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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended DECEMBER 31, 1999
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1999
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from __________________ to _______________________
Commission file number 1-9518
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THE PROGRESSIVE CORPORATION
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(Exact name of registrant as specified in its charter)
OHIO 34-0963169
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6300 Wilson Mills Road, Mayfield Village, Ohio 44143
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(Address of principal executive offices) (Zip Code)
(440) 461-5000
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
COMMON SHARES, $1.00 PAR VALUE NEW YORK STOCK EXCHANGE
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Securities registered pursuant to Section 12(g) of the Act:
None
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(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[ X ] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant at January 31, 2000: $3,945,195,528.75
The number of the registrant's Common Shares, $1.00 par value, outstanding as of
February 29, 2000: 72,993,722
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Annual Report to Shareholders for the year ended
December 31, 1999 are incorporated by reference in Parts I, II and IV hereof.
Portions of the registrant's Proxy Statement dated March 16, 2000, for the
Annual Meeting of Shareholders to be held on April 21, 2000, are incorporated by
reference in Part III hereof.
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INTRODUCTION
The Progressive Corporation and subsidiaries' (collectively, the "Company") 1999
Annual Report to Shareholders (the "Annual Report") contains portions of the
information required to be included in this Form 10-K, which are incorporated
herein by reference. Cross references to relevant sections of the Annual Report
are included under the appropriate items of this Form 10-K.
Portions of the information included in The Progressive Corporation's Proxy
Statement dated March 16, 2000, for the Annual Meeting of Shareholders to be
held on April 21, 2000 (the "Proxy Statement") have also been incorporated by
reference herein and are identified under the appropriate items in this Form
10-K.
PART I
ITEM 1. BUSINESS
(a) General Development of Business
The Progressive insurance organization began business in 1937. The Progressive
Corporation, an insurance holding company formed in 1965, has 82 subsidiaries
and 1 mutual insurance company affiliate. The Progressive Corporation's
insurance subsidiaries and affiliate provide personal automobile insurance and
other specialty property-casualty insurance and related services throughout the
United States. The Company's property-casualty insurance products protect its
customers against collision and physical damage to their motor vehicles and
liability to others for personal injury or property damage arising out of the
use of those vehicles.
(b) Financial Information About Industry Segments
Incorporated by reference from Note 11, SEGMENT INFORMATION, on page 46
of the Company's Annual Report.
(c) Narrative Description of Business
The Company offers a number of personal and commercial property-casualty
insurance products related to motor vehicles. Net premiums written were $6,124.7
million in 1999, compared to $5,299.7 million in 1998 and $4,665.1 million in
1997. The underwriting profit margin was 1.7% in 1999, compared to 8.4% in 1998
and 6.6% in 1997.
PERSONAL LINES
Of the approximately 230 United States insurance company groups writing private
passenger auto insurance, the Company estimates that it ranks fourth in size for
1999. For 1999, the estimated industry premiums written, which include personal
auto insurance in the United States and Ontario, Canada, were $123.8 billion,
and Progressive's share of this market was approximately 4.6%, compared to
$120.7 billion and 4.1%, respectively, in 1998, and $117.5 billion and 3.7% in
1997. Except as otherwise noted, all industry data and Progressive's market
share or ranking in the industry were derived either directly from data reported
by A.M. Best Company Inc. ("A.M. Best") or were estimated using A.M. Best data
as the primary source.
The Company's Personal Lines segment writes insurance for private passenger
automobiles and recreation vehicles. This business frequently offers more than
one program in a single state, with each targeted to a specific market segment.
Personal Lines accounted for 93% of the Company's 1999 and 1998 total net
premiums written, compared to 92% in 1997. The Company's strategy is to build
towards becoming a low-cost provider of a full line of auto insurance products
and related services, distributed through whichever channel the customer
prefers.
Private passenger automobile insurance is comprised of preferred, standard and
non-standard automobile risks. Standard and preferred automobile risks accounted
for between 45% and 50% of the Company's total Personal Lines premiums in 1999.
The Company's goal is to compete successfully in the standard and preferred
market, which comprises about 80% of the United States' personal automobile
insurance market.
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Nonstandard automobile insurance accounts for the remaining private passenger
automobile insurance written by the Company. The size of the nonstandard
automobile insurance market changes with the insurance environment and is
estimated to be about 20% of the United States' personal automobile insurance
market. Volume potential is influenced by the actions of direct competitors,
writers of standard and preferred automobile insurance and state-mandated
involuntary plans. Approximately 376 nonstandard insurance companies, many of
which are part of an affiliated group, compete for this business. The Company is
a leading writer in the nonstandard auto market.
The Company's specialty Personal Lines products include motorcycle, recreation
vehicle, mobile home, watercraft and snowmobile insurance. The Company's
competitors are specialty companies and large multi-line insurance carriers.
Although industry figures are not available, based on the Company's analysis of
this market, the Company believes that it is one of the largest participants in
the specialty personal lines market. In 1998, Progressive became the market
share leader in the motorcycle product.
The Company launched a homeowners product in Arizona in March 2000 and plans to
expand to a few additional states during the year. Initially, the Company will
sell its homeowners insurance through a select number of independent agents. The
Company recognizes that many consumers and agents prefer the convenience of
placing their home and auto insurance with the same company. The new product
line will also include condominium owners' and renters' insurance policies. To
minimize the overall exposure, the Company will reinsure this product through a
75% quota share agreement under which the Company has a 25% net retention.
The Personal Lines business is generated either by an Agent or written directly
by the Company. The Agent channel includes business written by the Company's
network of more than 30,000 Independent Insurance Agents, located throughout the
United States, and through Strategic Alliance business relationships. The
Independent Insurance Agents have the authority to bind the Company to specified
insurance coverages within prescribed underwriting guidelines, subject to
compliance with certain Company-mandated procedures. These guidelines prescribe
the kinds and amounts of coverage that may be written and the premium rates that
may be charged for specified categories of risk. The Agents do not have
authority on behalf of the Company to settle or adjust claims, establish
underwriting guidelines, develop rates or enter into other transactions or
commitments. The Strategic Alliances channel includes alliances with other
insurance companies, financial institutions, employers and national brokerage
agencies. In 1999, the total net premiums written through Independent Agents and
Strategic Alliance agency relationships represented 83% of the Personal Lines
volume, compared to 89% in 1998. Direct business includes business written
through 1-800-AUTO-PRO(R), the Internet (progressive.com) and the Strategic
Alliance business unit on behalf of affinity groups. Net premiums written on the
Direct business were 17% and 11% of the Personal Lines volume in 1999 and 1998,
respectively.
The Company introduced its local advertising campaign, which includes direct
mail, radio and television advertising, to 3 more states in 1999 , bringing the
total number of states in which the Company advertises to 35 plus Washington,
D.C. (107 markets). The Company expanded its television advertising campaign on
a national level in 1998.
Auto insurance differs greatly by community because regulations and legal
decisions vary by state and because traffic, law enforcement, cultural
attitudes, insurance agents, medical services and auto repair facilities vary by
community. The Company's matrix organization enables it to meet varied local
conditions under a cohesive set of policies and procedures designed to provide
consistency and control. The Company's 39 State and Community Managers run the
business in the markets they serve. They manage claims, distribution,
advertising budgets, price levels, agent development, regulation and community
relations for their territory. State Managers determine their state(s)
organization, and may appoint Community Managers with responsibilities similar
to their own for a large part of the state. Processing (such as customer service
calls, direct sales calls and claims processing) is performed at ten regional
sites in Albany, New York; Austin, Texas; Cleveland, Ohio; Colorado Springs,
Colorado; Richmond, Virginia; Sacramento, California; Tampa, Florida; Tempe,
Arizona; Tigard, Oregon and Toronto, Ontario.
State Managers report directly to the Company's senior officers and Distribution
Leaders, who are the Company's senior policy and decision makers. In 2000, the
senior officers include a Chief Executive Officer (CEO), a CEO-Insurance
Operations (who also serves as the Company's Chief Information Officer), a
CEO-Investments and Capital Management, a Chief Pricing/Product Officer, a Chief
Claim Officer, a Chief Financial Officer, a Chief Human Resources Officer and a
Chief Communications Officer. The Company also has three Distribution Leaders
(Independent Agent, 1-800-AUTO-PRO(R) and progressive.com). The Distribution
Leaders are challenged to develop and manage product offerings and customer
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service processes tailored to the unique requirements of customers who discover
and select Progressive through different distribution modes.
OTHER BUSINESSES
The Company's other lines of business include the commercial vehicle business
unit, United Financial Casualty Company (UFCC), Professional Liability Group
(PLG) and Motor Carrier business unit, which are organized by customer group and
headquartered in Cleveland, Ohio. These businesses accounted for 7% of total
revenue in 1999. The choice of distribution channel is driven by each customer
group's buying preference and service needs. Distribution channels include
independent agents, financial institutions, vehicle dealers and company-employed
sales forces. Distribution arrangements are individually negotiated between such
intermediaries and the Company and are tailored to the specific needs of the
customer group and the nature of the related financial or purchase transactions.
Most of these businesses operate in markets that are declining in size.
Monoline commercial vehicle insurance covers commercial vehicle risks for
primary liability, physical damage and other supplementary insurance coverages.
Based on the Company's analysis of this market, the Company competes for this
business on a nationwide basis with approximately 150 other companies. The
Company estimates itself to be one of the largest monoline commercial auto
carriers.
UFCC primarily provides physical damage insurance and related tracking services
to protect the commercial or retail lender's interest in collateral which is not
otherwise insured against these risks. The principal product offered is
collateral protection for automobile lenders, which is sold to financial
institutions and/or their customers. Commercial banks are UFCC's largest
customer group for these services. This business also serves savings and loan
institutions, finance companies and credit unions. According to the Company's
analysis of this market, numerous companies offer these products and none of
them has a dominant market share.
PLG's principal customers are community banks. Its principal products are
liability insurance for directors and officers and employee dishonesty
insurance. Progressive shares the risk and premium on these coverages with a
small mutual reinsurer controlled by its bank customers and various other
reinsurance entities. The program is sponsored by the American Bankers
Association. Additionally, the Company provides similar coverages for credit
unions and savings and loan institutions. The risk and premium on these
coverages are also reinsured by various reinsurance entities. PLG represented
less than one-half percent of the Company's total 1999 net premiums written.
The service operations of the other lines of business consist primarily of
processing business for Commercial Auto Insurance Procedures (CAIP), which are
state supervised plans serving the involuntary markets. The Motor Carrier
business unit processes CAIP in 26 states. As a CAIP servicing carrier, this
business unit processes over 50% of the premiums in the CAIP market and assumes
no indemnity risk. It competes with 2 other providers nationwide. Prior to
November 1999, service operations also provided claim services to fleet owners
and other insurance companies.
COMPETITIVE FACTORS
The automobile insurance and other property-casualty markets in which the
Company operates are highly competitive. Property-casualty insurers generally
compete on the basis of price, consumer recognition, coverages offered, claim
handling, financial stability, customer service and geographic coverage.
Vigorous competition is provided by large, well-capitalized national companies,
some of which have broad distribution networks of employed or captive agents,
and by smaller regional insurers. While the Company relies heavily on technology
and extensive data gathering and analysis to segment and price markets according
to risk potential, some competitors merely price their coverage at rates set
lower than the Company's published rates. By avoiding extensive data gathering
and analysis, these competitors incur lower underwriting expenses. The Company
has remained competitive by closely managing expenses and achieving operating
efficiencies, and by refining its risk measurement and price segmentation
skills. In addition, the Company offers prices for a wide spectrum of risks and
seeks to offer a wider array of payment plans, limits of liability and
deductibles than its competitors. Superior customer service, claim adjusting and
strong brand recognition are also important factors in the Company's competitive
strategy.
