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Exhibit 13
The Progressive Corporation
1999 Annual Report
2
1999 Financial Highlights 7
Vision, Core Values and Objectives 10
Letter to Shareholders 16
Financial Review 32
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The Progressive insurance organization began business in 1937. Progressive
Casualty Insurance Company was founded in 1956 to be among the first specialty
underwriters of nonstandard auto insurance. The Progressive Corporation, an
insurance holding company formed in 1965, owns 82 subsidiaries and has one
mutual insurance company affiliate. The companies provide personal automobile
insurance and other specialty property-casualty insurance and related services
throughout the United States.
About the Art
- -----------------------
Much about Progressive fits the statement "not what you'd expect from an
insurance company." To illustrate this concept in the Annual Report, we
commissioned artist Gregory Crewdson to investigate the idea of the end of
status quo with his evocative photographs. Crewdson's work explores a kind of
mystery and strangeness in recognizable scenes and landscapes. His elaborately
staged photographs address this notion of the "unexpected." Crewdson's work will
become part of Progressive's growing collection of contemporary art.
[Art - pages 4 through 6]
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1999 FINANCIAL HIGHLIGHTS
(millions-except per share amounts)
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AVERAGE ANNUAL
COMPOUNDED RATE OF INCREASE
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5-YEAR 10-YEAR
1999 1998 % CHANGE 1995-1999 1990-1999
- --------------------------------------------------------------------------------------------------------------------------
FOR THE YEAR
Direct premiums written $ 6,305.3 $ 5,451.3 16% 19% 17%
Net premiums written 6,124.7 5,299.7 16 20 18
Net premiums earned 5,683.6 4,948.0 15 21 17
Total revenues 6,124.2 5,292.4 16 20 16
Operating income 266.7 449.3 (41) 5 10
Net income 295.2 456.7 (35) 2 14
Per share:(1)
Operating income 3.58 6.01 (40) 5 11
Net income 3.96 6.11 (35) 2 15
Underwriting margin(2) 1.7% 8.4% 6 6
AT YEAR-END
Consolidated shareholders' equity $ 2,752.8 $ 2,557.1 8 19 20
Common Shares outstanding 73.1 72.5 1 1 --
Book value per share $ 37.66 $ 35.27 7 20 21
Market capitalization $ 5,345.4 $ 12,279.7 (56) 16 18
Return on average shareholders' equity(2) 10.9% 19.3% 17 20
STOCK PRICE APPRECIATION (DEPRECIATION)(3) 1-YEAR 5-YEAR 10-YEAR
Progressive (56.7)% 16.2% 19.7%
S&P 500 21.0% 28.5% 18.1%
(1) Presented on a diluted basis.
(2) The 5- and 10-year amounts represent averages for the period, not rates of
increase.
(3) Assumes dividend reinvestment.
[Art - pages 8 and 9]
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VISION, CORE VALUES AND OBJECTIVES
Communicating a clear picture of Progressive by stating what we try to achieve
(Vision), what guides our behavior (Core Values), what our people expect to
accomplish (Objectives), and how we evaluate performance (Measurements), permits
all people associated with Progressive to understand their role and to enjoy
their contributions.
Vision
- -------------------------
We seek to be an excellent, innovative, growing and enduring business by
cost-effectively and profitably reducing the human trauma and economic costs of
auto accidents and other mishaps, and by building a recognized, trusted,
admired, business-generating brand. We seek to earn a superior return on equity
and to provide a positive environment which attracts quality people who develop
and achieve ambitious growth plans.
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Core Values
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Progressive's Core Values are pragmatic statements of what works best for us in
the real world. They govern our decisions and behavior. We want them understood
and embraced by all Progressive people. Growth and change provide new
perspective, requiring regular refinement of Core Values.
INTEGRITY We revere honesty. We adhere to high ethical standards, report
promptly and completely, encourage disclosing bad news and welcome
disagreement.
GOLDEN RULE We respect all people, value the differences among them and deal
with them in the way we want to be dealt with. This requires us to know
ourselves and to try to understand others.
OBJECTIVES We strive to communicate clearly Progressive's ambitious objectives
and our people's personal and team objectives. We evaluate performance against
all these objectives.
EXCELLENCE We strive constantly to improve in order to meet and exceed the
highest expectations of our customers, shareholders and people. We teach and
encourage our people to improve performance and to reduce the costs of what
they do for customers. We base their rewards on results and promotion on
ability.
