriting profit (loss) of $(.7) million, $6.5 million and $7.9 million, respectively. |
(millions) | 2007 | 2006 | 2005 | |||||||||
Change in net loss and LAE reserves | $ | 291.6 | $ | 50.5 | $ | 364.6 | ||||||
Paid losses and LAE | 9,634.6 | 9,344.4 | 9,000.2 | |||||||||
Total incurred losses and LAE | $ | 9,926.2 | $ | 9,394.9 | $ | 9,364.8 | ||||||
App.-A-37
Table of Contents
($ in millions) | 2007 | 2006 | 2005 | |||||||||
Actuarial Adjustments | ||||||||||||
Favorable/(Unfavorable) | ||||||||||||
Prior accident years | $ | 37.3 | $ | 158.3 | $ | 127.2 | ||||||
Current accident year | (37.1) | 57.8 | 78.4 | |||||||||
Calendar year actuarial adjustment | $ | .2 | $ | 216.1 | $ | 205.6 | ||||||
Prior Accident Years Development | ||||||||||||
Favorable/(Unfavorable) | ||||||||||||
Actuarial adjustment | $ | 37.3 | $ | 158.3 | $ | 127.2 | ||||||
All other development | (117.6) | 88.6 | 228.7 | |||||||||
Total development | $ | (80.3) | $ | 246.9 | $ | 355.9 | ||||||
(Increase) decrease to calendar year combined ratio | (.6) pts. | 1.7 pts. | 2.6 pts. | |||||||||
App.-A-38
Table of Contents
C. | Personal Lines |
Growth Over Prior Year | ||||||||||||
2007 | 2006 | 2005 | ||||||||||
Net premiums written | (2 | )% | — | % | 4 | % | ||||||
Net premiums earned | (2 | )% | 1 | % | 4 | % | ||||||
Policies in force | 4 | % | 3 | % | 9 | % |
Growth Over Prior Year | ||||||||||||
2007 | 2006 | 2005 | ||||||||||
Net premiums written | (4 | )% | (2 | )% | 1 | % | ||||||
Net premiums earned | (3 | )% | (1 | )% | 1 | % | ||||||
Auto: policies in force | (1 | )% | (1 | )% | 6 | % | ||||||
new applications | (1 | )% | (10 | )% | (5) | % | ||||||
renewal applications | — | % | 4 | % | 9 | % |
App.-A-39
Table of Contents
Growth Over Prior Year | ||||||||||||
2007 | 2006 | 2005 | ||||||||||
Net premiums written | — | % | 4 | % | 10 | % | ||||||
Net premiums earned | 1 | % | 6 | % | 10 | % | ||||||
Auto: policies in force | 7 | % | 4 | % | 12 | % | ||||||
new applications | 5 | % | (4) | % | 8 | % | ||||||
renewal applications | 7 | % | 9 | % | 14 | % |
D. | Commercial Auto |
Growth Over Prior Year | ||||||||||||
2007 | 2006 | 2005 | ||||||||||
Net premiums written | (4) | % | 5 | % | 11 | % | ||||||
Net premiums earned | — | % | 11 | % | 9 | % | ||||||
Policies in force | 7 | % | 7 | % | 11 | % | ||||||
New applications | 3 | % | 1 | % | 3 | % | ||||||
Renewal applications | 5 | % | 4 | % | 8 | % |
App.-A-40
Table of Contents
E. | Other Indemnity |
F. | Service Businesses |
App.-A-41
Table of Contents
G. | Litigation |
H. | Income Taxes |
App.-A-42
Table of Contents
IV. | RESULTS OF OPERATIONS — INVESTMENTS |
A. | Portfolio Allocation |
Gross | Gross | % of | ||||||||||||||||||||||||||
Unrealized | Unrealized | Fair | Total | Duration | ||||||||||||||||||||||||
($ in millions) | Cost | Gains | Losses | Value | Portfolio | (years) | Rating5 | |||||||||||||||||||||
2007 | ||||||||||||||||||||||||||||
Fixed maturities1 | $ | 9,135.6 | $ | 137.1 | $ | (87.8 | ) | $ | 9,184.9 | 64.8 | % | 4.0 | AA | |||||||||||||||
Preferred stocks2 | 2,578.1 | 6.0 | (306.4 | ) | 2,270.3 | 16.0 | 1.9 | A- | ||||||||||||||||||||
Short-term investments: | ||||||||||||||||||||||||||||
Other short-term investments | 382.4 | — | — | 382.4 | 2.7 | <1 | AA+ | |||||||||||||||||||||
Total fixed income | 12,096.1 | 143.1 | (394.2 | ) | 11,837.6 | 83.5 | 3.5 | AA | ||||||||||||||||||||
Common equities | 1,361.0 | 986.8 | (20.3 | ) | 2,327.5 | 16.5 | na | na | ||||||||||||||||||||
Total portfolio2,3,4 | $ | 13,457.1 | $ | 1,129.9 | $ | (414.5 | ) | $ | 14,165.1 | 100.0 | % | 3.5 | AA | |||||||||||||||
2006 | ||||||||||||||||||||||||||||
Fixed maturities | $ | 9,959.6 | $ | 74.8 | $ | (75.5 | ) | $ | 9,958.9 | 67.8 | % | 3.6 | AAA- | |||||||||||||||
Preferred stocks | 1,761.4 | 31.5 | (11.9 | ) | 1,781.0 | 12.1 | 1.5 | A- | ||||||||||||||||||||
Short-term investments: | ||||||||||||||||||||||||||||
Auction rate municipal obligations | 99.4 | — | — | 99.4 | .7 | <1 | AAA- | |||||||||||||||||||||
Auction rate preferred stocks | 69.2 | .2 | — | 69.4 | .5 | <1 | A- | |||||||||||||||||||||
Other short-term investments | 412.4 | — | — | 412.4 | 2.8 | <1 | A+ | |||||||||||||||||||||
Total short-term investments | 581.0 | .2 | — | 581.2 | 4.0 | <1 | A+ | |||||||||||||||||||||
Total fixed income | 12,302.0 | 106.5 | (87.4 | ) | 12,321.1 | 83.9 | 3.1 | AA+ | ||||||||||||||||||||
Common equities | 1,469.0 | 904.0 | (4.9 | ) | 2,368.1 | 16.1 | na | na | ||||||||||||||||||||
Total portfolio3,4 | $ | 13,771.0 | $ | 1,010.5 | $ | (92.3 | ) | $ | 14,689.2 | 100.0 | % | 3.1 | AA+ | |||||||||||||||
1 | Includes $53.8 million of gains on our open interest rate swap positions. Also includes $34.1 million of collateral, in the form of Treasury Notes that were delivered to the counterparty on our open credit default swaps. See theDerivative Instrumentssection below for further discussion. |