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LICENSES
The Company operates under licenses issued by various state or provincial
insurance authorities. These licenses may be of perpetual duration or renewable
periodically, provided the holder continues to meet applicable regulatory
requirements. The licenses govern the kind of insurance coverages which may be
written in the issuing state. Such licenses are normally issued only after the
filing of an appropriate application and the satisfaction of prescribed
criteria. All licenses which are material to the Company's business are in good
standing.
INSURANCE REGULATION
The insurance subsidiaries are generally subject to regulation and supervision
by insurance departments of the jurisdictions in which they are domiciled or
licensed to transact business. At least one of the subsidiaries is licensed and
subject to regulation in each of the 50 states and certain U.S. possessions, in
three Canadian provinces and by Canadian federal authorities. The nature and
extent of such regulation and supervision varies from jurisdiction to
jurisdiction. Generally, an insurance company is subject to a higher degree of
regulation and supervision in its state of domicile. The Company's insurance
subsidiaries and affiliate are domiciled in the states of Arizona, California,
Colorado, Hawaii, Illinois, Florida, Louisiana, Michigan, Mississippi, Missouri,
New York, Ohio, Pennsylvania, Tennessee, Texas, Washington and Wisconsin. State
insurance departments have broad administrative power relating to licensing
insurers and agents, regulating premium rates and policy forms, establishing
reserve requirements, prescribing statutory accounting methods and the form and
content of statutory financial reports, and regulating the type and amount of
investments permitted. Rate regulation varies from "file and use" to prior
approval to mandated rates. Most jurisdictions prohibit rates that are
"excessive, inadequate or unfairly discriminatory."
Insurance departments are charged with the responsibility of ensuring that
insurance companies maintain adequate capital and surplus and comply with a
variety of operational standards. Insurance companies are generally required to
file detailed annual and other reports with the insurance department of each
jurisdiction in which they conduct business. Insurance departments are
authorized to make periodic and other examinations of regulated insurers'
financial condition, to ensure adherence to statutory accounting principles and
compliance with state insurance laws and regulations.
Insurance holding company laws enacted in many jurisdictions grant to insurance
authorities the power to regulate acquisitions of insurers and certain other
transactions involving insurers and to require periodic disclosure of certain
information. These laws impose prior approval requirements for certain
transactions between regulated insurers and their affiliates and generally
regulate dividend and other distributions, including loans and cash advances,
between regulated insurers and their affiliates. See the "Dividends" discussion
in Item 5(c) for further information on these dividend limitations.
Under state insolvency and guaranty laws, regulated insurers can be assessed or
required to contribute to state guaranty funds to cover policyholder losses
resulting from insurer insolvencies. Insurers are also required by many states,
as a condition of doing business in the state, to provide coverage to certain
risks which are not insurable in the voluntary market. These so-called "assigned
risk" plans generally specify the types of insurance and the level of coverage
which must be offered to such involuntary risks, as well as the allowable
premium. Many states also have involuntary market plans which hire a limited
number of servicing carriers to provide insurance to involuntary risks. These
plans, through assessments, pass underwriting and administrative expenses on to
insurers that write voluntary coverages in those states.
Insurance companies are generally required by insurance regulators to maintain
sufficient surplus to support their writings. Although the ratio of writings to
surplus that the regulators will allow is a function of a number of factors,
including the type of business being written, the adequacy of the insurer's
reserves, the quality of the insurer's assets, and the identity of the
regulator, as a general rule, the regulators prefer that annual net written
premiums be not more than three times the insurer's total policyholders'
surplus. Thus, the amount of an insurer's surplus may, in certain cases, limit
its ability to grow its business.
Many states have laws and regulations that limit an insurer's ability to exit a
market. For example, certain states limit an automobile insurer's ability to
cancel and non-renew policies. Furthermore, certain states prohibit an insurer
from withdrawing one or more lines of business from the state, except pursuant
to a plan that is approved by the state insurance
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department. The state insurance department may disapprove a plan that may lead
to market disruption. Laws and regulations that limit cancellation and
non-renewal and that subject program withdrawals to prior approval requirements
may restrict an insurer's ability to exit unprofitable markets.
Regulation of insurance constantly changes as real or perceived issues and
developments arise. Some changes may be due to technical factors, such as
changes in investment laws made to recognize new investment vehicles; other
changes result from such general pressures as consumer resistance to price
increases and concerns relating to insurer solvency. In recent years,
legislation and voter initiatives have been introduced which deal with use of
non-public consumer information, insurance rate development, rate determination
and the ability of insurers to cancel or renew insurance policies, reflecting
concerns about consumer privacy, coverage, availability, prices and alleged
discriminatory pricing.
In some states, the automobile insurance industry has been under pressure in
past years from regulators, legislators or special interest groups to reduce,
freeze or set rates to or at levels that are not necessarily related to
underlying costs, including initiatives to roll back automobile and other
personal lines rates. This kind of activity has adversely affected, and may in
the future adversely affect, the profitability and growth of the subsidiaries'
automobile insurance business in those jurisdictions, and may limit the
subsidiaries' ability to increase rates to compensate for increases in costs.
Adverse legislative and regulatory activity limiting the subsidiaries' ability
to adequately price automobile insurance may occur in the future. The impact of
these regulatory changes on the subsidiaries' businesses cannot be predicted.
The state insurance regulatory framework has come under increased federal
scrutiny, and certain state legislatures have considered or enacted laws that
alter and, in many cases, expand state authority to regulate insurance companies
and insurance holding company systems. Further, the National Association of
Insurance Commissioners (NAIC) and state insurance regulators are re-examining
existing laws and regulations, specifically focusing on insurance company
investments, issues relating to the solvency of insurance companies and further
limitations on the ability of regulated insurers to pay dividends. The NAIC also
developed a risk-based capital (RBC) program to enable regulators to take
appropriate and timely regulatory actions relating to insurers that show signs
of weak or deteriorating financial conditions. RBC is a series of dynamic
surplus-related formulas which contain a variety of factors that are applied to
financial balances based on a degree of certain risks, such as asset, credit and
underwriting risks. In addition, from time to time, the United States Congress
and certain federal agencies investigate the current condition of the insurance
industry to determine whether federal regulation is necessary.
In 1998, the NAIC adopted the Codification of Statutory Accounting Principles
guidance which will replace the current NAIC Accounting Practices and Procedures
manual as the NAIC's primary guidance on statutory accounting. The Codification
provides guidance for areas where statutory accounting has been silent and
changes current statutory accounting in some areas. The implementation date
established by the NAIC is January 1, 2001; however, the effective date will be
specified by each insurance company's state of domicile. The Company is
currently evaluating the potential effect of the Codification guidance, but does
not expect it to have a material impact on the Company's statutory surplus.
STATUTORY ACCOUNTING PRINCIPLES
The Company's results are reported in accordance with generally accepted
accounting principles (GAAP), which differ from amounts reported under statutory
accounting principles (SAP) prescribed by insurance regulatory authorities.
Specifically, under GAAP:
1. Commissions, premium taxes and other costs incurred in connection with
writing new and renewal business are capitalized and amortized on a pro
rata basis over the period in which the related premiums are earned,
rather than expensed as incurred, as required by SAP.
2. Certain assets are included in the consolidated balance sheets, which
for SAP are charged directly against statutory surplus. These assets
consist primarily of premium receivables that are outstanding over 90
days, furniture and equipment and prepaid expenses.
3. Amounts related to ceded reinsurance are shown gross as prepaid
reinsurance premiums and reinsurance recoverables, rather than netted
against unearned premium reserves and loss and loss adjustment expense
reserves, respectively, as required by SAP.
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4. Fixed maturities securities, which are classified as
available-for-sale, are reported at market values, rather than at
amortized cost, or the lower of amortized cost or market depending on
the specific type of security, as required by SAP. Equity securities
are reported at quoted market values which may differ from the NAIC
market values as required by SAP.
5. Costs for computer software developed or obtained for internal use are
capitalized and amortized over their useful life, rather then expensed
as incurred, as required by SAP.
The differing treatment of income and expense items results in a corresponding
difference in federal income tax expense.
INVESTMENTS
The Company employs a conservative approach to investment and capital management
intended to ensure that there is sufficient capital to support all the insurance
premium that can be profitably written. The Company's portfolio is invested
primarily in short-term and intermediate-term, investment-grade fixed-income
securities. The Company's investment portfolio, at market value, was $6,427.7
million at December 31, 1999, compared to $5,674.3 million at December 31, 1998.
Investment income is affected by shifts in the types of investments in the
portfolio, changes in interest rates and other factors. Investment income,
including net realized gains on security sales, before expenses and taxes, was
$387.9 million in 1999, compared to $306.2 million in 1998 and $373.4 million in
1997. See MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, beginning on page 14 herein for additional discussion.
EMPLOYEES
The number of employees, excluding temporary employees, at December 31, 1999,
was 18,753.
LIABILITY FOR PROPERTY-CASUALTY LOSSES AND LOSS ADJUSTMENT EXPENSES
The consolidated financial statements include the estimated liability for unpaid
losses and loss adjustment expenses (LAE) of the Company's insurance
subsidiaries. Total loss reserves are established at a level that is intended to
represent the midpoint of the reasonable range of loss reserve estimates. The
liabilities for losses and LAE are determined using actuarial and statistical
procedures and represent undiscounted estimates of the ultimate net cost of all
unpaid losses and LAE incurred through December 31 of each year. These estimates
are subject to the effect of future trends on claim settlement. These estimates
are continually reviewed and adjusted as experience develops and new information
becomes known. Such adjustments, if any, are reflected in the current results of
operations.
The accompanying tables present an analysis of property-casualty losses and LAE.
The following table provides a reconciliation of beginning and ending estimated
liability balances for 1999, 1998 and 1997 on a GAAP basis.
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RECONCILIATION OF NET RESERVES FOR LOSSES AND LOSS ADJUSTMENT EXPENSES
(millions) 1999 1998 1997
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Balance at January 1 $2,188.6 $2,146.6 $1,800.6
Less reinsurance recoverables on unpaid losses 242.8 279.1 267.7
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Net balance at January 1 1,945.8 1,867.5 1,532.9
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Net reserves of subsidiary purchased -- -- 82.2
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Incurred related to:
Current year 4,286.2 3,560.5 3,070.8
Prior years (29.8) (184.2) (103.3)
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Total incurred 4,256.4 3,376.3 2,967.5
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Paid related to:
Current year 2,919.2 2,376.0 1,971.5
Prior years 1,082.8 922.0 743.6
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Total paid 4,002.0 3,298.0 2,715.1
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Net balance at December 31 2,200.2 1,945.8 1,867.5
Plus reinsurance recoverable on unpaid losses 216.0 242.8 279.1
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Balance at December 31 $2,416.2 $2,188.6 $2,146.6
==================================================================
The reconciliation above shows $29.8 million of positive development, which
emerged during 1999, in the 1999 liability and a positive emergence of $184.2
million shown in the 1998 liability, based on information known as of December
31, 1999 and December 31, 1998, respectively. The Company's reserves have
historically developed conservatively. In 1999, the Company experienced an
increase in severity trends which led to less favorable development on prior
accident years as compared to 1998 and 1997.
The anticipated effect of inflation is explicitly considered when estimating
liabilities for losses and LAE. While anticipated increases due to inflation are
considered in estimating the ultimate claim costs, the increase in average
severities of claims is caused by a number of factors that vary with the
individual type of policy written. Future average severities are projected based
on historical trends adjusted for anticipated changes in underwriting standards,
inflation, policy provisions and general economic trends. These anticipated
trends are monitored based on actual development and are modified if necessary.
The Company has not entered into any loss reserve transfers or similar
transactions having a material effect on earnings or reserves.