PROFIT The opportunity to earn a profit is how the competitive free-enterprise
system motivates investment to enhance human health and happiness. Expanding
profits reflect our customers' and claimants' increasingly positive view of
Progressive. We value all people's well-being and strive to give back to our
communities.
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Financial Objectives and Measurements
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Consistent achievement of superior results requires that our people understand
Progressive's objectives and their specific role, and that their personal
objectives dovetail with Progressive's. Our objectives are ambitious yet
realistic. We are committed to achieving financial objectives over rolling
five-year periods. Experience always clarifies objectives and illuminates
better strategies. We constantly evolve as we monitor the execution of our
strategies and progress toward achieving our objectives.
RETURN ON SHAREHOLDERS' EQUITY Our most important financial goal is to achieve
an after-tax return on shareholders' equity over a five-year period that is at
least 15 percentage points greater than the rate of inflation (measured by the
Consumer Price Index which was 2.7% in 1999, and averaged 2.4% over the past
five years and 2.9% over the past ten years). Return on equity was 10.9% in
1999, and averaged 17.5% over the past five years and 19.6% over the past ten
years.
PROFITABILITY Progressive is driven by the goal of producing a calendar year 4%
underwriting profit. Overall, we had an underwriting profit of 1.7% in 1999,
5.9% for the past five years and 5.8% for the past ten years. Estimated industry
results for the personal auto insurance market for the same periods were
underwriting losses of 2.8%, 1.2% and 2.2%.
GROWTH We seek increases in net premium volume that are at least 15 percentage
points greater than the rate of inflation. Companywide net premiums written
increased 15.6% in 1999, 20.0% compounded annually over the past five years and
18.1% over the past ten years. Net premiums written in the personal auto
insurance market for the same periods grew 2.6%, 4.4% and 5.0%.
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ACHIEVEMENTS We are convinced that the best way to maximize shareholder value is
to achieve these financial objectives consistently. A shareholder who purchased
100 shares of Progressive for $1,800 in our first public stock offering on April
15, 1971, owned 7,689 shares on December 31, 1999, with a market value of
$562,000, for a 22.3% compounded annual return, compared to the 9.8% return
achieved by investors in the Standard & Poor's 500 during the same period. In
addition, the shareholder received dividends of $1,999 in 1999, bringing total
dividends received to $20,265 since the shares were purchased.
In the ten years since December 31, 1989, Progressive shareholders have
realized compounded annual returns of 19.7%, compared to 18.1% for the S&P 500.
In the five years since December 31, 1994, Progressive shareholders' returns
were 16.2%, compared to 28.5% for the S&P 500. In 1999, the returns were (56.7)%
on Progressive shares and 21.0% on the S&P 500.
Over the years, when we have had adequate capital and believe it is
appropriate, we have repurchased our shares. Since 1971, we spent $614.3 million
repurchasing our shares, at an average cost of $9.11 per share. During 1999, we
repurchased 6,044 Common Shares to offset obligations under various employee
benefit plans.
1999 Objectives and Accomplishments
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LAST LAST
1999 5 YEARS 10 YEARS
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RETURN ON SHAREHOLDERS' EQUITY
Objective 17.7% 17.4% 17.9%
Accomplishment 10.9 17.5 19.6
UNDERWRITING PROFIT (LOSS)
Objective 4.0 4.0 4.0
Accomplishment 1.7 5.9 5.8
Industry-Personal Auto
Insurance Market (2.8) (1.2) (2.2)
GROWTH (ANNUALIZED)
Objective 17.7 17.4 17.9
Accomplishment 15.6 20.0 18.1
Industry-Personal Auto
Insurance Market 2.6 4.4 5.0
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[Art - pages 14 and 15]
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LETTER TO SHAREHOLDERS
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Progressive's strategy is to become the number one choice of U.S. consumers for
auto insurance. Progressive has consciously decided to narrow its business focus
within the framework of that objective.
If past is prologue, Progressive will experience a resurgence. We increased
prices ahead of competitors which will likely slow our volume, allowing us to
focus on developing our current claim representatives rather than focus on
building the staff as we have for the past few years. We expect that this in
turn should produce lower loss costs.
A key part of the improved customer experience is building customer trust and
loyalty, which we do in part by continually identifying new and better ways to
serve customers.
The theme for this annual report is "not what you'd expect." Progressive has
routinely redefined what you should expect from an auto insurance company by
consistently dreaming, thinking outside the lines and having the will to do
things never before tried. Progressive's future depends on continuing to do
that. Progressive must lead. Leaders always go where others never have been.