2 | At December 31, 2007, the fair value included a $7.4 million change in certain hybrid securities that was recognized as a realized loss. |
3 | Includes net unsettled security acquisitions of $77.0 million and $41.9 million at December 31, 2007 and 2006, respectively. |
4 | December 31, 2007 and 2006 totals include $2.1 billion and $2.5 billion, respectively, of securities in the portfolio of a consolidated, non-insurance subsidiary of the holding company. |
5 | Credit quality ratings are assigned by nationally recognized securities rating organizations. To calculate the weighted average credit quality ratings, we weight individual securities based on fair value and assign a numeric score to each credit rating based on a scale from 0-5. |
App.-A-43
Table of Contents
($ in millions) | 2007 | 2006 | ||||||||||||||||
Investment-grade fixed maturities:1 | ||||||||||||||||||
Short/intermediate term | $ | 9,084.2 | 95.0 | % | $ | 10,381.9 | 98.5 | % | ||||||||||
Long term | 147.0 | 1.5 | 70.9 | .7 | ||||||||||||||
Non-investment-grade fixed maturities2 | 336.1 | 3.5 | 87.3 | .8 | ||||||||||||||
Total | $ | 9,567.3 | 100.0 | % | $ | 10,540.1 | 100.0 | % | ||||||||||
1 | Long term includes securities with expected liquidation dates of 10 years or greater. Asset-backed securities are reported at their weighted average maturity based upon their projected cash flows. All other securities that do not have a single expected maturity date are reported at average maturity. SeeNote 2 — Investmentsfor further discussion. |
2 | Non-investment-grade fixed-maturity securities are non-rated or have a quality rating of an equivalent BB+ or lower, classified by the lowest rating from a nationally recognized rating agency. |
Rating | 2007 | 2006 | ||||||||
AAA | 49.4 | % | 61.1 | % | ||||||
AA | 20.6 | 15.0 | ||||||||
A | 16.2 | 14.4 | ||||||||
BBB | 10.6 | 8.3 | ||||||||
Non Rated/Other | 3.2 | 1.2 | ||||||||
Total | 100.0 | % | 100.0 | % | ||||||
App.-A-44
Table of Contents
% of Asset-Backed | Duration | |||||||||||||||
($ in millions) | Fair Value | Securities | (years) | Rating | ||||||||||||
2007 | ||||||||||||||||
Collateralized mortgage obligations1 | $ | 611.4 | 24.3 | % | 1.2 | AAA- | ||||||||||
Commercial mortgage-backed obligations | 914.7 | 36.5 | 2.7 | AA | ||||||||||||
Commercial mortgage-backed obligations: interest only | 759.1 | 30.2 | 1.9 | AAA- | ||||||||||||
Subtotal commercial mortgage-backed obligations | 1,673.8 | 66.7 | 2.3 | AA+ | ||||||||||||
Other asset-backed securities: | ||||||||||||||||
Home equity2 | 148.7 | 5.9 | .1 | AA | ||||||||||||
Other | 77.7 | 3.1 | 1.1 | A | ||||||||||||
Subtotal other asset-backed securities | 226.4 | 9.0 | .4 | AA- | ||||||||||||
Total asset-backed securities | $ | 2,511.6 | 100.0 | % | 1.9 | AA+ | ||||||||||
2006 | ||||||||||||||||
Collateralized mortgage obligations1 | $ | 575.9 | 24.1 | % | 1.8 | AAA | ||||||||||
Commercial mortgage-backed obligations | 770.4 | 32.2 | 3.1 | AAA- | ||||||||||||
Commercial mortgage-backed obligations: interest only | 893.7 | 37.4 | 2.2 | AAA- | ||||||||||||
Subtotal commercial mortgage-backed obligations | 1,664.1 | 69.6 | 2.6 | AAA- | ||||||||||||
Other asset-backed securities: | ||||||||||||||||
Home equity2 | 23.0 | 1.0 | .5 | AAA | ||||||||||||
Other | 127.1 | 5.3 | 1.2 | AA- | ||||||||||||
Subtotal other asset-backed securities | 150.1 | 6.3 | 1.1 | AA- | ||||||||||||
Total asset-backed securities | $ | 2,390.1 | 100.0 | % | 2.3 | AAA- | ||||||||||
1 | Includes $52.3 million of Alt-A, non-prime bonds (low document/no document or non-conforming prime loans) with a net unrealized loss of $.1 million and a credit quality of AAA for 2007; 2006 included $63.1 million of Alt-A bonds that had a net unrealized loss of $.3 million and a credit quality of AAA. |
2 | Represents sub-prime bonds with a net unrealized loss of $12.2 million and $.1 million for 2007 and 2006, respectively; these bonds are unrelated to the asset-backed derivative position discussed below. |
App.-A-45
Table of Contents
($ in millions) | Deal Origination Year | % of Home | ||||||||||||||||||||||||||||||
Rating (date acquired) | 2007 | 2006 | 2005 | 2004 | 2003 | Total | Equity Loans | |||||||||||||||||||||||||
AAA (October2003-December 2007)1 | $ | — | $ | 59.9 | $ | 4.9 | $ | — | $ | .1 | $ | 64.9 | 43.7 | % | ||||||||||||||||||
Increase (decrease) in value | — | (1.2 | )% | (.4 | )% | — | — | (1.1 | )% | |||||||||||||||||||||||
AA (August 2007-October 2007) | $ | 3.1 | — | $ | 23.2 | $ | 14.5 | — | $ | 40.8 | 27.4 | % | ||||||||||||||||||||
Increase (decrease) in value | (37.0 | )% | — | (13.6 | )% | .3 | % | — | (11.7 | )% | ||||||||||||||||||||||
A (August 2007) | — | — | $ | 34.0 | $ | 6.3 | — | $ | 40.3 | 27.1 | % | |||||||||||||||||||||
Increase (decrease) in value | — | — | (13.9 | )% | 2.2 | % | — | (11.7 | )% | |||||||||||||||||||||||
BBB (March 2007) | — | — | — | $ | 2.7 | — | $ | 2.7 | 1.8 | % | ||||||||||||||||||||||
Increase (decrease) in value | — | — | — | (21.4 | )% | — | (21.4 | )% | ||||||||||||||||||||||||