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ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSES DEVELOPMENT
(millions)
YEAR ENDED 1989 1990 1991 1992 1993 1994(3) 1995 1996 1997 1998 1999
LIABILITY FOR UNPAID
LOSSES AND LAE(1) $748.6 $791.6 $861.5 $956.4 $1,012.4 $1,098.7 $1,314.4 $1,532.9 $1,867.5$1,945.8 $2,200.2
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PAID (CUMULATIVE) AS OF:
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One year later 293.1 322.4 353.4 366.8 417.0 525.3 593.0 743.6 922.0 1,082.8
Two years later 446.8 490.8 518.8 520.0 589.8 706.4 838.9 1,034.5 1,289.6 --
Three years later 539.8 570.4 583.2 598.2 664.1 810.6 960.1 1,266.1 -- --
Four years later 588.2 600.0 617.6 632.8 709.9 857.1 1,057.1 -- -- --
Five years later 603.1 613.6 635.8 658.6 729.8 892.7 -- -- -- --
Six years later 608.1 624.7 651.2 669.7 742.2 -- -- -- -- --
Seven years later 614.7 631.1 656.2 676.0 -- -- -- -- -- --
Eight years later 619.2 634.7 659.7 -- -- -- -- -- -- --
Nine years later 620.9 638.6 -- -- -- -- -- -- -- --
Ten years later 623.9 -- -- -- -- -- -- -- -- --
LIABILITY RE-ESTIMATED
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AS OF:
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One year later 685.4 748.8 810.0 857.9 869.9 1,042.1 1,208.6 1,429.6 1,683.3 1,916.0
Two years later 677.9 726.5 771.9 765.5 837.8 991.7 1,149.5 1,364.5 1,668.5 --
Three years later 668.6 712.7 718.7 737.4 811.3 961.2 1,118.6 1,432.3 -- --
Four years later 667.1 683.7 700.1 725.2 794.6 940.6 1,137.7 -- -- --
Five years later 654.7 666.3 695.1 717.3 782.9 945.5 -- -- -- --
Six years later 647.1 664.8 692.6 711.1 780.1 -- -- -- -- --
Seven years later 645.7 664.5 688.2 709.2 -- -- -- -- -- --
Eight years later 645.4 661.4 687.9 -- -- -- -- -- -- --
Nine years later 641.9 660.4 -- -- -- -- -- -- -- --
Ten years later 641.5 -- -- -- -- -- -- -- -- --
CUMULATIVE REDUNDANCY $107.1 $131.2 $173.6 $247.2 $232.3 $153.2 $176.7 $100.6 $199.0 $29.8
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PERCENTAGE(2) 14.3 16.6 20.2 25.8 22.9 13.9 13.4 6.6 10.7 1.5
(1) Represents loss and LAE reserves net of reinsurance recoverables on unpaid
losses at the balance sheet date.
(2) Cumulative redundancy / liability for unpaid losses and LAE.
(3) In 1994, based on a review of its total loss reserves, the Company
eliminated its $71.0 million "supplemental reserve."
The above table presents the development of balance sheet liabilities for 1989
through 1998. The top line of the table shows the estimated liability for unpaid
losses and LAE recorded at the balance sheet date for each of the indicated
years for the property-casualty insurance subsidiaries only. This liability
represents the estimated amount of losses and LAE for claims that are unpaid at
the balance sheet date, including losses that had been incurred but not
reported.
The upper section of the table shows the cumulative amount paid with respect to
the previously recorded liability as of the end of each succeeding year. The
lower portion of the table shows the re-estimated amount of the previously
recorded liability based on experience as of the end of each succeeding year.
The estimate is increased or decreased as more information about the claims
becomes known for individual years. For example, as of December 31, 1999 the
companies had
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paid $638.6 million of the currently estimated $660.4 million of losses and LAE
that had been incurred through the end of 1990; thus an estimated $21.8 million
of losses incurred through 1990 remain unpaid as of the current financial
statement date.
The "Cumulative Redundancy" represents the aggregate change in the estimates
over all prior years. For example, the 1989 liability has developed
conservatively by $107.1 million over ten years. That amount has been reflected
in income over the ten years and did not have a significant effect on the income
of any one year. The effects on income during the past three years due to
changes in estimates of the liabilities for losses and LAE is shown in the
reconciliation table on page 8 as the "prior years" contribution to incurred
losses and LAE.
In evaluating this information, note that each cumulative redundancy amount
includes the effects of all changes in amounts during the current year for prior
periods. For example, the amount of the development related to losses settled in
1992, but incurred in 1989, will be included in the cumulative redundancy amount
for years 1989, 1990 and 1991. Conditions and trends that have affected
development of the liability in the past may not necessarily occur in the
future. Accordingly, it generally is not appropriate to extrapolate future
development based on this table.
The Analysis of Loss and Loss Adjustment Expenses Development table on page 9 is
constructed from Schedule P, Part-1, from the 1991 through 1999 Consolidated
Annual Statements, as filed with the state insurance departments, and Schedules
O and P filed for years prior to 1991. This development table differs from the
development displayed in Schedule P, Part-2 due to the fact Schedule P, Part-2
excludes Canadian operations and unallocated loss adjustment expenses and
reflects the change in the method of accounting for salvage and subrogation for
1994 and prior.
(d) Financial Information about Foreign and Domestic Operations
The Company operates throughout the United States. The Company ceased writing
new business in Canada in 1999. For 1999, the amount of Canadian revenues and
assets were less than 2% of the Company's consolidated revenues and assets. The
amount of operating income (loss) generated by its Canadian operations was
immaterial with respect to the Company's consolidated operating income.
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ITEM 2. PROPERTIES
The Company's 517,800 square foot corporate office complex is located on a
42-acre parcel in Mayfield Village, Ohio, owned by a subsidiary. The Company's
central data processing facility occupies a building containing an additional
107,000 square feet of office space, on this same parcel.
The Company also owns six other buildings in suburbs adjoining the corporate
office complex (excluding the buildings in the following paragraph), four
buildings in Tampa, Florida, and a building in each of the following cities:
Tempe, Arizona; Albany, New York; Tigard, Oregon; Plymouth Meeting,
Pennsylvania; and Austin, Texas. In total, these buildings contain 1,497,000
square feet of office, warehouse and training facility space and are owned by
subsidiaries of the Company. These locations are occupied by the Company's
business units or other operations and are not segregated by industry segment.
In addition, the Company owns two buildings in Tampa, Florida that are currently
for sale, which are partially leased to non-affiliates. The building in Plymouth
Meeting, Pennsylvania is also partially leased to non-affiliates.
In November 1997, the Company purchased 91 acres in Mayfield Village, Ohio to
construct an office complex near the site of its corporate headquarters. This
office complex is part of a five-year cooperative effort with Mayfield Village
to develop over 300 acres. Progressive will serve as the anchor corporate user
with additional business users and recreational facilities on the site. The
Company is constructing five buildings, containing a total of approximately
770,000 square feet, on the site, and a parking garage, at an estimated cost of
$132.5 million. As of December 31, 1999, $65.8 million has been paid. The first
building was completed in May 1999. The next two buildings were completed in the
first quarter of 2000. The parking garage and fourth building are scheduled to
be completed in October 2000. The fifth building is scheduled to be completed in
the first quarter of 2001. The construction projects are being funded through
operating cash flows.
The Company leases 703,000 square feet of office and warehouse space at various
locations throughout the United States for its other business units and staff
functions. In addition, the Company leases 347 claim offices, consisting of
1,431,000 square feet, at various locations throughout the United States. These
leases are generally short-term to medium-term leases of standard commercial
office space. Two offices totaling 16,000 square feet are leased in Canada.
As the Company continues to grow, it expects that it will need additional space
and is actively engaged in seeking out additional locations to meet its current
and anticipated needs.
ITEM 3. LEGAL PROCEEDINGS
Incorporated by reference from Note 2, LITIGATION, on page 39 of the Company's
Annual Report.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated by reference from information with respect to executive officers of
The Progressive Corporation and its subsidiaries set forth in Item 10 in Part
III of this Annual Report on Form 10-K.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
(a) Market Information
The Company's Common Shares are traded on the New York Stock Exchange under the
symbol PGR. The high and low prices set forth below are as reported on the
consolidated transaction reporting system.
Dividends
Year Quarter High Low Close Per Share
- --------------------------------------------------------------------------------------------------------------------------
1999 1 $174 1/4 $115 7/16 $143 1/2 $.065
2 152 1/8 127 3/8 145 .065
3 144 15/16 81 1/2 81 11/16 .065
4 97 5/8 68 1/2 73 1/8 .065
-------------------------------------------------------------------------------------------
$174 1/4 $68 1/2 $ 73 1/8 $.260
===========================================================================================
1998 1 $135 1/2 $106 11/16 $134 11/16 $.060
2 150 126 1/2 141 .060
3 156 3/4 95 112 3/4 .065
4 172 94 169 3/8 .065
-------------------------------------------------------------------------------------------
$172 $94 $169 3/8 $.250
===========================================================================================
The closing price of the Company's Common Shares on February 29, 2000 was $59
1/2.
(b) Holders
There were 3,858 shareholders of record on February 29, 2000.
(c) Dividends
Statutory policyholders' surplus was $2,258.9 million and $2,029.9 million at
December 31, 1999 and 1998, respectively. Generally, under state insurance laws,
the net admitted assets of insurance subsidiaries available for transfer to a
corporate parent are limited to those net admitted assets, as determined in
accordance with SAP, which exceed minimum statutory capital requirements. At
December 31, 1999, $278.5 million of consolidated statutory policyholders'
surplus represents net admitted assets of the insurance subsidiaries that are
required to meet minimum statutory surplus requirements in the subsidiaries'
states of domicile. Furthermore, state insurance laws limit the amount that can
be paid as a dividend or other distribution in any given year without prior
regulatory approval and adequate policyholders' surplus must be maintained to
support premiums written. Based on the dividend laws currently in effect, the
insurance subsidiaries may pay aggregate dividends to the corporate parent of
$200.3 million in 2000 out of statutory policyholders' surplus, without prior
approval by regulatory authorities.
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ITEM 6. SELECTED FINANCIAL DATA
(millions - except per share amounts)
For the years ended December 31,
1999 1998 1997 1996 1995
--------------------------------------------------------------------------------------------------
Total revenues $6,124.2 $5,292.4 $4,608.2 $3,478.4 $3,011.9
Operating income 266.7 449.3 336.0 309.1 220.1
Net income 295.2 456.7 400.0 313.7 250.5
Per share:
Operating income(1) 3.58 6.01 4.46 4.12 2.85
Net income(1) 3.96 6.11 5.31 4.14 3.26
Dividends .260 .250 .240 .230 .220
Total assets 9,704.7 8,463.1 7,559.6 6,183.9 5,352.5
Debt outstanding 1,048.6 776.6 775.9 775.7 675.9
(1) Presented on a diluted basis. In 1997, the Company adopted Statement of
Financial Accounting Standards (SFAS) 128 "Earnings Per Share," and, as a
result, restated prior periods per share amounts, if applicable.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION The Progressive Corporation is a holding company and does
not have any revenue producing operations of its own. It receives cash through
borrowings, equity sales, subsidiary dividends and other transactions, and may
use the proceeds to contribute to the capital of its insurance subsidiaries in
order to support premium growth, to repurchase its Common Shares, to retire its
outstanding indebtedness, to pay dividends and for other business purposes.