1999 was a mixed year for Progressive. Many positive accomplishments, including
a 16% increase in annual premium volume and becoming the 4th largest U.S.auto
insurer, were overshadowed by a 6.7 point decrease in the Company's year-to-year
underwriting profit (from 8.4% in 1998 to 1.7% in 1999) with a concomitant
decline in earnings per share from $6.11 in 1998 to $3.96 in 1999. Progressive
shareholders had a wild ride as Progressive's stock traded at an all-time high
price of 174+ on January 12 and then plummeted to close 1999 at $73.125.
Disappointing 1999 performance caused us to reappraise all of our assumptions,
abilities, approaches, advantages and attitudes. This letter shares our view of
what happened and why, what we are doing about each issue, how we view both
competition and the social/political environment vis-a-vis auto insurance, what
our strategy is and how we will execute it.
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What Happened and What We Are Doing
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RATE CHANGES In 1999, we were surprised by the sudden reversal in the long-term
trend of reducing accident frequency and severity, resulting in loss cost
increases not contemplated in the rates we charged. We attribute the change to
forces both inside and outside Progressive. Progressive decreased rates an
average of 1.3% during the first six months of 1999, only to increase rates 4.4%
in the second half of the year, primarily in the fourth quarter. It is likely
that these rate increases will slow volume growth in 2000, and, since the
majority of our policies are annual, we will not see the full impact of these
rate changes on earnings until the fourth quarter of 2000. We will take
advantage of this slow down to increase the tenure of our claim force and to
improve our service to customers, agents and claimants.
OPERATING GOALS We recognized that the way we structured our goals and
incentive compensation program for 1999 helped drive our disappointing calendar
underwriting results. We created internal incentives that credited a portion of
anticipated future policy renewal profits to current results to encourage
growing the business acquired directly. Although expanding the direct business
is key to Progressive's long-term viability, we learned that we are unable to
measure accurately either who will renew and/or the likely future profit
margins on the renewals. The insoluble issues include that we often change
prices and/or risk categories, and that distribution is changing fast so that
history may no longer be a good predictor. We decided that anticipating profit
to be earned on policies to be renewed in the future can lead to flawed
conclusions, inadequate pricing and GAAP underwriting losses. In response, we
based our goals and manager incentives for 2000 on calendar year results.
CLAIM FOCUS Progressive's premium volume has expanded from $2,457.2 million in
1994 to $6,124.7 million in 1999, a compound annual growth rate of 20%. Our
number of claims handled has grown at a similar rate, from 348,000 in 1994 to
988,000 in 1999. Automobile insurance is a personal service business. Claim
handling, a highly technical job, is the most significant of Progressive's
services. It takes about two years to train and develop a new claim
representative to be a consistently excellent claim handler. The claim staff
expanded from 3,093 in 1994 to 7,561 in 1999, with average claim representative
tenure of 3.7 years, bringing with it predictable but unmeasurably lower claim
handling quality and increased loss costs. As premium growth slows, we expect
to see a reduction in new claim representative hiring and an increase in
average claim representative tenure. Our claim effort is focused on building
our industry recognized Immediate Response(R) claims service with the goal of
improved total resolution (pay and conclude with happy customers and
claimants). Continuously delighting customers drives us to create new
customer/claimant services.
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RESERVE ADEQUACY In 1999, we reduced loss reserves relating to prior accident
years, amounting to .5 combined ratio points, compared to 3.7 points in 1998,
2.5 points in 1997 and 3.3 points in 1996. We believe that our loss reserves are
fairly stated; we continually monitor their adequacy to ensure that we remain
properly reserved.
ADVERTISING During 1999, we continued to increase our understanding of
advertising, brand building and direct sales management. Our inexperience, and
probably a bit of hubris, beginning with our advertising and sponsorship
associated with Super Bowl XXXIII, led us to incur significant costs without
achieving proportionate benefits. Although we didn't get the hoped-for consumer
response, we did achieve a boost in overall awareness of Progressive as an auto
insurer. We also learned about advertising agency and media selection
management, more about what messages sell best and more about call center
management--all developing skills for Progressive. We changed advertising
agencies and, in 2000, are running a new series of advertising spots leading
with our strongest attribute--Progressive's own people explaining the many
advantages we have to offer with a greater focus on generating calls and sales
while building the brand.