Total | $ | 3.1 | $ | 59.9 | $ | 62.1 | $ | 23.5 | $ | .1 | $ | 148.7 | 100.0 | % | ||||||||||||||||||
Increase (decrease) in value | (37.0 | )% | (1.2 | )% | (12.8 | )% | (2.3 | )% | — | % | (7.6 | )% | ||||||||||||||||||||
Rating | ||||||||||||||||||||||||||||
($ in millions) | Non-Investment | % of Total | ||||||||||||||||||||||||||
Deal Origination Year | AAA | AA | A | BBB | Grade | Fair Value | Exposure | |||||||||||||||||||||
Pre-2000 | $ | 6.1 | $ | — | $ | — | $ | 40.4 | $ | 23.5 | $ | 70.0 | 7.6 | % | ||||||||||||||
2000 | 53.2 | 24.5 | — | — | — | 77.7 | 8.5 | |||||||||||||||||||||
2001 | 140.2 | 27.5 | 7.4 | — | — | 175.1 | 19.1 | |||||||||||||||||||||
2002 | 43.1 | — | — | — | — | 43.1 | 4.7 | |||||||||||||||||||||
2003 | 155.3 | 13.5 | — | — | — | 168.8 | 18.5 | |||||||||||||||||||||
2004 | 78.9 | 8.8 | 4.8 | — | 7.1 | 99.6 | 10.9 | |||||||||||||||||||||
2005 | 71.0 | — | — | — | — | 71.0 | 7.8 | |||||||||||||||||||||
2006 | 145.5 | — | — | — | 25.2 | 170.7 | 18.7 | |||||||||||||||||||||
2007 | — | — | — | 6.9 | 31.8 | 38.7 | 4.2 | |||||||||||||||||||||
Total Fair Value | $ | 693.3 | $ | 74.3 | $ | 12.2 | $ | 47.3 | $ | 87.6 | $ | 914.7 | 100.0 | % | ||||||||||||||
% of Total Fair Value | 75.8 | % | 8.1 | % | 1.3 | % | 5.2 | % | 9.6 | % | 100.0 | % | ||||||||||||||||
App.-A-46
Table of Contents
($ in millions) | % of Total | |||||||
Deal Origination Year | Fair Value | Exposure | ||||||
Pre-2000 | $ | 7.3 | 1.0 | % | ||||
2000 | 38.4 | 5.0 | ||||||
2001 | 29.0 | 3.8 | ||||||
2002 | 33.1 | 4.4 | ||||||
2003 | 115.5 | 15.2 | ||||||
2004 | 119.9 | 15.8 | ||||||
2005 | 192.0 | 25.3 | ||||||
2006 | 223.9 | 29.5 | ||||||
Total Fair Value | $ | 759.1 | 100.0 | % | ||||
App.-A-47
Table of Contents
(millions) | ||||||||||||
Monoline Insurer/ | General | |||||||||||
Rating | Obligations | Revenue Bonds | Total | |||||||||
FGIC | ||||||||||||
AA | $ | 149.0 | $ | 113.1 | $ | 262.1 | ||||||
A | 77.5 | 36.6 | 114.1 | |||||||||
$ | 226.5 | $ | 149.7 | $ | 376.2 | |||||||
AMBAC | ||||||||||||
AA | $ | 129.1 | $ | 71.6 | $ | 200.7 | ||||||
A | 38.7 | 2.1 | 40.8 | |||||||||
BBB | — | 4.5 | 4.5 | |||||||||
Non-rated | — | 2.4 | 2.4 | |||||||||
$ | 167.8 | $ | 80.6 | $ | 248.4 | |||||||
MBIA | ||||||||||||
AA | $ | 95.3 | $ | 78.1 | $ | 173.4 | ||||||
A | 44.0 | 58.8 | 102.8 | |||||||||
BBB | — | 5.3 | 5.3 | |||||||||
$ | 139.3 | $ | 142.2 | $ | 281.5 | |||||||
FSA | ||||||||||||
AA | $ | 97.7 | $ | 131.5 | $ | 229.2 | ||||||
A | — | 23.5 | 23.5 | |||||||||
BBB | — | 4.5 | 4.5 | |||||||||
$ | 97.7 | $ | 159.5 | $ | 257.2 | |||||||
TOTAL | ||||||||||||
AA | $ | 471.1 | $ | 394.3 | $ | 865.4 | ||||||
A | 160.2 | 121.0 | 281.2 | |||||||||
BBB | — | 14.3 | 14.3 | |||||||||
Non-rated | — | 2.4 | 2.4 | |||||||||
$ | 631.3 | $ | 532.0 | $ | 1,163.3 | |||||||
App.-A-48
Table of Contents
Sector | AAA | AA | A | BBB | % of Portfolio | |||||||||||||||
Financial | 2.7 | % | 16.4 | % | 21.6 | % | 3.3 | % | 44.0 | % | ||||||||||
Agency | — | — | — | — | — | |||||||||||||||
Industrial | — | — | 4.7 | 49.5 | 54.2 | |||||||||||||||
Utility | — | — | 1.8 | — | 1.8 | |||||||||||||||
Total | 2.7 | % | 16.4 | % | 28.1 | % | 52.8 | % | 100.0 | % | ||||||||||
Non-Investment | ||||||||||||||||||||
Sector | AA | A | BBB | Grade | % of Portfolio | |||||||||||||||
Financial | 7.1 | % | 40.9 | % | 13.8 | % | 3.8 | % | 65.6 | % | ||||||||||
Agency | 15.7 | — | — | — | 15.7 | |||||||||||||||
Industrial | — | 4.0 | 4.4 | 5.3 | 13.7 | |||||||||||||||
Utility | — | 1.5 | 3.5 | — | 5.0 | |||||||||||||||
Total | 22.8 | % | 46.4 | % | 21.7 | % | 9.1 | % | 100.0 | % | ||||||||||
($ in millions) | 2007 | 2006 | ||||||||||||||||||
Common stocks | $ | 2,313.8 | 99.4 | % | $ | 2,352.0 | 99.3 | % | ||||||||||||
Other risk investments | 13.7 | .6 | 16.1 | .7 | ||||||||||||||||
Total common equities | $ | 2,327.5 | 100.0 | % | $ | 2,368.1 | 100.0 | % | ||||||||||||
App.-A-49
Table of Contents
(millions) | 2007 | 2006 | 2005 | |||||||||
Credit default swap | $ | (51.3 | ) | $ | 9.9 | $ | (6.8 | ) | ||||
Treasury Notes | 7.9 | — | (.8 | ) | ||||||||
Combined gain (loss) | $ | (43.4 | ) | $ | 9.9 | $ | (7.6 | ) | ||||
App.-A-50
Table of Contents
B. | Investment Results |
2007 | 2006 | 2005 | ||||||||||
Pretax recurring investment book yield | 4.8% | 4.6% | 4.1% | |||||||||
Weighted average FTE book yield | 5.6% | 5.3% | 4.7% | |||||||||
FTE total return: | ||||||||||||
Fixed-income securities | 4.4% | 5.9% | 3.4% | |||||||||
Common stocks | 6.2% | 16.3% | 7.1% | |||||||||
Total portfolio | 4.7% | 7.4% | 4.0% |
App.-A-51
Table of Contents
Write-downs | Write-downs | |||||||||
Total | on Securities | on Securities | ||||||||
Write- | Subsequently | Held at Period | ||||||||
(millions) | downs | Sold | End | |||||||
2007 | ||||||||||
Fixed income1 | $ | 19.3 | $ | — | $ | 19.3 | ||||
Common equities | 2.4 | 2.1 | .3 | |||||||
Total portfolio | $ | 21.7 | $ | 2.1 | $ | 19.6 | ||||
2006 | ||||||||||