During 1999, the Company repurchased 6,044 of its Common Shares at a total cost
of $.6 million (average $93.25 per share) to satisfy obligations under the
Company's benefit plans. During the three-year period ended December 31, 1999,
the Company repurchased 440,316 of its Common Shares at a total cost of $46.0
million (average $104.57 per share). During the same period, The Progressive
Corporation made $82.5 million of capital contributions to its subsidiaries, net
of dividends received from these subsidiaries. The regulatory restrictions on
subsidiary dividends are described in Item 5(c) herein.
The Company has substantial capital resources and is unaware of any trends,
events or circumstances that are reasonably likely to affect its capital
resources in a material way. In March 1999, the Company issued $300 million of 6
5/8% Senior Notes due 2029 under an outstanding shelf registration, which became
effective in 1998. The net proceeds of $293.7 million will be used to repay
current outstanding debt upon its maturity. The Company also has available a
$10.0 million revolving credit agreement. The Company's debt to total capital
ratio is 28%; management believes the Company has substantial capital resources
and sufficient borrowing capacity to support current and anticipated growth.
The Company's insurance operations create liquidity by collecting and investing
premiums from new and renewal business in advance of paying claims. For the
three years ended December 31, 1999, operations generated positive cash flows of
$2,127.8 million, and cash flows are expected to be positive in both the
short-term and reasonably foreseeable future. The Company's investment portfolio
is highly liquid and consists substantially of readily marketable securities.
Total capital expenditures for the three years ended December 31, 1999,
aggregated $443.6 million. In December 1997, the Company purchased approximately
72 acres in Tampa, Florida to construct a three-building, 307,000 square foot,
regional call center. The final cost of the project was $45.5 million. The first
two buildings were completed during 1998. The third building was completed in
February 1999. In addition, in November 1997, the Company purchased 91 acres in
Mayfield Village, Ohio to construct an office complex, near the site of its
corporate headquarters. This office complex is part of a five-year cooperative
effort with Mayfield Village to develop over 300 acres. Progressive will serve
as the anchor corporate user, with additional business users and recreational
facilities on the site. The Company is constructing five buildings, containing a
total of approximately 770,000 square feet, on the site, and a parking garage,
at an estimated cost of $132.5 million. As of December 31, 1999, $65.8 million
has been paid. The first building was completed in May 1999. The next two
buildings were completed in the first quarter of 2000. The parking garage and
fourth building are scheduled to be completed in October 2000. The fifth
building is scheduled to be completed in the first quarter of 2001. The
construction projects are being funded through operating cash flows.
INVESTMENTS The Company invests in fixed-maturity, equity and short-term
securities. The Company's investment strategy recognizes its need to maintain
capital adequate to support its insurance operations. The Company evaluates the
risk/reward tradeoffs of investment opportunities, measuring their effects on
stability, diversity, overall quality and liquidity of the investment portfolio.
At December 31, 1999, the Company's portfolio was $6,427.7 million, compared to
$5,674.3 million in 1998.
As of December 31, 1999, the Company's portfolio had $5.4 million in unrealized
losses, compared to $174.3 million in unrealized gains in 1998. This decrease in
value was the result of widening credit spreads on non-treasury related products
and the portfolio's underperformance relative to the S&P 500, due to
underweighting in the technology sector. The weighted average fully taxable
equivalent book yield of the portfolio was 6.3% for the years ended December 31,
1999 and 1998 and 6.6% for 1997.
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The majority of the portfolio is invested in high-grade, fixed-maturity
securities, of which short- and intermediate-term securities represented
$4,417.7 million, or 68.7% of the portfolio, at the end of 1999, compared to
$4,439.4 million, or 78.3%, at the end of 1998. Long-term investment-grade
securities, including those principal paydowns from asset-backed securities that
are greater than 10-years, were $96.0 million, or 1.5% of the portfolio, at the
end of 1999, compared to $93.5 million, or 1.6%, at the end of 1998.
Non-investment-grade fixed-maturity securities were $248.0 million, or 3.9% of
the portfolio, at the end of 1999, compared to $128.0 million, or 2.3%, at the
end of 1998, and offer the Company higher returns and added diversification
without a significant adverse effect on the stability and quality of the
investment portfolio as a whole. Non-investment-grade securities may involve
greater risks often related to creditworthiness, solvency and relative liquidity
of the secondary trading market. The duration of the fixed-income portfolio was
3.0 years at December 31, 1999, compared to 2.8 years at December 31, 1998.
The quality distribution of the fixed-income portfolio is as follows:
Percentage at Percentage at
Rating December 31, 1999 December 31,
1998
-------------------------- --------------------- ---------------------
AAA 54.7% 57.7%
AA 14.2 14.3
A 20.0 20.4
BBB 5.1 4.1
Non Rated/Other 6.0 3.5
--------------------- ---------------------
100.0% 100.0%
===================== =====================
As of December 31, 1999, the Company held $1,831.1 million of asset-backed
securities, which represented 28.5% of the total investment portfolio. The
asset-backed portfolio included collateralized mortgage obligations (CMO) and
commercial mortgage-backed obligations (CMB) totaling $612.0 million and $649.7
million, respectively. The remainder of the asset-backed portfolio was invested
primarily in auto loan and other asset-backed securities. As of December 31,
1999, the CMO portfolio included sequential bonds, representing 68.3% of the CMO
portfolio ($417.7 million), and planned amortization class bonds, representing
31.7% of the CMO Portfolio ($194.3 million). At December 31, 1999, the CMO
portfolio had an average life of 3.88 years and a weighted average Moody's or
Standard & Poor's rating of AAA. The CMB portfolio had an average life of 5.75
years and a weighted average Moody's or Standard & Poor's rating of AA. At
December 31, 1999, the CMO and CMB portfolios had unrealized losses of $13.0
million and $45.1 million, respectively. The single largest unrealized loss in
any individual CMO security was $1.3 million and in any CMB security was $6.9
million, at December 31, 1999. The CMB portfolio includes $106.6 million of CMB
interest-only certificates, which had an average life of 6.45 years and a
weighted average Moody's or Standard & Poor's rating of AAA at December 31,
1999. Both the CMO and CMB portfolios are liquid with available market quotes
and contain no residual interests. During 1997, the Company sold $178.4 million
(proceeds of $200.8 million) of non-investment-grade CMB securities to a
third-party purchaser. The purchaser subsequently transferred the securities to
a trust as collateral in a resecuritized debt offering. The transaction was
accounted for as a sale under Statement of Financial Accounting Standards (SFAS)
125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," resulting in a net gain of $22.4 million. A
bankruptcy remote subsidiary of the Company acquired $22.8 million of the
resecuritized debt, which was subsequently sold in 1998 for a net gain of $3.5
million. This portion of the transaction was not accounted for as a sale in 1998
in accordance with SFAS 125.
A portion of the investment portfolio is invested in marketable equity
securities. Common stocks represented $1,243.6 million, or 19.3% of the
portfolio, at the end of 1999, compared to $636.9 million, or 11.2%, a year
earlier. The majority of the common stock portfolio is invested in domestic
equities traded on nationally recognized securities exchanges. The common stock
portfolio also includes term trust certificates, the common shares of closed-end
bond funds, which have the risk and reward characteristics of the underlying
bonds and comprised $230.2 million of the common stock portfolio at the end of
1999; no term trust securities were held at the end of 1998. Foreign equities,
which may include stock index futures and foreign currency forwards, comprised
$84.2 million of the common stock portfolio at the end of 1999,
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compared to $130.7 million last year, and partnership investments comprised
$104.0 million of the common stock portfolio at the end of 1999, compared to
$63.7 million last year. Preferred stocks represented $422.4 million, or 6.6% of
the portfolio, at the end of 1999, compared to $376.5 million, or 6.6%, a year
earlier, and was comprised of over 89% of fixed-rate preferred stocks with
mechanisms that are expected to provide an opportunity to liquidate at par.
Investments in the Company's portfolio have varying degrees of risk. The primary
market risk exposure to the fixed-income portfolio is interest rate risk, which
is limited by managing duration to a defined range of 1.8 to 5 years. The
distribution of maturities and convexity are monitored on a regular basis.
Common stocks, excluding term trust certificates, and other risk assets, which
generally have greater risk and volatility of market value, may range from 0 to
25% of the total portfolio; at December 31, 1999, the Company held 16.5% of
these securities. Market values, along with industry and sector concentrations
of common stocks and similar investments, are monitored daily. Exposure to
foreign currency exchange risk is limited by Company restrictions and is
monitored quarterly for compliance. Exposures are evaluated individually and as
a whole, considering the effects of cross correlation. For the quantitative
market risk disclosures, see page 56 of the Company's Annual Report. The Company
quarterly examines its portfolio for evidence of impairment. In such cases,
changes in market value are evaluated to determine the extent to which such
changes are attributable to: (i) interest rates, (ii) market-related factors
other than interest rates and (iii) financial conditions, business prospects and
other fundamental factors specific to the issuer. Declines attributable to
issuer fundamentals are reviewed in further detail. Available evidence is
considered to estimate the realizable value of the investment. When a security
in the Company's investment portfolio has a decline in market value which is
other than temporary, the Company is required by GAAP to reduce the carrying
value of such security to its net realizable value.
Included in the Company's fixed-maturity and equity portfolios are $195.8
million, or 3.0%, of other risk assets. These include high yield and distressed
debt, private equities and warrants, and mezzanine investments. No individual
security in this category comprised more than 1% of the Company's total
investment portfolio. The total return on this asset class in 1999 was 7.1% with
a total net unrealized gain of $20.5 million.
Trading securities and derivative instruments held or issued for trading are
entered into for the purpose of near-term profit taking. During 1999, net
activity in the trading portfolio was not material to the Company's financial
position, cash flows or results of operations. At December 31, 1999, trading
positions had a net market value of $50.2 million, compared to $(.4) million at
December 31, 1998. Net gains and losses for the year ended December 31, 1999 and
1998, were $.8 million and $(1.2) million, respectively.
Derivative instruments are primarily used to manage the risks and enhance the
returns of the available-for-sale portfolio. This is accomplished by modifying
the basis, duration, interest rate or foreign currency characteristics of the
portfolio, hedged securities or hedged cash flows. During 1998, the Company
entered into two transactions, an interest rate swap hedge and a short futures
position, to hedge against possible rises in interest rates prior to the
issuance of debt under the $300 million shelf registration. During 1999, the
$300 million of debt was issued and the hedges were closed. The interest rate
swap performed as expected and was recorded as a deferred asset under SFAS 80,
"Accounting for Futures Contracts," as a qualified hedge. The deferred asset of
$4.8 million is recognized as an adjustment to interest expense over the life of
the debt. During 1998, the short futures position, driven by changing economic
conditions, did not meet the established criteria for hedging correlation and
was discontinued as a hedge, but the Company continued to hold it for risk
management of the anticipated debt offering. The Company recognized a net
realized gain of $8.1 million in 1999 and a net realized loss of $9.2 million in
1998, on the short futures position. Derivative instruments may also be used for
trading purposes. For all derivative positions, net cash requirements are
limited to changes in market values which may vary based upon changes in
interest rates and other factors. Exposure to credit risk is limited to the
carrying value; collateral is not required to support the credit risk.
RESULTS OF OPERATIONS Operating income, which excludes net realized gains and
losses from security sales and one-time items, was $266.7 million, or $3.58 per
share, in 1999, $449.3 million, or $6.01 per share, in 1998 and $336.0 million,
or $4.46 per share, in 1997. The GAAP combined ratio was 98.3 in 1999, 91.6 in
1998 and 93.4 in 1997.