STOCK PRICE The question I am most often asked is, "Why did PGR drop from the
$170s to the $60s?" Because my personal net worth has always been based on the
value of Progressive stock, I have 30 years experience with, and interest in,
the stock's price. I respond to the question first with an honest, "I don't
know." Then I reminisce. In December 1974, Progressive dropped from the $27 per
share it sold at in early 1973 to nearly $2 per share, a decline which rendered
me insolvent. Since 1974, I have known that inexplicably high prices are
possible and can be followed by precipitous price drops. My personal explanation
for last year's Progressive stock price gyrations is that after 35 years of
being an exciting growth company, Progressive was finally recognized as such. In
the euphoria of last year's stock market and despite our comments to the
contrary, some assumed we would achieve both the wide profit margins and high
growth of the late '90s well into the future. When it became clear that we would
sustain neither the margin nor the growth rate during a cyclical auto insurance
downturn, the stock price plummeted. Through the efforts discussed above, I
believe that we have both the strategy and determination in place to return to
more profitable times.
It is possible that the many changes implemented in 1999 (e.g., program
design, credit vendors, etc.) interacted to cause unanticipated risk selection
problems. In 2000, we will focus more on improving what we've developed rather
than creating new processes and systems.
[Art - pages 20 and 21]
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The Current Environment
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Auto insurance is a cyclical business. From 1974 through 1991, the auto
insurance industry lost an annual average of 6% in underwriting. During that
same period, Progressive made an average 1% underwriting profit. From 1992
through 1998, the auto insurance industry lost only 1% in underwriting, similar
to results in the seven years prior to 1974. During that same period, 1992
through 1998, Progressive made an average underwriting profit of 7.9%. It
appears that the cycle began to turn again in 1999, meaning that Progressive
will have to continue to outperform the industry in order to achieve our
targeted 4% underwriting profit. Progressive now competes directly with the
largest auto insurance companies in the U.S., most of which are well-capitalized
and very experienced. In addition, industry consolidation is underway, which
will probably result in fewer, but much stronger, competitors. Multiple-line
companies doing business with insurance agents confront increasing competitive
disadvantages from the insurers specializing in automobile insurance. Some sold
their personal lines business in 1999--more will. This trend could benefit
Progressive, which sells more auto insurance through Independent Agents than any
other auto insurer. On the other hand, we anticipate greater competition for
agent business.
Progressive's product and service innovations have changed the competitive
landscape. Customers are beginning to expect 24-hour service and the ability to
buy when and where it is convenient for them. Customers also want special
pricing and coverages to meet their unique needs.
Technology presents continuous opportunity and challenge. Much money and
energy is being invested to develop new ways to distribute auto insurance over
the Internet, as well as new ways to make it easy and inexpensive for consumers
to compare prices and other aspects of individual insurer offerings. Technology
becomes increasingly critical to everything we do.
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Personal Lines Business
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In 1999, we continued to focus on growing our Personal Lines business.
Insurance written for private passenger automobiles, motorcycles and recreation
vehicles accounted for 93% of Progressive's total net premiums written in 1999.
In 1999, Personal Lines net premiums written were $5,702.4 million, an increase
of 16% as compared to 1998. The underwriting profit margin was 1.2% in 1999,
compared to 7.9% last year. Although we had several significant missteps in
1999, our fundamental strategy remains sound.
OFFER A CHOICE IN HOW TO BUY Progressive recognizes the importance of providing
consumers choices in how to buy based on where, when and how they want it.
Accordingly, we continue to pursue a multiple-distribution approach. We view no
distribution method through which we sell as superior to any other. No matter
whether our customers choose to buy through an Independent Insurance Agent or
direct through 1-800-AUTO-PRO(R) or progressive.com, we believe that to get the
business we seek, we have to provide the lowest price. Therefore, we identify
and market to those groups with the greatest likelihood of buying. We also know
that we have to be as efficient as possible. To continue to be successful, we
need to be the leader in market innovation. During 1999, one of our more
significant achievements was the success we experienced in selling auto
insurance over the Internet. By continuing to offer our products for sale in
every way in which customers wish to shop, we believe we can achieve our goal of
being consumers' number one choice for auto insurance.