Fixed income | $ | 1.8 | $ | .3 | $ | 1.5 | ||||
Common equities | 2.4 | 2.0 | .4 | |||||||
Total portfolio | $ | 4.2 | $ | 2.3 | $ | 1.9 | ||||
2005 | ||||||||||
Fixed income | $ | 14.6 | $ | 5.3 | $ | 9.3 | ||||
Common equities | 7.1 | — | 7.1 | |||||||
Total portfolio | $ | 21.7 | $ | 5.3 | $ | 16.4 | ||||
Equity Portfolio | Russell 1000 | Russell 1000 | Remaining Gross | |||||||||||||||
Amount of | Allocation at | Allocation at | Sector | Unrealized Loss at | ||||||||||||||
($ in millions) | Write-down | December 31, | December 31, | Return | December 31, | |||||||||||||
Sector | in 2007 | 2007 | 2007 | in 2007 | 2007 | |||||||||||||
Auto and Transportation | $ | — | 2.5 | % | 2.3 | % | — | % | $ | 1.2 | ||||||||
Consumer Discretionary | .3 | 11.7 | 12.9 | (3.2 | ) | 2.8 | ||||||||||||
Consumer Staples | — | 8.3 | 7.3 | 8.6 | .1 | |||||||||||||
Financial Services | .6 | 17.9 | 18.6 | (16.9 | ) | 10.3 | ||||||||||||
Health Care | .4 | 11.4 | 11.9 | 7.5 | 3.2 | |||||||||||||
Integrated Oil | — | 8.4 | 6.6 | 29.8 | — | |||||||||||||
Materials and Processing | .1 | 4.7 | 5.2 | 27.7 | .3 | |||||||||||||
Other Energy | — | 4.3 | 5.5 | 42.0 | .2 | |||||||||||||
Producer Durables | .9 | 5.6 | 5.0 | 13.3 | .2 | |||||||||||||
Technology | — | 13.7 | 13.7 | 16.7 | 1.1 | |||||||||||||
Utilities | .1 | 6.9 | 7.1 | 9.6 | .7 | |||||||||||||
Other Equities | — | 4.6 | 3.9 | 1.0 | .1 | |||||||||||||
Total Common Stocks | $ | 2.4 | 100.0 | % | 100.0 | % | 5.8 | % | $ | 20.2 | ||||||||
Other Risk Assets | — | .1 | ||||||||||||||||
Total Common Equities | $ | 2.4 | $ | 20.3 | ||||||||||||||
During each of the last three years, we entered into repurchase commitment transactions, whereby we loaned U.S. Treasury or U.S. Government agency securities to accredited brokerage firms in exchange for cash equal to the fair value of the securities. These internally managed transactions were typically overnight arrangements. The cash proceeds were invested in Eurodollar and commercial paper obligations issued by large, high-quality institutions with yields that exceeded our interest obligation on the borrowed cash. We are able to borrow the cash at low rates since the securities
App.-A-52
Table of Contents
Progressive is required to make certain estimates and assumptions when preparing its financial statements and accompanying notes in conformity with GAAP. Actual results could differ from those estimates in a variety of areas. The two areas that we view as most critical with respect to the application of estimates and assumptions are the establishment of our loss reserves and the method of determining impairments in our investment portfolio.
Loss and loss adjustment expense (LAE) reserves represent our best estimate of our ultimate liability for losses and LAE relating to events that occurred prior to the end of any given accounting period but have not yet been paid. At December 31, 2007, we had $5.7 billion of net loss and LAE reserves, which included $4.5 billion of case reserves and $1.2 billion of incurred but not recorded (IBNR) reserves.
App.-A-53
Table of Contents
Estimated Changes in Severity for Accident Year 2007 | |||||||||||||||||||||||||
(millions) | -2% | -1% | As Reported | +1% | +2% | ||||||||||||||||||||
Personal Auto Liability | $ | 4,125.4 | $ | 4,177.2 | $ | 4,229.0 | $ | 4,280.8 | $ | 4,332.6 | |||||||||||||||
Commercial Auto Liability | 1,291.5 | 1,300.4 | 1,309.3 | 1,318.2 | 1,327.1 | ||||||||||||||||||||
Other1 | 116.9 | 116.9 | 116.9 | 116.9 | 116.9 | ||||||||||||||||||||
Total | $ | 5,533.8 | $ | 5,594.5 | $ | 5,655.2 | $ | 5,715.9 | $ | 5,776.6 | |||||||||||||||
1 | Includes reserves for personal and commercial auto physical damage claims and our non-auto lines of business; no change in estimates is presented due to the immaterial level of these reserves. |
Estimated Changes in Severity for Accident Years 2007, 2006 and 2005 | |||||||||||||||||||||||||
(millions) | -2% | -1% | As Reported | +1% | +2% | ||||||||||||||||||||
Personal Auto Liability | $ | 3,924.0 | $ | 4,076.5 | $ | 4,229.0 | $ | 4,381.5 | $ | 4,534.0 | |||||||||||||||
Commercial Auto Liability | 1,257.1 | 1,283.2 | 1,309.3 | 1,335.4 | 1,361.5 | ||||||||||||||||||||
Other1 | 116.9 | 116.9 | 116.9 | 116.9 | 116.9 | ||||||||||||||||||||
Total | $ | 5,298.0 | $ | 5,476.6 | $ | 5,655.2 | $ | 5,833.8 | $ | 6,012.4 | |||||||||||||||
1 | Includes reserves for personal and commercial auto physical damage claims and our non-auto lines of business; no change in estimates is presented due to the immaterial level of these reserves. |
App.-A-54
Table of Contents
($ in millions) | ||||||||||||||||||||||||||||||||||||||||||||
For The Years Ended | ||||||||||||||||||||||||||||||||||||||||||||
December 31, | 1997 | 1998 | 1999 | 2000 | 2001 | 2002 | 2003 | 2004 | 2005 | 2006 | 2007 | |||||||||||||||||||||||||||||||||
Loss and LAE Reserves1 | $ | 1,867.5 | $ | 1,945.8 | $ | 2,200.2 | $ | 2,785.3 | $ | 3,069.7 | $ | 3,632.1 | $ | 4,346.4 | $ | 4,948.5 | $ | 5,313.1 | $ | 5,363.6 | $ | 5,655.2 | ||||||||||||||||||||||