Direct premiums written increased 16% to $6,305.3 million in 1999, compared to
$5,451.3 million in 1998 and $4,825.2 million in 1997. Net premiums written
increased 16% to $6,124.7 million in 1999, compared to $5,299.7 million in 1998
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and $4,665.1 million in 1997. The difference between direct and net premiums
written is attributable to premiums written under state-mandated involuntary
Commercial Auto Insurance Procedures, for which the Company retains no indemnity
risk, of $49.7 million in 1999, $60.7 million in 1998 and $78.4 million in 1997,
and reinsurance the Company maintains in its auto and non-auto programs and its
strategic alliance relationships. Premiums earned, which are a function of the
amount of premiums written in the current and prior periods, increased 15% in
1999, compared to 18% in 1998 and 31% in 1997.
Net premiums written in the Company's Personal Lines business units, which write
insurance for private passenger automobiles and recreation vehicles and
represented 93% of the Company's 1999 total premiums written, grew 16%, 15% and
36% in 1999, 1998 and 1997, respectively, primarily reflecting an increase in
unit sales. The Company decreased rates an average of 1.3% during the first six
months of 1999, and increased rates 4.4% in the second half of the year, for
an annual rate increase of 3.1% in 1999, compared to rate decreases of 5.3% and
.9% in 1998 and 1997, respectively. The Company expects that these rate
increases will likely slow volume growth in 2000 and, since nearly two-thirds of
the Company's new auto policies are on an annual term, the Company does not
expect to see the full impact of these rate changes until the fourth
quarter of 2000.
The Personal Lines business is generated either by an Agent or written directly
by the Company. The Agent channel includes business written by the Company's
network of 30,000 Independent Insurance Agents and through Strategic Alliance
business relationships (other insurance companies, financial institutions,
employers and national brokerage agencies). Total net premiums written through
Independent Agents and Strategic Alliance agency relationships were $4,746.5
million in 1999, compared to $4,390.4 million in 1998 and $4,033.8 million in
1997. The combined ratios for the Agency channel were 96.5, 90.6 and 93.2 for
1999, 1998 and 1997, respectively. Direct business includes business written
through 1-800-AUTO-PRO(R), the Internet (progressive.com) and the Strategic
Alliance business unit on behalf of affinity groups. Net premiums written and
combined ratio on the Direct business were $955.9 million and 113.1,
respectively, in 1999, compared to $531.9 million and 107.5 in 1998 and $255.0
million and 103.8 in 1997. The sales generated via the Internet represented
approximately 7% and 2% of the Direct business net premiums written for 1999 and
1998, respectively; the Company started selling insurance directly over the
Internet in August 1997. Through these multiple distribution channels, the
Company continues to write standard and preferred risks, which represented
between 45% and 50% of total 1999 Personal Lines volume, compared to between 30%
and 35% in 1998 and between 20% and 25% in 1997, as well as its traditional
nonstandard auto products.
Claim costs, the Company's most significant expense, represent actual payments
made and changes in estimated future payments to be made to or on behalf of its
policyholders, including expenses required to settle claims and losses. These
costs include a loss estimate for future assignments and assessments, based on
current business, under state-mandated involuntary automobile programs. Claim
costs are influenced by inflation and loss severity and frequency, the impact of
which is mitigated by adequate pricing. Increases in the rate of inflation
increase loss payments, which are made after premiums are established.
Accordingly, anticipated rates of inflation are taken into account when the
Company establishes premium rates and loss reserves. Claim costs, expressed as a
percentage of premiums earned, were 75% in 1999, compared to 68% in 1998 and 71%
in 1997. The increase in the loss ratios was driven by the factors discussed
below.
Four factors contributed to the Company's underwriting losses during the second
half of 1999 and its inability to meet its traditional goals in 1999. The first
factor was that, during 1999, the Company reduced loss reserves relating to
prior accident years $29.8 million, or .5 points, compared to $184.2 million, or
3.7 points, and $103.3 million, or 2.5 points, for 1998 and 1997, respectively.
The second factor was continued strong growth in the Direct business in 1999. In
periods of rapid growth in the Direct business, the Company's earnings may be
lower as a result of higher up-front costs and higher loss costs traditionally
associated with new business. In response, the Company decided to return to
profit targets based on a calendar year measure rather than over the entire
retention period of a policyholder, with the intent to bring the combined ratio
back to the historic goal of 96 over the next few years. The Company's profit
and growth opportunities change from year to year; however, over every
consecutive 5-year period, the Company strives to produce a four percent
underwriting profit and to grow at 15 percentage points greater than the rate of
inflation. The third factor was that the Company lowered rates in 1998 and
during the first half of 1999, in an attempt to raise its combined ratio to 96
while achieving its growth target. Lastly, during 1999, loss trend accelerated
at an unanticipated pace; consequently, loss costs rose faster than expected.
The Company expects these loss costs trends to continue. In 1999, actual trend
for
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pricing exceeded estimates. Similarly, the emerging loss development is greater
than anticipated primarily for the 1999 losses, which led to the Company
experiencing approximately 6 points of adverse development during the first two
months of 2000. During March 2000, the Company undertook a comprehensive review
of those reserve segments that have shown the most development and intends to
adjust the reserves accordingly.
The Company's other lines of business include writing insurance for small fleets
of commercial vehicles, collateral protection and loan tracking for auto lenders
and financial institutions, directors' and officers' liability and fidelity
coverage for American Bankers Association member community banks and independent
credit unions, and providing related claim, underwriting and system services.
Revenues in these businesses were $437.0 million in 1999, compared to $405.5
million in 1998 and $402.1 million in 1997. Pretax operating profit was $41.8
million in 1999, compared to $61.9 million in 1998 and $36.6 million in 1997.
The Company writes directors and officers and other professional liability
coverage for community banks and credit unions and, therefore, could potentially
be exposed to liability for errors made by these institutions relating to the
year 2000 conversion. The Company has reinsurance to limit its potential
exposure to approximately 7% of the average policy limits in the event any of
the insured directors or officers are held liable for year 2000 noncompliance by
their financial institutions. It is currently unknown whether these financial
institutions have been able to completely avoid errors relating to year 2000
compliance and the Company is unable to predict to what extent such financial
institutions will incur losses as a result of noncompliance and whether their
directors and officers will be subject to individual liability for such
noncompliance. In the event of a claim, applicable factual and coverage issues
would have to be resolved. Based on information currently available and
management's best estimate, the Company does not believe that any losses
resulting from this exposure will have a material impact on the Company's
liquidity, financial condition, cash flows or results of operations.
Because the Company is primarily an insurer of motor vehicles, it has limited
exposure for environmental, product and general liability claims. The Company
has established reserves for these exposures, in amounts which it believes to be
adequate based on information currently known by it. Management does not believe
that these claims will have a material impact on the Company's liquidity,
financial condition, cash flows or results of operations.
Policy acquisition and other underwriting expenses as a percentage of premiums
earned were 23% in 1999, 1998 and 1997. The Company advertises locally in 35
states, plus Washington D.C. (107 markets), as compared to 32 states (83
markets) in 1998 and 19 states (40 markets) in 1997. The Company expanded its
television advertising campaign on a national level during 1998. During 1999,
the Company incurred advertising expenses of $124 million, compared to $70
million in 1998 and $23 million in 1997.
Recurring investment income (interest and dividends) increased 16% to $340.7
million in 1999, compared to $294.8 million in 1998 and $274.9 million in 1997,
primarily due to an increase in the size of the investment portfolio. Net
realized gains on security sales were $47.2 million in 1999, $11.4 million in
1998 and $98.5 million in 1997. Investment expenses were $9.5 million in 1999,
compared to $7.4 million in 1998 and $9.9 million in 1997.
YEAR 2000 COMPLIANCE The Company's five-year effort to achieve year 2000
compliance was successful. The Company successfully operated through the
rollover to year 2000 with only minor issues and has not experienced any
significant business outage or incurred any significant cost due to the year
2000 failure or errors of business partners to date. The total cost to modify
existing production systems, which includes both internal and external costs of
programming, coding and testing, was $9.3 million, of which $9.2 million had
been expensed through December 31, 1999. The Company also replaced some of its
systems. In addition to being year 2000 compliant, these new systems added
increased functionality to the Company. The majority of the projects were
completed in 1998, with remaining parallel testing completed during the first
half of 1999. As of December 31, 1999, $5.5 million, which include both internal
and external costs, had been paid for these systems. All costs were funded
through operating cash flows.
The Company continually evaluates computer hardware and software upgrades for
enhancements and, therefore, many of the costs to replace these items to be year
2000 compliant were not incremental costs to the Company.
18
19
In preparing for the rollover to the 21st century, the Company's process teams
and business groups identified potential year 2000 scenarios. For those
scenarios deemed to be both probable and with a potentially significant business
impact, the Company developed contingency plans. These plans were reviewed by
the Company's chief financial and technology officers throughout 1999. It has
not been necessary to execute any of the contingency plans to date.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995: CERTAIN MATTERS IN THIS ANNUAL REPORT ON FORM 10-K MAY BE CONSIDERED
FORWARD-LOOKING STATEMENTS THAT ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES
THAT COULD CAUSE ACTUAL EVENTS AND RESULTS TO DIFFER MATERIALLY FROM THOSE
DISCUSSED HEREIN. THESE RISKS AND UNCERTAINTIES INCLUDE, WITHOUT LIMITATION,
UNCERTAINTIES RELATED TO ESTIMATES, ASSUMPTIONS AND PROJECTIONS GENERALLY;
CHANGES IN ECONOMIC CONDITIONS (INCLUDING CHANGES IN INTEREST RATES AND
FINANCIAL MARKETS); PRICING COMPETITION AND OTHER INITIATIVES BY COMPETITORS;
LEGISLATIVE AND REGULATORY DEVELOPMENTS; WEATHER CONDITIONS (INCLUDING THE
SEVERITY AND FREQUENCY OF STORMS, HURRICANES, SNOWFALLS, HAIL AND WINTER
CONDITIONS); CHANGES IN DRIVING PATTERNS AND LOSS TRENDS; COURT DECISIONS AND
TRENDS IN LITIGATION AND HEALTH CARE COSTS; UNFORESEEN TECHNOLOGICAL ISSUES
ASSOCIATED WITH THE YEAR 2000 COMPLIANCE EFFORTS AND THE EXTENT TO WHICH
VENDORS, PUBLIC UTILITIES, GOVERNMENTAL ENTITIES AND OTHER THIRD PARTIES THAT
INTERFACE WITH THE COMPANY MAY FAIL TO ACHIEVE YEAR 2000 COMPLIANCE; AND OTHER
MATTERS DESCRIBED FROM TIME TO TIME BY THE COMPANY IN OTHER DOCUMENTS FILED WITH
THE UNITED STATES SECURITIES AND EXCHANGE COMMISSION. THE COMPANY ASSUMES NO
OBLIGATION TO UPDATE THE INFORMATION IN THIS ANNUAL REPORT.
19
20
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The quantitative and qualitative disclosures about market risk are incorporated
by reference from the "Investments" section of MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS set forth in Item 7 of
the Company's Annual Report on Form 10-K for the year ended December 31, 1999,
and pages 56 and 57 of the Company's 1999 Annual Report to Shareholders, which
is included as Exhibit 13 to such Annual Report on Form 10-K.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements of the Company, along with the related
notes, supplementary data and report of independent accountants, are
incorporated by reference from the Company's 1999 Annual Report, pages 33
through 47 and pages 51 through 58.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
20
21
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information relating to all of the directors and the individuals who have been
nominated for election as directors at the 2000 Annual Meeting of Shareholders
of the Registrant, is incorporated herein by reference from the section entitled
"Election of Directors" in the Proxy Statement, pages 2 through 4.
Information relating to executive officers of the Registrant and its
subsidiaries follows. Unless otherwise indicated, the executive officer has held
the position(s) indicated for at least the last five years.