BECOME A RECOGNIZED, TRUSTED BRAND Progressive's brand promotion can be seen in
a variety of media in every market where we do business, completing in 1999,
our multi-year rollout of our direct distribution option. Despite the fact that
we have been the largest seller of auto insurance through Independent Insurance
Agents for several years, it is only recently that we have become more of a
household name. During 1999, our brand profile with consumers continued to
rise. Our awareness measures, particularly our awareness levels with age
segments up to 35, an attractive part of our new acquisition range, have all
improved. Our advertising, which was initially centered around our promise to
give the rates of several of our largest competitors, seems to have resonated
well with consumers and earned their trust. During 1999, we attempted several
creative directions to build awareness and communicate our size and innovative
service features. As our brand strengthened and awareness grew, consumer
confidence was expressed in increased conversion rates. We ended 1999 much
stronger than we entered, with many lessons learned.
PROVIDE A COMPETITIVE PRICE FOR ALL DRIVERS In 1996, we migrated to a goal to
produce a 4% underwriting profit over the entire retention period of a
policyholder. In mid-1999, we realized this approach was not consistent with
our financial goals. Accordingly, we returned to our historic target of a
calendar year 96 combined ratio in Personal Lines, with the intent to achieve
that goal within the next few years. One important lesson of migrating to and
then from profit targets based on the entire retention period of a policyholder
was a better appreciation of the importance of customer retention. Beginning in
1999, we focused on better understanding what actions, in addition to price, we
can take to retain our customers longer. While customer retention is an
important tenet in our pricing strategy, the end goal is still to capture
sufficient information so that we provide the lowest rates possible for all
drivers while still earning a reasonable rate of return. We continue to believe
that we do this as well as or better than anyone in the industry.
BE EASY TO DO BUSINESS WITH We realized early on that, regardless of
distribution method, people migrate to the company with the lowest rates. On
the other hand, more and more people put a premium on their own time.
Accordingly, in addition to providing a low-cost product, we have to be easy to
do business with. What does that mean for Progressive? For a multi-distribution
company, that means several things. From the Agency side, we must offer simple
and reliable software on the desktop of each Agency's customer service
representative. In the event that these representatives have a question, they
need to be able to contact someone 24 hours a day, 7 days a week for an answer.
Waiting until tomorrow is not acceptable. In addition, we are focusing on those
Independent Agents who, like Progressive, deliver a superior customer
experience at the point of sale. The same principles hold true for our direct
operations. When customers call Progressive, either to purchase a policy or ask
a question, they want a process that is efficient and customer friendly.
Perhaps the most demanding customers are found on the Internet. Used to the
control they exercise over the buying process, Internet customers demand a site
that is both fast and efficient. To discover the ease of doing business with
Progressive, we invite you to call a local agent, call us at 1-800-AUTO-PRO(R)
or visit us at progressive.com. Sometimes we have the lowest price. Sometimes
we don't. But one thing that is certain, Progressive is always working to
ensure that we are easy to do business with.
FOCUS ON SATISFACTORY CLAIM RESOLUTION FOR CUSTOMERS While most consumers make
their purchasing decisions based on the cost of the product, some actually
think about the service they will receive in the event they have an accident. A
customer that had a claim under a
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Progressive policy in 1999, would have received an in-person contact within nine
hours about 42% of the time. Following this initial contact, the claim
representative would have verified coverage, assessed the damage and provided a
timely settlement. With five claim call centers open 24 x 7, and over 7,500
claim professionals in 350 field offices, we believe the overall process is as
good as any in the industry.
As we look forward to 2000, we expect that executing against these five
tenets will allow us to move steadily toward our goal of becoming consumers'
number one choice for auto insurance.
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Other Businesses
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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 claims, underwriting and system services.
Revenues in these businesses were $437.0 million in 1999, compared to $405.5
million the prior year. Pretax operating profit was $41.8 million, compared to
$61.9 million in 1998, and return on revenue was 9.6%, compared to 15.3% in
1998.
Investments and Capital Management
-------------------------------------------------
Progressive's investment and capital management goals are first to ensure that
there is sufficient capital to support all the insurance premium we can
profitably write, and second to maximize our total investment return. Our
objectives are to finance growth internally, to sustain an A or better debt
rating, to have a lower debt cost than peer companies and to repurchase stock
cost effectively. Progressive's senior debt was rated A+ and A2 by Standard &
Poor's and Moody's, respectively, at year-end 1999, and our debt to debt plus
equity ratio was 27.6%.
During 1999, we did not repurchase shares other than to fulfill obligations
under certain employee benefit programs. Over the last ten years, we repurchased
20.8 million split-adjusted shares at an average cost of $20.89. The shares we
bought back in the 1990s were purchased for $433 million and were worth $1.5
billion at the end of the decade, an annualized return of 38%, exceeding the S&P
500 index return of 18%. We do not follow a formulaic approach, but consider
short- and long-term factors, both technical and fundamental, in deciding
whether to repurchase shares. In 1999, some of the important considerations that
caused us to hold off buying shares were the excessive capital in the industry
and falling auto rate levels. Over the long term, we expect Progressive to be a
much larger company and will need the capital we have now, if not more, but we
will buy back shares when, in our judgement, we believe it is appropriate.