Re-estimated reserves as of: | ||||||||||||||||||||||||||||||||||||||||||||
One year later | 1,683.3 | 1,916.0 | 2,276.0 | 2,686.3 | 3,073.2 | 3,576.0 | 4,237.3 | 4,592.6 | 5,066.2 | 5,443.9 | ||||||||||||||||||||||||||||||||||
Two years later | 1,668.5 | 1,910.6 | 2,285.4 | 2,708.3 | 3,024.2 | 3,520.7 | 4,103.3 | 4,485.2 | 5,130.5 | — | ||||||||||||||||||||||||||||||||||
Three years later | 1,673.1 | 1,917.3 | 2,277.7 | 2,671.2 | 2,988.7 | 3,459.2 | 4,048.0 | 4,501.6 | — | — | ||||||||||||||||||||||||||||||||||
Four years later | 1,669.2 | 1,908.2 | 2,272.3 | 2,666.9 | 2,982.7 | 3,457.8 | 4,070.0 | — | — | — | ||||||||||||||||||||||||||||||||||
Five years later | 1,664.7 | 1,919.0 | 2,277.5 | 2,678.5 | 2,993.7 | 3,475.4 | — | — | — | — | ||||||||||||||||||||||||||||||||||
Six years later | 1,674.5 | 1,917.6 | 2,284.9 | 2,683.7 | 3,002.5 | — | — | — | — | — | ||||||||||||||||||||||||||||||||||
Seven years later | 1,668.4 | 1,921.9 | 2,287.4 | 2,688.4 | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||
Eight years later | 1,673.9 | 1,923.4 | 2,291.9 | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||
Nine years later | 1,675.5 | 1,928.5 | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||
Ten years later | 1,680.8 | — | — | — | — | — | — | — | — | — | ||||||||||||||||||||||||||||||||||
Cumulative Development: | ||||||||||||||||||||||||||||||||||||||||||||
Favorable/(unfavorable) | $ | 186.7 | $ | 17.3 | $ | (91.7 | ) | $ | 96.9 | $ | 67.2 | $ | 156.7 | $ | 276.4 | $ | 446.9 | $ | 182.6 | $ | (80.3 | ) | ||||||||||||||||||||||
Percentage2 | 10.0 | .9 | (4.2 | ) | 3.5 | 2.2 | 4.3 | 6.4 | 9.0 | 3.4 | (1.5 | ) |
1 | Represents loss and LAE reserves net of reinsurance recoverables on net unpaid losses at the balance sheet date. |
2 | Cumulative development¸ loss and LAE reserves. |
B. | Other-than-Temporary Impairment |
App.-A-55
Table of Contents
Total Gross | ||||||||||||||||||||||
Unrealized | Decline of Investment Value | |||||||||||||||||||||
(millions) | Fair Value | Losses | >15% | >25% | >35% | > 45% | ||||||||||||||||
Unrealized loss for 1 quarter | $ | 1,198.1 | $110.3 | $ | 67.8 | $ | 8.0 | $ | 6.8 | $ | .7 | |||||||||||
Unrealized loss for 2 quarters | 826.6 | 159.7 | 133.3 | 33.7 | 16.8 | — | ||||||||||||||||
Unrealized loss for 3 quarters | 581.5 | 45.0 | 17.9 | 7.0 | .3 | — | ||||||||||||||||
Unrealized loss for 1 year or longer | 2,038.9 | 99.5 | 33.6 | 24.6 | — | — | ||||||||||||||||
Total | $ | 4,645.1 | $414.5 | $ | 252.6 | $ | 73.3 | $ | 23.9 | $ | .7 | |||||||||||
App.-A-56
Table of Contents
App.-A-57
Table of Contents
2007 | 2006 | 2005 | 2004 | 2003 | ||||||||||||||||
Insurance Companies Selected Financial Information and Operating Statistics — Statutory Basis | ||||||||||||||||||||
Net premiums written | $ | 13,772.5 | $ | 14,132.0 | $ | 14,007.6 | $ | 13,378.1 | $ | 11,913.4 | ||||||||||
Growth | (3 | )% | 1 | % | 5 | % | 12 | % | 26 | % | ||||||||||
Policyholders’ surplus | $ | 4,587.3 | $ | 4,963.7 | $ | 4,674.1 | $ | 4,671.0 | $ | 4,538.3 | ||||||||||
Net premiums written to policyholders’ surplus ratio | 3.0 | 2.8 | 3.0 | 2.9 | 2.6 | |||||||||||||||
Loss and loss adjustment expense ratio | 71.6 | 66.6 | 68.1 | 65.0 | 67.4 | |||||||||||||||
Underwriting expense ratio | 21.1 | 19.9 | 19.3 | 19.6 | 18.8 | |||||||||||||||
Statutory combined ratio | 92.7 | 86.5 | 87.4 | 84.6 | 86.2 | |||||||||||||||
Selected Consolidated Financial Information — GAAP Basis | ||||||||||||||||||||
Total assets | $ | 18,843.1 | $ | 19,482.1 | $ | 18,898.6 | $ | 17,184.3 | $ | 16,281.5 | ||||||||||
Total shareholders’ equity | 4,935.5 | 6,846.6 | 6,107.5 | 5,155.4 | 5,030.6 | |||||||||||||||
Common Shares outstanding | 680.2 | 748.0 | 789.3 | 801.6 | 865.8 | |||||||||||||||
Common Share price: | ||||||||||||||||||||
High | $ | 25.16 | $ | 30.09 | $ | 31.23 | $ | 24.32 | $ | 21.17 | ||||||||||
Low | 17.26 | 22.18 | 20.35 | 18.28 | 11.56 | |||||||||||||||
Close (at December 31) | 19.16 | 24.22 | 29.20 | 21.21 | 20.90 | |||||||||||||||
Market capitalization | $ | 13,032.6 | $ | 18,116.6 | $ | 23,040.7 | $ | 17,001.9 | $ | 18,088.9 | ||||||||||
Book value per Common Share | 7.26 | 9.15 | 7.74 | 6.43 | 5.81 | |||||||||||||||
Return on average common shareholders’ equity | 19.5 | % | 25.3 | % | 25.0 | % | 30.0 | % | 29.1 | % | ||||||||||
Debt outstanding | $ | 2,173.9 | $ | 1,185.5 | $ | 1,284.9 | $ | 1,284.3 | $ | 1,489.8 | ||||||||||
Ratios: | ||||||||||||||||||||
Debt to total capital | 30.6 | % | 14.8 | % | 17.4 | % | 19.9 | % | 22.8 | % | ||||||||||
Price to earnings | 11.6 | 11.5 | 16.7 | 11.1 | 14.7 | |||||||||||||||
Price to book | 2.6 | 2.6 | 3.8 | 3.3 | 3.6 | |||||||||||||||
Earnings to fixed charges | 13.5x | 24.7x | 21.3x | 27.1x | 18.8x | |||||||||||||||
Net premiums earned | $ | 13,877.4 | $ | 14,117.9 | $ | 13,764.4 | $ | 13,169.9 | $ | 11,341.0 | ||||||||||