Offices Held and
Name Age Last Five Years' Business Experience
---- --- ------------------------------------
Peter B. Lewis 66 President and Chairman of the Board; Chief Executive Officer since
January 2000 and prior to January 1999; Chief Executive Officer -
Insurance Operations during 1999; President, Chairman of the Board and
Chief Executive Officer of Progressive Casualty Insurance Company, the
principal subsidiary of the Registrant
Alan R. Bauer 47 Internet Distribution Leader since January 1999;
International/Internet Officer from December 1996 to December 1998;
Independent Agent Marketing Process Leader from March 1996 to December
1996; West Division President prior to March 1996
Jeffrey W. Basch 41 Vice President since December 1999; Chief Accounting Officer
Charles B. Chokel 46 Chief Executive Officer - Investments and Capital Management since
January 1999; Chief Financial Officer and Treasurer prior to January
1999
Janet A. Dolohanty 46 Vice President since December 1999; Tax Director
W. Thomas Forrester 51 Chief Financial Officer and Treasurer since January 1999; Ownership
Process Leader from March 1996 to December 1998; Central States
Division President prior to April 1996
R. Steven Kestner 45 Chief Legal Officer and Secretary of the Registrant since January
2000; Partner at Baker & Hostetler LLP, which is the principal outside
law firm of the Registrant
Thomas A. King 40 Vice President since December 1999; Corporate Controller since March
1998; General Manager of Minnesota and Wisconsin from October 1995 to
February 1998; Pennsylvania Auto Product Manager prior to October 1995
Moira A. Lardakis 48 Chief Communications Officer since January 1999; Community Manager
Support Process Leader during 1998; General Manager of Ohio Business
Unit from March 1996 to December 1997; Ohio Division President prior to
March 1996
Daniel R. Lewis 53 Independent Agent Distribution Leader since January 1999; Independent
Agent Marketing Process Leader from December 1996 to December 1998;
General Manager of South Florida Community prior to January 1997
Brian J. Passell 43 Chief Claim Officer since January 1999; General Manager of
Pennsylvania from March 1996 to December 1998; New York Division Claim
Manager prior to March 1996
21
22
Glenn M. Renwick 44 Chief Executive Officer - Insurance Operations since January 2000;
Chief Information Officer from January 1998; Consumer Marketing
Process Leader from March 1996 to December 1997; Director of Consumer
Marketing prior to March 1996
Tiona M. Thompson 49 Chief Human Resources Officer
Richard H. Watts 45 Direct Business Leader since January 2000; General Manager of
Northeast Ohio from January 1996 to December 1999; Direct Product
Manager of Ohio during 1995
Robert T. Williams 43 Chief Pricing/Product Officer since January 1999; Product Process
Leader during 1998; General Manager of New York Business Unit
from March 1996 to December 1997; New York Division President prior
to April 1996; Manager of Special Lines prior to March 1997
Section 16(a) Beneficial Ownership Reporting Compliance. The February 16, 1999
purchase of 1,400 shares by a partnership organized for the benefit of B.
Charles Ames and members of his immediate family was reported in a Form 4 filed
on May 27, 1999.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference from the section of the Proxy Statement entitled
"Executive Compensation," pages 9 through 21.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Incorporated by reference from the section of the Proxy Statement entitled
"Security Ownership of Certain Beneficial Owners and Management," pages 6
through 8.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference from the section of the Proxy statement entitled
"Election of Directors - Certain Relationships and Related Transactions," page
5.
22
23
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K.
(a)(1) Listing of Financial Statements
The following consolidated financial statements of the
Registrant and its subsidiaries, included in the Registrant's
Annual Report, are incorporated by reference in Item 8:
Report of Independent Accountants
Consolidated Statements of Income - For the Years
Ended December 31, 1999, 1998 and 1997
Consolidated Balance Sheets - December 31, 1999
and 1998
Consolidated Statements of Changes in Shareholders'
Equity - For the Years Ended December 31, 1999, 1998
and 1997
Consolidated Statements of Cash Flows - For the Years
Ended December 31, 1999, 1998 and 1997
Notes to Consolidated Financial Statements
Supplemental Information*
*Not covered by Report of Independent Accountants.
(a)(2) Listing of Financial Statement Schedules
The following financial statement schedules of the Registrant
and its subsidiaries, Report of Independent Accountants and
Consent of Independent Accountants are included in Item 14(d):
SCHEDULES
Report of Independent Accountants
Consent of Independent Accountants
Schedule I - Summary of Investments -
Other than Investments in Related Parties
Schedule II - Condensed Financial
Information of Registrant
Schedule III - Supplementary Insurance
Information
23
24
Schedule IV - Reinsurance
Schedule VI - Supplemental Information Concerning
Property-Casualty Insurance Operations
No other schedules are required to be filed herewith
pursuant to Article 7 of Regulation S-X.
(a)(3) Listing of Exhibits
See exhibit index contained herein at pages 39 through 43.
Management contracts and compensatory plans and arrangements
are identified in the Exhibit Index as Exhibit Nos. (10)(D)
through (10)(V).
(b) Reports on Form 8-K
On November 22, 1999, the Registrant filed a Current Report
on Form 8-K, dated November 18, 1999, discussing certain
changes in the senior management of the Registrant.
(c) Exhibits
The exhibits in response to this portion of Item 14 are
submitted concurrently with this report.
(d) Financial Statement Schedules
The response to this portion of Item 14 is located at pages 30
through 38.
24
25
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
THE PROGRESSIVE CORPORATION
March 30, 2000 BY: /S/ PETER B. LEWIS
--------------------------------
Peter B. Lewis
Director, Chairman, President and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant in
the capacities and on the dates indicated.
/S/ PETER B. LEWIS Director, Chairman, President and March 30, 2000
- -----------------------------------------
Peter B. Lewis Chief Executive Officer
/S/ CHARLES B. CHOKEL Director and Chief Executive Officer- March 30, 2000
- -----------------------------------------
Charles B. Chokel Investments and Capital Management
/S/ GLENN M. RENWICK Director and Chief Executive Officer- March 30, 2000
- -----------------------------------------
Glenn M. Renwick Insurance Operations
/S/ W. THOMAS FORRESTER Treasurer and Chief Financial Officer March 30, 2000
- -----------------------------------------
W. Thomas Forrester
/S/ JEFFREY W. BASCH Vice President and Chief Accounting Officer March 30, 2000
- -----------------------------------------
Jeffrey W. Basch
* Director March 30, 2000
- -----------------------------------------
Milton N. Allen
* Director March 30, 2000
- -----------------------------------------
B. Charles Ames
* Director March 30, 2000
- -----------------------------------------
James E. Bennett III
* Director March 30, 2000
- -----------------------------------------
Charles A. Davis
25
26
* Director March 30, 2000
- -----------------------------------------
Stephen R. Hardis
* Director March 30, 2000
- -----------------------------------------
Janet Hill
* Director March 30, 2000
- -----------------------------------------
Norman S. Matthews
* Director March 30, 2000
- -----------------------------------------
Donald B. Shackelford
* R. STEVEN KESTNER, by signing his name hereto, does sign this document on
behalf of the persons indicated above pursuant to a power of attorney duly
executed by such persons.
By /S/ R. STEVEN KESTNER March 30, 2000
------------------------------------------------------------------------------------------
R. Steven Kestner
Attorney-in-fact
26
27
ANNUAL REPORT ON FORM 10-K
ITEM 14(d)
FINANCIAL STATEMENT SCHEDULES
YEAR ENDED DECEMBER 31, 1999
THE PROGRESSIVE CORPORATION
MAYFIELD VILLAGE, OHIO
27
28
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders,
The Progressive Corporation:
Our report on the consolidated financial statements of The Progressive
Corporation and subsidiaries has been incorporated by reference in this Form
10-K from page 33 of the 1999 Annual Report to Shareholders of The Progressive
Corporation. In connection with our audits of such financial statements, we have
also audited the related financial statement schedules listed in the index on
pages 23 and 24 of this Form 10-K.
In our opinion, the financial statement schedules referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information required to be
included therein.
PRICEWATERHOUSECOOPERS LLP
Cleveland, Ohio
January 25, 2000
28
29
CONSENT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders,
The Progressive Corporation:
We consent to the incorporation by reference in the Registration Statement of
The Progressive Corporation on Form S-8 (File No. 333-51613) filed May 1, 1998,
the Registration Statement on Form S-8 (File No. 333-25197) filed April 15,
1997, the Registration Statement on Form S-8 (File No. 33-57121) filed December
29, 1994, the Registration Statement on Form S-8 (File No. 33-64210) filed June
10, 1993, the Registration Statement on Form S-8 (File No. 33-51034) filed
August 20, 1992, the Registration Statement on Form S-8 (File No. 33-46944)
filed April 3, 1992, the Registration Statement on Form S-8 (File No. 33-38793)
filed February 4, 1991, the Registration Statement on Form S-8 (File No.
33-38107) filed December 6, 1990, the Registration Statement on Form S-8 (File
No. 33-37707) filed November 9, 1990, the Registration Statement on Form S-8
(File No. 33-33240) filed January 31, 1990, and the Registration Statement on
Form S-8 (File No. 33-16509) filed August 14, 1987, of our reports dated January
25, 2000, on our audits of the consolidated financial statements and financial
statement schedules of The Progressive Corporation and subsidiaries as of
December 31, 1999 and 1998, and for each of the three years in the period ended
December 31, 1999, which reports are included in this Annual Report on Form
10-K.
PRICEWATERHOUSECOOPERS LLP
Cleveland, Ohio
March 27, 2000
29
30
SCHEDULE I -- SUMMARY OF INVESTMENTS -- OTHER
THAN INVESTMENTS IN RELATED PARTIES
THE PROGRESSIVE CORPORATION AND SUBSIDIARIES
- --------------------------------------------
(millions)
December 31, 1999
-----------------------------------------------------------------
Amount At Which Shown
In The
Type of Investment Cost Market Value Balance Sheet
-----------------------------------------------------------------
Fixed Maturities:
Available-for-sale:
United States Government and
government agencies and
authorities $ 352.4 $ 345.6 $ 345.6
States, municipalities and political
subdivisions 1,352.9 1,332.2 1,332.2
Asset-backed securities 1,897.3 1,831.1 1,831.1
Foreign government obligations 60.4 59.0 59.0
Corporate and other debt securities 950.2 927.0 927.0
Redeemable preferred stock 37.7 37.8 37.8
-----------------------------------------------------------------
Total fixed maturities 4,650.9 4,532.7 4,532.7
-----------------------------------------------------------------
Equity securities:
Common stocks:
Public utilities 17.3 15.2 15.2
Banks, trust and insurance
companies 405.9 397.1 397.1
Industrial, miscellaneous and
all other 704.6 831.3 831.3
Nonredeemable preferred stocks 425.4 422.4 422.4
-----------------------------------------------------------------
Total equity securities 1,553.2 1,666.0 1,666.0
-----------------------------------------------------------------
Short-term investments 229.0 229.0 229.0
-----------------------------------------------------------------
Total investments $6,433.1 $6,427.7 $6,427.7
=================================================================
The Company did not have any securities of one issuer with an aggregate cost or
market value exceeding 10% of total shareholders' equity at December 31, 1999.
30
31
SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF INCOME
THE PROGRESSIVE CORPORATION (PARENT COMPANY)
- --------------------------------------------
(millions)
Years Ended December 31,
1999 1998 1997
----------------------------------------------------
Revenues
Dividends from subsidiaries* $95.4 $151.0 $108.1
Intercompany investment income* 41.2 25.9 35.3
----------------------------------------------------
136.6 176.9 143.4
----------------------------------------------------
Expenses
Interest expense 79.5 64.5 64.5
Other operating costs and expenses .6 5.2 6.2
----------------------------------------------------
80.1 69.7 70.7
----------------------------------------------------
Operating income and income before income
taxes and other items below 56.5 107.2 72.7
Income tax benefit (14.2) (16.2) (12.7)
----------------------------------------------------
Income before equity in undistributed earnings of
subsidiaries 70.7 123.4 85.4
Equity in undistributed net income of consolidated
subsidiaries* 224.5 333.3 314.6
----------------------------------------------------
Net income $295.2 $456.7 $400.0
====================================================
*Eliminated in consolidation.