In March 1999, we successfully issued $300 million of 30-year senior debt at
6.625% in a public offering. We intend to use these funds to pay the $300
million of debt ($150 million at 10% and $150 million at 10.125%) due at the end
of 2000.
At year-end 1999, $4,513.7 million, 70.2% of our total invested assets, were
investment-grade, fixed-maturity securities, compared to $4,532.9 million and
79.9% in 1998. Non-investment-grade fixed-maturity securities were $248.0
million, 3.9% of total invested assets, compared to $128.0 million and 2.3% in
1998. The portfolio's duration was 3.0 years at year-end 1999, near the middle
of our target range. We earned 3.0% on our fixed-income assets which was a good
result relative to other fixed-income managers who had flat or declining total
returns caused by the rise in interest rates (five-year government bonds rose
174 basis points from 4.5% to 6.3% in 1999).
We increased our common stock investments during the year to $1,243.6
million, 19.3% of total invested assets, compared to $636.9 million and 11.2% in
1998. A truer representation of our common equity exposure at year end is
$1,013.4 million, or 15.8%, which excludes $230.2 million of term trust
certificates holding fixed-income investments. Our 11.6% equity return was in
line with value oriented active equity managers, but underperformed relative to
the Russell 3000's 20.9% because of our underweighting technology stocks
throughout the year. Borrowing a terrific quote from Byron Wien at Morgan
Stanley, as stated in Barron's, "In my lifetime, we've gone from valuing stocks
based on dividends to earnings, to cash flow, and then momentum. Now stocks are
priced on possibilities." At Progressive, we never adopted the "momentum"
approach and focus on the intrinsic value of a company to invest in more than
its "possibilities."
Included in our fixed-maturity and common 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 Progressive's total
investment portfolio. Our total return in this asset class was 7.1%.
In 1999, Progressive earned $387.9 million of investment income before
taxes, compared to $306.2 million in 1998, including realized gains of $47.2
million in 1999 and $11.4 million in 1998. The weighted average fully taxable
equivalent book yield of the portfolio was 6.3% in both 1999 and 1998.
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Management Transition
- ------------------------------------------------------
We closed the year with another step in management transition. Glenn Renwick was
named CEO-Insurance Operations. With Glenn assuming that new role officially on
January 1, 2000, and Chuck Chokel already in a comparable position for
Investments and Capital Management, the new generation of Progressive leadership
is in place and leading the way. I am thrilled to continue to be deeply involved
working with Glenn and Chuck as well as our senior staff officers.
2000 Focus
--------------------
Helping customers and claimants resolve the inconvenience, pain and costs
associated with automobile accidents is what Progressive is all about. In 2000,
we will pursue, with all the energy, creativity and focus that we can bring to
it, ways that we can change what we do to improve the claim experience that our
customers and claimants have when they have the misfortune to be involved in a
loss. We want to produce an even better experience from beginning to end for our
customers in every one of their interactions with Progressive.
Like customers for all services and products, auto insurance customers want
more information about their opportunities and many more options as to how they
can seize those opportunities. Our objective is to make the buying experience
with Progressive the easiest, most interesting and gratifying of any auto
insurer.
The Internet has become the market of choice for people ages 18-35. As this
age group has the highest propensity to shop for auto insurance, it is a market
in which we are most interested. In 1999, Progressive extended its dominance in
Internet auto insurance. We are unique in offering consumers the option to buy
insurance directly online in 47 states, plus
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the District of Columbia. During the year, we sold more than $70 million of auto
insurance on the Internet (for the year, Internet sales, which either closed
directly online or through a customer service representative, represented about
7% of our direct sales), gave over 1 million insurance quotes to consumers, and
serviced over 65,000 customers online. For those consumers who prefer buying
through an Independent Agent, we provided a quick online way to find a local
Independent Agent, which was accessed by consumers over 5,000 times a month
during 1999. Through "Personal Progressive" (located at progressive.com) we are
able to provide our policyholders a personalized online insurance service center
for billing, online payments, policy changes, individualized claim information
and vehicle replacement quotes.