Total revenues | 14,686.8 | 14,786.4 | 14,303.4 | 13,782.1 | 11,892.0 | |||||||||||||||
Underwriting margins:1 | ||||||||||||||||||||
Personal Lines | 7.0 | % | 12.3 | % | 11.0 | % | 14.1 | % | 12.1 | % | ||||||||||
Commercial Auto | 10.1 | % | 19.8 | % | 17.9 | % | 21.1 | % | 17.5 | % | ||||||||||
Other indemnity2 | NM | NM | NM | NM | NM | |||||||||||||||
Total underwriting operations | 7.4 | % | 13.3 | % | 11.9 | % | 14.9 | % | 12.7 | % | ||||||||||
Net income | $ | 1,182.5 | $ | 1,647.5 | $ | 1,393.9 | $ | 1,648.7 | $ | 1,255.4 | ||||||||||
Per share (diluted basis) | 1.65 | 2.10 | 1.74 | 1.91 | 1.42 | |||||||||||||||
Dividends declared per share | 2.1450 | .0325 | .0300 | .0275 | .0250 | |||||||||||||||
Number of people employed | 26,851 | 27,778 | 28,336 | 27,085 | 25,834 |
1 | Underwriting margins are calculated as pretax underwriting profit (loss), as defined inNote 9 — Segment Information, as a percentage of net premiums earned. |
2 | In 2003, we ceased writing business for our lender’s collateral protection program. As a result, underwriting margin is not meaningful (NM) for our other indemnity businesses due to the low level of premiums earned by, and the variability of losses in, such businesses after that date. |
App.-A-58
Table of Contents
2002 | 2001 | 2000 | 1999 | 1998 | ||||||||||||||||
Insurance Companies Selected Financial Information and Operating Statistics — Statutory Basis | ||||||||||||||||||||
Net premiums written | $ | 9,452.0 | $ | 7,260.1 | $ | 6,196.1 | $ | 6,124.7 | $ | 5,299.7 | ||||||||||
Growth | 30 | % | 17 | % | 1 | % | 16 | % | 14 | % | ||||||||||
Policyholders’ surplus | $ | 3,370.2 | $ | 2,647.7 | $ | 2,177.0 | $ | 2,258.9 | $ | 2,029.9 | ||||||||||
Net premiums written to policyholders’ surplus ratio | 2.8 | 2.7 | 2.8 | 2.7 | 2.6 | |||||||||||||||
Loss and loss adjustment expense ratio | 70.9 | 73.6 | 83.2 | 75.0 | 68.5 | |||||||||||||||
Underwriting expense ratio | 20.4 | 21.1 | 21.0 | 22.1 | 22.4 | |||||||||||||||
Statutory combined ratio | 91.3 | 94.7 | 104.2 | 97.1 | 90.9 | |||||||||||||||
Selected Consolidated Financial Information — GAAP Basis | ||||||||||||||||||||
Total assets | $ | 13,564.4 | $ | 11,122.4 | $ | 10,051.6 | $ | 9,704.7 | $ | 8,463.1 | ||||||||||
Total shareholders’ equity | 3,768.0 | 3,250.7 | 2,869.8 | 2,752.8 | 2,557.1 | |||||||||||||||
Common Shares outstanding | 871.8 | 881.2 | 882.2 | 877.1 | 870.5 | |||||||||||||||
Common Share price: | ||||||||||||||||||||
High | $ | 15.12 | $ | 12.65 | $ | 9.25 | $ | 14.52 | $ | 14.33 | ||||||||||
Low | 11.19 | 6.84 | 3.75 | 5.71 | 7.83 | |||||||||||||||
Close (at December 31) | 12.41 | 12.44 | 8.64 | 6.09 | 14.11 | |||||||||||||||
Market capitalization | $ | 10,819.3 | $ | 10,958.6 | $ | 7,616.8 | $ | 5,345.4 | $ | 12,279.7 | ||||||||||
Book value per Common Share | 4.32 | 3.69 | 3.25 | 3.14 | 2.94 | |||||||||||||||
Return on average common shareholders’ equity | 19.3 | % | 13.5 | % | 1.7 | % | 10.9 | % | 19.3 | % | ||||||||||
Debt outstanding | $ | 1,489.0 | $ | 1,095.7 | $ | 748.8 | $ | 1,048.6 | $ | 776.6 | ||||||||||
Ratios: | ||||||||||||||||||||
Debt to total capital | 28.3 | % | 25.2 | % | 20.7 | % | 27.6 | % | 23.3 | % | ||||||||||
Price to earnings | 16.6 | 27.2 | 164.5 | 18.5 | 27.7 | |||||||||||||||
Price to book | 2.9 | 3.4 | 2.7 | 1.9 | 4.8 | |||||||||||||||
Earnings to fixed charges | 13.2x | 10.7x | 1.3x | 5.7x | 10.2x | |||||||||||||||
Net premiums earned | $ | 8,883.5 | $ | 7,161.8 | $ | 6,348.4 | $ | 5,683.6 | $ | 4,948.0 | ||||||||||
Total revenues | 9,294.4 | 7,488.2 | 6,771.0 | 6,124.2 | 5,292.4 | |||||||||||||||
Underwriting margins:1 | ||||||||||||||||||||
Personal Lines | 7.5 | % | 4.5 | % | (5.2 | )% | 1.2 | % | 7.9 | % | ||||||||||
Commercial Auto | 9.1 | % | 8.3 | % | 3.3 | % | 8.4 | % | 17.6 | % | ||||||||||
Other indemnity2 | 7.2 | % | 7.0 | % | 13.6 | % | 10.8 | % | 8.6 | % | ||||||||||
Total underwriting operations | 7.6 | % | 4.8 | % | (4.4 | )% | 1.7 | % | 8.4 | % | ||||||||||
Net income | $ | 667.3 | $ | 411.4 | $ | 46.1 | $ | 295.2 | $ | 456.7 | ||||||||||
Per share (diluted basis) | .75 | .46 | .05 | .33 | .51 | |||||||||||||||
Dividends declared per share | .0240 | .0233 | .0225 | .0218 | .0208 | |||||||||||||||
Number of people employed | 22,974 | 20,442 | 19,490 | 18,753 | 15,735 |
App.-A-59
Table of Contents
Fair Value | ||||||||||||||||||||
-200 bps | -100 bps | +100 bps | +200 bps | |||||||||||||||||
(millions) | Change | Change | Actual | Change | Change | |||||||||||||||
U.S. government obligations | $ | 1,519.5 | $ | 1,358.0 | $ | 1,207.1 | $ | 1,066.9 | $ | 937.4 | ||||||||||
State and local government obligations | 3,974.0 | 3,856.0 | 3,745.1 | 3,641.8 | 3,545.5 | |||||||||||||||
Asset-backed securities | 2,612.4 | 2,562.4 | 2,511.6 | 2,461.6 | 2,413.8 | |||||||||||||||
Corporate securities | 1,179.9 | 1,127.5 | 1,078.4 | 1,032.5 | 989.4 | |||||||||||||||
Preferred stocks | 2,375.6 | 2,323.8 | 2,270.3 | 2,228.3 | 2,184.0 | |||||||||||||||