See notes to condensed financial statements.
31
32
SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
CONDENSED BALANCE SHEETS
THE PROGRESSIVE CORPORATION (PARENT COMPANY)
- --------------------------------------------
(millions)
December 31,
1999 1998
-----------------------------------------------
ASSETS
Investment in non-consolidated affiliates $ .4 $ .4
Investment in subsidiaries* 3,076.0 2,882.9
Receivable from subsidiary* 745.7 441.1
Intercompany receivable* -- 9.9
Income taxes 12.9 19.7
Other assets 18.5 12.6
-----------------------------------------------
TOTAL ASSETS $3,853.5 $3,366.6
===============================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued expenses $ 39.3 $ 32.9
Intercompany payable* 20.5 --
Debt 1,040.9 776.6
-----------------------------------------------
Total liabilities 1,100.7 809.5
-----------------------------------------------
Shareholders' equity:
Common Shares, $1.00 par value, authorized 300.0
shares, issued 83.1, including treasury
shares of 10.0 and 10.6 73.1 72.5
Paid-in capital 481.6 448.3
Accumulated other comprehensive income:
Net unrealized appreciation (depreciation)
of investment in equity securities
of consolidated subsidiaries (3.4) 113.3
Other (9.0) (9.6)
Retained earnings 2,210.5 1,932.6
-----------------------------------------------
Total shareholders' equity 2,752.8 2,557.1
-----------------------------------------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $3,853.5 $3,366.6
===============================================
*Eliminated in consolidation.
See notes to condensed financial statements.
32
33
SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
CONDENSED STATEMENTS OF CASH FLOWS
THE PROGRESSIVE CORPORATION (PARENT COMPANY)
- --------------------------------------------
(millions)
Years Ended December 31,
1999 1998 1997
--------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $295.2 $456.7 $400.0
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Equity in income of consolidated subsidiaries (319.9) (484.3) (422.7)
Changes in:
Intercompany receivable or payable 30.4 (37.8) 34.5
Accounts payable and accrued expenses 6.4 9.3 1.4
Income taxes 6.8 9.2 (15.9)
Other, net 3.4 (4.7) (3.5)
--------------------------------------------------
Net cash provided by (used in) operating 22.3 (51.6) (6.2)
activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Additional investments in equity securities of
consolidated subsidiaries (90.2) (124.1) (219.3)
Purchase of consolidated subsidiaries -- -- (100.5)
Dividends received from consolidated subsidiaries 95.4 151.0 108.1
--------------------------------------------------
Net cash provided by (used in) investing 5.2 26.9 (211.7)
activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 12.6 11.5 14.1
Proceeds from exercise of stock options
Tax benefits from exercise of stock options 20.4 25.6 17.6
Proceeds from Debt 293.7 -- --
Payments of Debt (30.0) -- --
Receivable from subsidiary (304.6) 48.3 206.4
Dividends paid to shareholders (19.0) (18.1) (17.3)
Acquisition of treasury shares (.6) (42.6) (2.9)
--------------------------------------------------
Net cash provided by (used in) financing
activities (27.5) 24.7 217.9
--------------------------------------------------
Change in cash -- -- --
Cash, beginning of year -- -- --
--------------------------------------------------
Cash, end of year $ -- $ -- $ --
==================================================
See notes to condensed financial statements.
33
34
SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
NOTES TO CONDENSED FINANCIAL STATEMENTS
The accompanying condensed financial statements of The Progressive Corporation
(the "Registrant") should be read in conjunction with the consolidated financial
statements and notes thereto of The Progressive Corporation and subsidiaries
included in the Registrant's 1999 Annual Report.
STATEMENTS OF CASH FLOWS -- For the purpose of the Statements of Cash Flows,
cash includes only bank demand deposits. The Registrant paid income taxes of
$116.5 million in 1999, and $235.9 million, and $166.9 million in 1998 and 1997,
respectively. Total interest paid was $72.4 million for 1999 and $63.8 million
for 1998 and 1997.
DEBT -- Debt at December 31 consisted of:
1999 1998
--------------------------- ---------------------------
(millions) Market Market
Cost Value Cost Value
------------------------------------------------------------
6 5/8% Senior Notes due 2029 (issued: $300.0, March 1999) $293.7 $254.1 $ -- $ --
7.30% Notes due 2006 (issued: $100.0, May 1996) 99.7 98.0 99.7 109.5
6.60% Notes due 2004 (issued: $200.0, January 1994) 199.3 193.7 199.1 199.4
7% Notes due 2013 (issued: $150.0, October 1993) 148.5 138.8 148.4 157.2
8 3/4% Notes due 1999 (issued: $30.0, May 1989) -- -- 29.9 30.4
10% Notes due 2000 (issued: $150.0, December 1988) 149.9 154.3 149.8 162.7
10 1/8% Subordinated Notes due 2000 (issued: 149.8 154.5 149.7 162.4
$150.0, December 1988)
------------------------------------------------------------
$1,040.9 $ 993.4 $776.6 $821.6
============================================================
Debt includes amounts the Registrant has borrowed and contributed to the capital
of its insurance subsidiaries or borrowed for other long-term purposes. During
1999, there were no bank borrowings outstanding. Market values are obtained from
publicly quoted sources.
All debt is noncallable, except for the 6 5/8% Senior Notes which may be
redeemed all or in part at any time, subject to a "make whole" provision;
interest is payable semiannually.
In May 1990, the Registrant entered into a revolving credit arrangement with
National City Bank, which is reviewed by the bank annually. Under this
agreement, the Registrant has the right to borrow up to $10.0 million. By
selecting from available credit options, the Registrant may elect to pay
interest at rates related to the London interbank offered rate, the bank's base
rate or at a money market rate. A commitment fee is payable on any unused
portion of the committed amount at the rate of .125% per annum. The Registrant
had no borrowings under this arrangement at December 31, 1999 and 1998.
Aggregate principal payments on debt outstanding at December 31, 1999 are $300.0
for 2000, $0 million for 2001, 2002 and 2003, $200.0 for 2004 and $550.0 million
thereafter.
34
35
SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
NOTES TO CONDENSED FINANCIAL STATEMENTS
INCOME TAXES -- The Registrant files a consolidated Federal income tax return
with all eligible subsidiaries. The Federal income taxes in the accompanying
Condensed Balance Sheets represent amounts recoverable from the Internal Revenue
Service by the Registrant as agent for the consolidated tax group. The
Registrant and its subsidiaries have adopted, pursuant to a written agreement, a
method of allocating consolidated Federal income taxes. Amounts allocated to the
subsidiaries under the written agreement are included in Intercompany Receivable
from Subsidiaries in the accompanying Condensed Balance Sheets.
INVESTMENTS IN CONSOLIDATED SUBSIDIARIES -- The Registrant, through its
investment in consolidated subsidiaries, recognizes the changes in unrealized
gains (losses) on available-for-sale securities of the subsidiaries. These
amounts were:
(millions) 1999 1998 1997
-----------------------------------------------------------------
Unrealized gains (losses):
Available-for-sale: fixed maturities $ (165.6) $ (7.2) $ 29.5
equity securities (14.1) (6.9) 44.8
Deferred income taxes 63.0 5.1 (26.0)
-----------------------------------------------------------------
$ (116.7) $ (9.0) $ 48.3
=================================================================
OTHER MATTERS -- The information relating to incentive compensation plans is
incorporated by reference from Note 9, EMPLOYEE BENEFIT PLANS, "Incentive
Compensation Plans" on pages 44 and 45 of the Registrant's 1999 Annual Report.
35
36
SCHEDULE III -- SUPPLEMENTARY INSURANCE INFORMATION
THE PROGRESSIVE CORPORATION AND SUBSIDIARIES
- --------------------------------------------
(millions)
Future
policy Other
benefits, policy Benefits,
Deferred losses, claims claims,
policy claims and and losses and
acquisition loss Unearned benefits Premium Investment settlement
Segment costs(1) expenses(1) premiums(1) payable(1) revenue income(1)(2) expenses
------------------------------------------------------------------------------------
Year ended December 31, 1999:
Personal Lines $5,294.1 $4,002.7
Other 389.5 253.7
------------------------------------------------------------------------------------
Total $343.4 $2,416.2 $2,781.4 $ -- $5,683.6 $340.7 $4,256.4
====================================================================================
Year ended December 31, 1998:
Personal Lines $4,580.7 $3,164.4
Other 367.3 211.9
------------------------------------------------------------------------------------
Total $299.1 $2,188.6 $2,329.7 $ -- $4,948.0 $294.8 $3,376.3
====================================================================================
Year ended December 31, 1997:
Personal Lines $3,832.7 $2,743.3
Other 356.8 224.2
------------------------------------------------------------------------------------
Total $259.6 $2,146.6 $1,980.1 $ -- $4,189.5 $274.9 $2,967.5
====================================================================================
Amortization
of deferred
policy Other Net
acquisition operating premiums
Segment costs(3) expenses written
--------------------------------------
Year ended December 31, 1999:
Personal Lines $693.9 $534.3 $5,702.4
Other 51.1 49.5 422.3
--------------------------------------
Total $745.0 $583.8 $6,124.7
======================================
Year ended December 31, 1998:
Personal Lines $610.9 $443.9 $4,922.3
Other 49.0 51.9 377.4
--------------------------------------
Total $659.9 $495.8 $5,299.7
======================================
Year ended December 31, 1997:
Personal Lines $556.0 $290.4 $4,288.8
Other 51.8 45.6 376.3
--------------------------------------
Total $607.8 $336.0 $4,665.1
======================================
(1) The Company does not allocate assets or investment income to operating
segments.
(2) Excluding investment expenses of $9.5 million in 1999, $7.4 million in 1998
and $9.9 million in 1997.
(3) Since the Company does not allocate deferred policy acquisition costs to
operating segments, amounts were allocated based on premium revenue.
36
37
SCHEDULE IV -- REINSURANCE
THE PROGRESSIVE CORPORATION AND SUBSIDIARIES
- --------------------------------------------
(millions)
YEAR ENDED Assumed Percentage
- ---------- Ceded to From of Amount
Gross Amount Other Other Assumed
Companies Companies Net Amount to Net
-----------------------------------------------------------------------------------
DECEMBER 31, 1999
- ----------------
Premiums earned:
Property and liability $5,853.5 $169.9 $-- $5,683.6 --
===================================================================================
DECEMBER 31, 1998
- -----------------
Premiums earned:
Property and liability $5,100.5 $152.5 $-- $4,948.0 --
===================================================================================
DECEMBER 31, 1997
- -----------------
Premiums earned:
Property and liability $4,382.9 $193.4 $-- $4,189.5 --
===================================================================================
37
38
SCHEDULE VI -SUPPLEMENTAL INFORMATION CONCERNING PROPERTY - CASUALTY INSURANCE
OPERATIONS
THE PROGRESSIVE CORPORATION AND SUBSIDIARIES
- --------------------------------------------
(millions)
Paid Losses and
Losses and Loss Adjustment Expenses Loss Adjustment
Incurred Related to Expenses
--------------------------------------------------- -------------------
Current Prior
YEAR ENDED Year Years
- ----------
-------------------------- ----------------------
December 31, 1999 $4,286.2 $(29.8) $4,002.0
========================== ====================== ===================
December 31, 1998 $3,560.5 $(184.2) $3,298.0
========================== ====================== ===================
December 31, 1997 $3,070.8 $(103.3) $2,715.1
========================== ====================== ===================
Pursuant to Rule 12-18 of Regulation S-X. See Schedule III, page 36, for the
additional information required in Schedule VI.