We will launch a homeowners product in Arizona in March 2000 and plan to
expand to a few additional states during the year. Progressive 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. We will limit our rollout
of these new products to states where the competitive and regulatory
environments allow us to charge adequate premiums for the risk and provide
reasonable opportunity to achieve an underwriting profit.
The Future
- ----------------------------
We begin 2000 excited about the opportunities that lie ahead yet respectful of
the challenges that are implicit in our objectives and strategy. Much will be
required to realize our vision. At Progressive, it is always as if we are just
beginning our business. We believe the future is brighter than ever.
We deeply appreciate the customers we are privileged to serve. Thank you for
your business. Thanks to the more than 30,000 Independent Insurance Agents who
did business with Progressive in 1999. We are grateful for our shareholders'
continued confidence. To the 18,753 men and women who make Progressive a great
company, thanks for all your contributions in 1999 and for the promise you bring
to our future.
Joy, Love and Peace
/s/Peter B. Lewis
Peter B. Lewis
Chairman, President and Chief Executive Officer
[Art - pages 28 through 31]
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1999 FINANCIAL REVIEW
Consolidated Financial Statements 34
Management's Discussion and Analysis 48
Quarterly Financial and Common Share Data 51
Ten Year Summaries 52
Quantitative Market Risk Disclosures 56
Analysis of Loss and LAE Development 58
Direct Premiums Written by State 58
32
20
REPORT OF PRICEWATERHOUSECOOPERS LLP, INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS, THE PROGRESSIVE CORPORATION:
In our opinion, the accompanying consolidated balance sheets and
the related consolidated statements of income, changes in shareholders' equity
and cash flows present fairly, in all material respects, the financial position
of The Progressive Corporation and subsidiaries at December 31, 1999 and 1998,
and the results of their operations and their cash flows for each of the three
years in the period ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States. These financial statements
are the responsibility of the Company's management; our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits of these statements in accordance with auditing
standards generally accepted in the United States, which require that we plan
and perform the audits to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for the opinion expressed above.
/s/Pricewaterhousecoopers L.L.P.
Cleveland, Ohio
January 25, 2000
33
21
CONSOLIDATED STATEMENTS OF INCOME
(millions-except per share amounts)
- ---------------------------------------------------------------------------------------------
For the years ended December 31, 1999 1998 1997
- ---------------------------------------------------------------------------------------------
NET PREMIUMS WRITTEN $ 6,124.7 $ 5,299.7 $ 4,665.1
===============================================
REVENUES
Premiums earned $ 5,683.6 $ 4,948.0 $ 4,189.5
Investment income 340.7 294.8 274.9
Net realized gains on security sales 47.2 11.4 98.5
Service revenues 47.5 38.2 45.3
Other income(1) 5.2 -- --
-----------------------------------------------
Total revenues 6,124.2 5,292.4 4,608.2
-----------------------------------------------
EXPENSES
Losses and loss adjustment expenses 4,256.4 3,376.3 2,967.5
Policy acquisition costs 745.0 659.9 607.8
Other underwriting expenses 583.8 495.8 336.0
Investment expenses 9.5 7.4 9.9
Service expenses 40.9 30.8 43.9
Interest expense 76.4 61.1 64.6
----------------------------------------------
Total expenses 5,712.0 4,631.3 4,029.7
-----------------------------------------------
NET INCOME
Income before income taxes 412.2 661.1 578.5
Provision for income taxes 117.0 204.4 178.5
-----------------------------------------------
Net income $ 295.2 $ 456.7 $ 400.0
===============================================
COMPUTATION OF EARNINGS PER SHARE
Basic:
Average shares outstanding 72.9 72.5 72.0
===============================================
Per share $ 4.05 $ 6.30 $ 5.56
===============================================
Diluted:
Average shares outstanding 72.9 72.5 72.0
Net effect of dilutive stock options 1.7 2.2 3.3
-----------------------------------------------
Total equivalent shares 74.6 74.7 75.3
===============================================
Per share $ 3.96 $ 6.11 $ 5.31
===============================================
(1) See Note 12-Related Party Transaction for discussion.
See notes to consolidated financial statements.