Other debt securities1 | 706.1 | 673.2 | 642.7 | 614.5 | 588.6 | |||||||||||||||
Short-term investments | 382.4 | 382.4 | 382.4 | 382.4 | 382.4 | |||||||||||||||
Balance as of December 31, 2007 | $ | 12,749.9 | $ | 12,283.3 | $ | 11,837.6 | $ | 11,428.0 | $ | 11,041.1 | ||||||||||
Balance as of December 31, 2006 | $ | 13,110.5 | $ | 12,707.5 | $ | 12,321.1 | $ | 11,954.2 | $ | 11,608.4 | ||||||||||
1 | Includes $612.5 million in redeemable preferred stocks. |
Hypothetical | ||||||||||||
Fair | Market Changes | |||||||||||
(millions) | Value | +10% | -10% | |||||||||
Common equities as of December 31, 2007 | $ | 2,327.5 | $ | 2,560.3 | $ | 2,094.8 | ||||||
Common equities as of December 31, 2006 | $ | 2,368.1 | $ | 2,604.9 | $ | 2,131.3 |
App.-A-60
Table of Contents
December 31, | September 30, | June 30, | March 31, | December 31, | ||||||||||||||||
($ in millions) | 2007 | 2007 | 2007 | 2007 | 2006 | |||||||||||||||
66-day VaR | ||||||||||||||||||||
Fixed-income portfolio | $ | (358.5 | ) | $ | (324.5 | ) | $ | (279.7 | ) | $ | (210.5 | ) | $ | (234.1 | ) | |||||
% of portfolio | (3.0 | )% | (2.6 | )% | (2.0 | )% | (1.7 | )% | (1.9 | )% | ||||||||||
% of shareholders’ equity | (7.3 | )% | (6.1 | )% | (5.1 | )% | (3.0 | )% | (3.4 | )% | ||||||||||
Common equity portfolio | $ | (449.5 | ) | $ | (440.9 | ) | $ | (319.1 | ) | $ | (316.5 | ) | $ | (196.5 | ) | |||||
% of portfolio | (19.3 | )% | (18.0 | )% | (12.6 | )% | (13.2 | )% | (8.3 | )% | ||||||||||
% of shareholders’ equity | (9.1 | )% | (8.3 | )% | (5.8 | )% | (4.6 | )% | (2.9 | )% | ||||||||||
Total portfolio | $ | (387.8 | ) | $ | (470.0 | ) | $ | (465.5 | ) | $ | (337.1 | ) | $ | (300.9 | ) | |||||
% of portfolio | (2.7 | )% | (3.2 | )% | (2.9 | )% | (2.2 | )% | (2.0 | )% | ||||||||||
% of shareholders’ equity | (7.9 | )% | (8.8 | )% | (8.5 | )% | (4.9 | )% | (4.4 | )% |
App.-A-61
Table of Contents
App.-A-62
Table of Contents
App.-A-63
Table of Contents
Net Income | Stock Price1 | Dividends | ||||||||||||||||||||||||||||||
Total | Per | Rate of | Declared | |||||||||||||||||||||||||||||
Quarter | Revenues | Total | Share2 | High | Low | Close | Return3 | Per Share4 | ||||||||||||||||||||||||
2007 | ||||||||||||||||||||||||||||||||
1 | $ | 3,686.8 | $ | 363.5 | $ | .49 | $ | 24.75 | $ | 20.91 | $ | 21.82 | $ | — | ||||||||||||||||||
2 | 3,675.9 | 283.7 | .39 | 25.16 | 21.55 | 23.93 | 2.0000 | |||||||||||||||||||||||||
3 | 3,709.6 | 299.2 | .42 | 24.10 | 18.88 | 19.41 | — | |||||||||||||||||||||||||
4 | 3,614.5 | 236.1 | .34 | 20.50 | 17.26 | 19.16 | .1450 | |||||||||||||||||||||||||
$ | 14,686.8 | $ | 1,182.5 | $ | 1.65 | $ | 25.16 | $ | 17.26 | $ | 19.16 | (12.6 | )% | $ | 2.1450 | |||||||||||||||||
2006 | ||||||||||||||||||||||||||||||||
1 | $ | 3,660.9 | $ | 436.6 | $ | .55 | $ | 30.09 | $ | 25.25 | $ | 26.07 | $ | .00750 | ||||||||||||||||||
2 | 3,707.9 | 400.4 | .51 | 27.86 | 25.25 | 25.71 | .00750 | |||||||||||||||||||||||||
3 | 3,723.8 | 409.6 | .53 | 25.84 | 22.18 | 24.54 | .00875 | |||||||||||||||||||||||||
4 | 3,693.8 | 400.9 | .53 | 25.54 | 22.19 | 24.22 | .00875 | |||||||||||||||||||||||||
$ | 14,786.4 | $ | 1,647.5 | $ | 2.10 | $ | 30.09 | $ | 22.18 | $ | 24.22 | (17.0 | )% | $ | .03250 | |||||||||||||||||
2005 | ||||||||||||||||||||||||||||||||
1 | $ | 3,491.8 | $ | 412.7 | $ | .51 | $ | 23.12 | $ | 20.35 | $ | 22.94 | $ | .00750 | ||||||||||||||||||
2 | 3,590.1 | 394.3 | .49 | 25.22 | 21.88 | 24.70 | .00750 | |||||||||||||||||||||||||
3 | 3,622.5 | 305.3 | .38 | 26.83 | 23.43 | 26.19 | .00750 | |||||||||||||||||||||||||
4 | 3,599.0 | 281.6 | .35 | 31.23 | 25.76 | 29.20 | .00750 | |||||||||||||||||||||||||
$ | 14,303.4 | $ | 1,393.9 | $ | 1.74 | $ | 31.23 | $ | 20.35 | $ | 29.20 | 37.9 | % | $ | .03000 | |||||||||||||||||
1 | Prices as reported on the consolidated transaction reporting system. Progressive’s Common Shares are listed on the New York Stock Exchange under the symbol PGR. |
2 | Presented on a diluted basis. The sum may not equal the total because the average equivalent shares differ in the periods. |
3 | Represents annual rate of return, assuming dividend reinvestment, including the $2.00 per share extraordinary cash dividend paid in September 2007. |
4 | Progressive transitioned to an annual variable dividend policy beginning in 2007; the annual dividend of $.1450 per common share was declared by the Board of Directors in December 2007 and paid on January 31, 2008. In addition, in June 2007, Progressive’s Board declared an extraordinary cash dividend payable September 14, 2007 to shareholders of record at the close of business on August 31, 2007. |
App.-A-64
Table of Contents
PGR, S&P Index, P/C Group (Performance Results through12/31/07)
(assumes $100 was invested at the close of trading on December 31, 2002)
2003 | 2004 | 2005 | 2006 | 2007 | ||||||||||||||||
PGR | $ | 168.75 | $ | 171.52 | $ | 236.38 | $ | 196.35 | $ | 171.54 | ||||||||||