38
39
EXHIBIT INDEX
Exhibit No.
Under Reg. Form 10-K
S-K, Item 601 Exhibit No. Description of Exhibit
(3)(i) 3(A) Amended Articles of Incorporation, as amended, of The Progressive
Corporation
(3)(ii) 3(B) Code of Regulations of Progressive
(4) 4(A) Indenture dated as of November 15, 1988 between
Progressive and State Street Bank and Trust Company (successor in
interest to Rhode Island Hospital Trust National Bank), as Trustee
("Subordinated Indenture") (including Table of Contents
and cross-reference sheet)
(4) 4(B) Form of 10 1/8% Subordinated Notes due 2000 issued in
the aggregate principal amount of $150,000,000 under the
Subordinated Indenture
(4) 4(C) Indenture dated as of November 15, 1988 between
Progressive and State Street Bank and Trust Company (successor in
interest to The First National Bank of Boston), as Trustee
("1988 Senior Indenture") (including Table of Contents
and cross-reference sheet)
(4) 4(D) Form of 10% Notes due 2000 issued in the aggregate
principal amount of $150,000,000 under the 1988 Senior Indenture
(4) 4(E) $10,000,000 Unsecured Line of Credit with National City
Bank (dated May 23, 1990; renewed May 20, 1992; amended February
1, 1994 and May 1, 1997)
Exhibit No.
Under Reg. Form 10-K If Incorporated by Reference, Documents with Which
S-K, Item 601 Exhibit No. Exhibit was Previously Filed with SEC
(3)(i) 3(A) Registration Statement No. 333-51613 (Filed with SEC on
May 1, 1998; see Exhibit 4(C) therein)
(3)(ii) 3(B) Quarterly Report on Form 10-Q (filed with SEC on May 15,
1997; see Exhibit 3 therein)
(4) 4(A) Contained in Exhibit Binder
(4) 4(B) Contained in Exhibit Binder
(4) 4(C) Contained in Exhibit Binder
(4) 4(D) Contained in Exhibit Binder
(4) 4(E) Annual Report on Form 10-K (Filed with SEC on March 27,
1998; see Exhibit 4(F) therein)
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Exhibit No.
Under Reg. Form 10-K
S-K, Item 601 Exhibit No. Description of Exhibit
(4) 4(F) Indenture dated as of September 15, 1993 between
Progressive and State Street Bank and Trust Company (successor in
interest to The First National Bank of Boston),
as Trustee ("1993 Senior Indenture") (including Table of Contents
and cross-reference sheet)
(4) 4(G) Form of 7% Notes due 2013 issued in the aggregate principal amount
of $150,000,000 under the 1993 Senior Indenture
(4) 4(H) Form of 6.60% Notes due 2004 issued in the aggregate principal
amount of $200,000,000 under the 1993 Senior Indenture
(4) 4(I) First Supplemental Indenture dated March 15, 1996 between
Progressive and State Street Bank and Trust Company, evidencing
the designation of State Street Bank and Trust Company as
successor Trustee under the 1993 Senior Indenture
(4) 4(J) Form of 7.30% Notes due 2006, issued in the aggregate principal
amount of $100,000,000 under the 1993 Senior Indenture, as amended
and supplemented
(4) 4(K) Second Supplemental Indenture dated February 26, 1999 between
Progressive and State Street Bank and Trust Company, as Trustee,
supplementing and amending the 1993 Senior Indenture
(4) 4(L) Form of 6 5/8% Senior Notes due 2029, issued in the aggregate
principal amount of $300,000,000 under the 1993
Senior Indenture, as amended and supplemented
Exhibit No.
Under Reg. Form 10-K If Incorporated by Reference, Documents with Which
S-K, Item 601 Exhibit No. Exhibit was Previously Filed with SEC
(4) 4(F) Registration Statement No. 333-48935 (Filed with SEC on
March 31, 1998; see Exhibit 4.1 therein)
(4) 4(G) Annual Report on Form 10-K (Filed with SEC on March 27,
1999; see Exhibit 4(H) therein)
(4) 4(H) Contained in Exhibit Binder
(4) 4(I) Registration Statement No. 333-0175 (Filed with SEC on
March 15, 1996; see Exhibit 4.2 therein)
(4) 4(J) Quarterly Report on Form 10-Q (Filed with SEC on July
31, 1996; see Exhibit 4 therein)
(4) 4(K) Current Report on Form 8-K (Filed with SEC on February
26, 1999; see Exhibit 4.4 therein)
(4) 4(L) Current Report on Form 8-K (Filed with SEC on February
26, 1999; see Exhibit 4.5 therein)
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Exhibit No.
Under Reg. Form 10-K
S-K, Item 601 Exhibit No. Description of Exhibit
(10)(i) 10(A) Construction Agreements dated November 3, 1997 between Progressive
Casualty Insurance Company and HCB Contractors
(10)(i) 10(B) Construction Agreement dated April 6, 1998 between Progressive
Casualty Insurance Company and the Whiting-Turner Construction
Company for the Corporate Office Complex in Mayfield Village, Ohio
(10)(i) 10(C) Development Agreement by and between G.P. Ohio, L.L.C. (as
"Developer") and Progressive Casualty Insurance Company (as
"Progressive")
(10)(ii) 10(D) Aircraft Purchase Agreement
(10)(ii) 10(E) Aircraft Management Agreement
(10)(iii) 10(F) The Progressive Corporation 1997 Gainsharing Plan
(10)(iii) 10(G) The Progressive Corporation 1999 Gainsharing Plan
(10)(iii) 10(H) The Progressive Corporation 2000 Gainsharing Plan
(10)(iii) 10(I) The Progressive Corporation 1997 Executive Bonus Plan
(10)(iii) 10(J) The Progressive Corporation 1999 Executive Bonus Plan
Exhibit No.
Under Reg. Form 10-K If Incorporated by Reference, Documents with Which
S-K, Item 601 Exhibit No. Exhibit was Previously Filed with SEC
(10)(i) 10(A) Annual Report on Form 10-K (Filed with SEC on March 27,
1998; see Exhibit 10(A) therein)
(10)(i) 10(B) Quarterly Report on Form 10-Q (Filed with SEC on August
14, 1998; see Exhibit 10 therein)
(10)(i) 10(C) Contained in Exhibit Binder
(10)(ii) 10(D) Contained in Exhibit Binder
(10)(ii) 10(E) Contained in Exhibit Binder
(10)(iii) 10(F) Annual Report on Form 10-K (Filed with SEC on March 31,
1997; see Exhibit 10(B) therein)
(10)(iii) 10(G) Annual Report on Form 10-K (filed with SEC on March 27,
1999; see Exhibit 10(D) therein)
(10)(iii) 10(H) Contained in Exhibit Binder
(10)(iii) 10(I) Annual Report on Form 10-K (Filed with SEC on March 31,
1997; see Exhibit 10(D) therein)
(10)(iii) 10(J) Annual Report on Form 10-K (filed with SEC on March 27,
1999; see Exhibit 10(F) therein)
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Exhibit No.
Under Reg. Form 10-K
S-K, Item 601 Exhibit No. Description of Exhibit
(10)(iii) 10(K) The Progressive Corporation Directors Deferral Plan (Amendment and
Restatement), as further amended on October 25, 1996
(10)(iii) 10(L) The Progressive Corporation 1989 Incentive Plan (amended and
restated as of April 24, 1992, as further amended on July 1, 1992
and February 5, 1993)
(10)(iii) 10(M) The Progressive Corporation 1998 Directors' Stock Option Plan
(10)(iii) 10(N) The Progressive Corporation 1990 Directors'
Stock Option Plan (Amended and Restated
as of April 24, 1992 and as further amended on
July 1, 1992)
(10)(iii) 10(O) Agreement dated March 11, 1996 with Bruce W. Marlow
(10)(iii) 10(P) The Progressive Corporation 1995 Incentive Plan
(10)(iii) 10(Q) The Progressive Corporation Executive Deferred
Compensation Plan (Amended and Restated as of January 1, 1997), as
further amended December 1, 1997
(10)(iii) 10(R) Third Amendment to The Progressive Corporation Executive Deferred
Compensation Plan dated December 1, 1998
(10)(iii) 10(S) The Progressive Corporation Executive Deferred Compensation Trust
(December 1, 1998 Amendment and Restatement)
Exhibit No.
Under Reg. Form 10-K If Incorporated by Reference, Documents with Which
S-K, Item 601 Exhibit No. Exhibit was Previously Filed with SEC
(10)(iii) 10(K) Quarterly Report on Form 10-Q (Filed with SEC on
November 13, 1996; see Exhibit 10 therein)
(10)(iii) 10(L) Annual Report on Form 10-K (Filed with SEC on March 27,
1999; see Exhibit 10(H) therein)
(10)(iii) 10(M) Annual Report on Form 10-K/A-No. 1 (Filed with SEC on
March 30, 1998; see Exhibit 10(H) therein)
(10)(iii) 10(N) Annual Report on Form 10-K (Filed with SEC on March 27,
1998; see Exhibit 10(I) therein)
(10)(iii) 10(O) Annual Report on Form 10-K (Filed with SEC on March 15,
1996; see Exhibit 10(H) therein)
(10)(iii) 10(P) Contained in Exhibit binder
(10)(iii) 10(Q) Annual Report on Form 10-K (Filed with SEC on March 27,
1998; see Exhibit 10(M) therein)
(10)(iii) 10(R) Annual Report on Form 10-K (Filed with SEC on March 27,
1999; see Exhibit 10(O) therein)
(10)(iii) 10(S) Annual Report on Form 10-K (Filed with SEC on March 27,
1999; see Exhibit 10(P) therein)
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Exhibit No.
Under Reg. Form 10-K
S-K, Item 601 Exhibit No. Description of Exhibit
(10)(iii) 10(T) Form of Non-Qualified Stock Option Agreement under The Progressive
Corporation 1989 Incentive Plan (single award)
(10)(iii) 10(U) Form of Non-Qualified Stock Option Agreement under The Progressive
Corporation 1989 Incentive Plan (multiple awards)
(10)(iii) 10(V) The Progressive Corporation 1999 Information Services Incentive
Plan
(11) 11 Computation of Earnings Per Share
(13) 13 The Progressive Corporation 1999 Annual Report
(21) 21 Subsidiaries of The Progressive Corporation
(23) 23 Consent of Independent Accountants
(24) 24 Powers of Attorney
(27) 27 Financial Data Schedule
Exhibit No.
Under Reg. Form 10-K If Incorporated by Reference, Documents with Which
S-K, Item 601 Exhibit No. Exhibit was Previously Filed with SEC
(10)(iii) 10(T) Quarterly Report on Form 10-Q (Filed with SEC on May 1,
1996; see Exhibit 10(B) therein)
(10)(iii) 10(U) Quarterly Report on Form 10-Q (Filed with SEC on May 1,
1996; see Exhibit 10(C) therein)
(10)(iii) 10(V) Annual Report on Form 10-K (filed with SEC on March 27,
1999; see Exhibit 10(S) therein)
(11) 11 Contained in Exhibit Binder
(13) 13 Contained in Exhibit Binder
(21) 21 Contained in Exhibit Binder
(23) 23 Incorporated herein by reference to page 29 of this
Annual Report on Form 10-K
(24) 24 Contained in Exhibit Binder
(27) 27 These exhibits are contained in the EDGAR filing
of the Annual Report on Form 10-K for the year ended
December 31, 1999 only
No other exhibits are required to be filed herewith pursuant to Item 601 of
Regulation S-K.
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