S&P Index | 128.69 | 142.69 | 149.70 | 173.34 | 182.86 | |||||||||||||||
P/C Group | 126.49 | 141.36 | 156.80 | 179.48 | 218.55 |
* | Assumes reinvestment of dividends. |
App.-A-65
Table of Contents
($ in millions) | 2007 | 2006 | 2005 | 2004 | 2003 | |||||||||||||||||||||||||||||||||||||||
Florida | $ | 1,656.9 | 12.0 | % | $ | 1,811.5 | 12.8 | % | $ | 1,774.2 | 12.7 | % | $ | 1,522.6 | 11.4 | % | $ | 1,338.2 | 11.2 | % | ||||||||||||||||||||||||
California | 1,106.4 | 8.0 | 1,085.1 | 7.7 | 982.8 | 7.0 | 892.7 | 6.7 | 736.2 | 6.2 | ||||||||||||||||||||||||||||||||||
Texas | 1,072.0 | 7.8 | 1,096.0 | 7.8 | 1,126.8 | 8.0 | 1,181.1 | 8.8 | 1,126.4 | 9.4 | ||||||||||||||||||||||||||||||||||
New York | 847.9 | 6.2 | 930.6 | 6.6 | 968.8 | 6.9 | 935.7 | 7.0 | 808.3 | 6.8 | ||||||||||||||||||||||||||||||||||
Georgia | 748.9 | 5.4 | 751.0 | 5.3 | 749.5 | 5.4 | 733.2 | 5.5 | 614.4 | 5.2 | ||||||||||||||||||||||||||||||||||
Ohio | 655.9 | 4.8 | 693.7 | 4.9 | 736.0 | 5.3 | 754.2 | 5.6 | 712.1 | 6.0 | ||||||||||||||||||||||||||||||||||
Pennsylvania | 610.5 | 4.4 | 642.1 | 4.5 | 659.1 | 4.7 | 634.4 | 4.7 | 589.3 | 4.9 | ||||||||||||||||||||||||||||||||||
All other | 7,074.0 | 51.4 | 7,122.0 | 50.4 | 7,010.4 | 50.0 | 6,724.2 | 50.3 | 5,988.5 | 50.3 | ||||||||||||||||||||||||||||||||||
Total | $ | 13,772.5 | 100.0 | % | $ | 14,132.0 | 100.0 | % | $ | 14,007.6 | 100.0 | % | $ | 13,378.1 | 100.0 | % | $ | 11,913.4 | 100.0 | % | ||||||||||||||||||||||||
App.-A-66
Table of Contents
Charles A. Davis3,5,6 Chief Executive Officer, Stone Point Capital LLC (private equity investing) Stephen R. Hardis1,2,5,6 Lead Director, Axcelis Technologies, Inc. (manufacturing) Bernadine P. Healy, M.D.1,6 Health Editor and Medical Columnist, U.S. News & World Report (publishing) Jeffrey D. Kelly2,4,6 Vice Chairman and Chief Financial Officer, National City Corporation (commercial banking) Abby F. Kohnstamm6 President and Chief Executive Officer, Abby F. Kohnstamm & Associates, Inc. (marketing consulting) | Peter B. Lewis2,4,6,7 Chairman of the Board Norman S. Matthews3,5,6 Consultant, formerly President, Federated Department Stores, Inc. (retailing) Patrick H. Nettles, Ph.D.1,6 Executive Chairman, Ciena Corporation (telecommunications) Glenn M. Renwick2 President and Chief Executive Officer Donald B. Shackelford4,6 Chairman, Fifth Third Bank, Central Ohio (commercial banking) Bradley T. Sheares, Ph.D.3,6 formerly Chief Executive Officer, Reliant Pharmaceuticals, Inc. (pharmaceuticals) | 1Audit Committee member 2Executive Committee member 3Compensation Committee member 4Investment and Capital Committee member 5Nominating and Governance Committee member 6Independent director 7Non-executive chairman |
Corporate Officers | Other Executive Officers | |
Glenn M. Renwick President and Chief Executive Officer Brian C. Domeck Vice President and Chief Financial Officer Charles E. Jarrett Vice President, Secretary and Chief Legal Officer Thomas A. King Vice President and Treasurer Jeffrey W. Basch Vice President and Chief Accounting Officer Peter B. Lewis Chairman of the Board (non-executive) | John A. Barbagallo Commercial Lines Group President William M. Cody Chief Investment Officer Susan Patricia Griffith Chief Human Resource Officer John P. Sauerland Personal Lines Group President Raymond M. Voelker Chief Information Officer |
App.-A-67
Table of Contents
Private passenger autos, motorcycles and | ||||
recreational vehicles | Commercial autos/trucks | |||
To report a claim | 1-800-274-4499 | 1-800-274-4499 | ||
For customer service | ||||
If you bought your policy through an independent agent or broker | 1-800-925-2886 (1-800-300-3693 in California) progressiveagent.com | 1-800-444-4487 progressivecommercial.com | ||
If you bought your policy directly through Progressive online or by phone | 1-800-PROGRESSIVE (1-800-776-4737) progressive.com | 1-800-895-2886 progressivecommercial.com |
App.-A-68
Table of Contents
App.-A-69
Table of Contents
1. | [ ] WITH authority to vote (except as marked to the contrary below), or [ ] WITHOUT authority to vote, for the election as directors of all four nominees listed below, each to serve for a term of three years. |
2. | Proposal to approve amendments to the Company’s Amended Articles of Incorporation and Code of Regulations to adopt a majority voting standard in uncontested elections of directors. |
3. | Proposal to approve an amendment to the Company’s Code of Regulations to modify the definition of a director’s “term of office.” |
4. | Proposal to approve an amendment to the Company’s Code of Regulations to increase the maximum number of director positions from 12 to 13 and to fix the number of directors at 13. |
5. | Proposal to ratify the appointment of PricewaterhouseCoopers LLP as the Company’s independent registered public accounting firm for 2008. |
6. | In their discretion, to vote upon such other business as may properly come before the meeting. |
Date: | , 2008 | |||||||||
Signature of Shareholder(s) |