THE PROGRESSIVE CORPORATION AND SUBSIDIARIES
34
22
CONSOLIDATED BALANCE SHEETS
(millions)
- ----------------------------------------------------------------------------------------------------------------------
December 31, 1999 1998
- ----------------------------------------------------------------------------------------------------------------------
ASSETS
Investments:
Available-for-sale:
Fixed maturities, at market (amortized cost: $4,650.9 and $4,171.6) $ 4,532.7 $ 4,219.0
Equity securities, at market:
Preferred stocks (cost: $425.4 and $374.3) 422.4 376.5
Common stocks (cost: $1,127.8 and $512.2) 1,243.6 636.9
Short-term investments, at amortized cost (market: $229.0 and $441.9) 229.0 441.9
- ----------------------------------------------------------------------------------------------------------------------
Total investments 6,427.7 5,674.3
Cash 14.2 18.6
Accrued investment income 54.0 53.1
Premiums receivable, net of allowance for doubtful accounts of $42.9 and $34.0 1,760.8 1,456.2
Reinsurance recoverables 254.7 281.0
Prepaid reinsurance premiums 88.3 77.7
Deferred acquisition costs 343.4 299.1
Income taxes 273.7 192.9
Property and equipment, net of accumulated depreciation of $243.8 and $194.1 447.7 376.2
Other assets 40.2 34.0
======================================================================================================================
Total assets $ 9,704.7 $ 8,463.1
=============================
LIABILITIES AND SHAREHOLDERS' EQUITY
Unearned premiums $ 2,781.4 $ 2,329.7
Loss and loss adjustment expense reserves 2,416.2 2,188.6
Policy cancellation reserve 17.8 29.1
Accounts payable and accrued expenses 687.9 582.0
Debt 1,048.6 776.6
- ----------------------------------------------------------------------------------------------------------------------
Total liabilities 6,951.9 5,906.0
======================================================================================================================
Shareholders' equity:
Common Shares, $1.00 par value (authorized 300.0, 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) on investment securities (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 $ 9,704.7 $ 8,463.1
======================================================================================================================
See notes to consolidated financial statements.
THE PROGRESSIVE CORPORATION AND SUBSIDIARIES
35
23
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(millions-except per share amounts)
- -----------------------------------------------------------------------------------------------------------------------------------
For the years ended December 31, 1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
RETAINED EARNINGS
Balance, Beginning of year $ 1,932.6 $ 1,534.8 $ 1,155.2
Net income 295.2 $ 295.2 456.7 $ 456.7 400.0 $ 400.0
----------- ----------- ------------
Cash dividends on Common Shares ($.26, $.25
and $.24 per share) (19.0) (18.1) (17.3)
Treasury shares purchased (.6) (39.8) (2.7)
Other, net 2.3 (1.0) (.4)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, End of year $ 2,210.5 $ 1,932.6 $ 1,534.8
- -----------------------------------------------------------------------------------------------------------------------------------
ACCUMULATED OTHER COMPREHENSIVE
INCOME (LOSS), NET OF TAX
Balance, Beginning of year $ 103.7 $ 116.0 $ 68.4
Change in unrealized appreciation (depreciation) (116.7) (9.0) 48.3
Other .6 (3.3) (.7)
----------- ----------- ------------
Other comprehensive income (loss) (116.1) (116.1) (12.3) (12.3) 47.6 47.6
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, End of year $ (12.4) $ 103.7 $ 116.0
- -----------------------------------------------------------------------------------------------------------------------------------
COMPREHENSIVE INCOME $ 179.1 $ 444.4 $ 447.6
=========== =========== ============
COMMON SHARES, $1.00 PAR VALUE
Balance, Beginning of year $ 72.5 $ 72.3 $ 71.5
Stock options exercised .6 .6 .8
Treasury shares purchased -- (.4) --
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, End of year $ 73.1 $ 72.5 $ 72.3
- -----------------------------------------------------------------------------------------------------------------------------------
PAID-IN CAPITAL
Balance, Beginning of year $ 448.3 $ 412.8 $ 381.8
Stock options exercised 12.0 10.9 13.3
Tax benefits on stock options exercised 20.4 25.6 17.6
Treasury shares purchased -- (2.4) (.2)
Other 0.9 1.4 .3
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, End of year $ 481.6 $ 448.3 $ 412.8
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY $ 2,752.8 $ 2,557.1 $ 2,135.9
==================================================================== ========== ==========
There are 20.0 million Serial Preferred Shares authorized; no such shares are
issued or outstanding.
There are 5.0 million Voting Preference Shares authorized; no such shares have
been issued.
See notes to consolidated financial statements.
THE PROGRESSIVE CORPORATION AND SUBSIDIARIES
36
24
CONSOLIDATED STATEMENTS OF CASH FLOWS
(millions)
- ---------------------------------------------------------------------------------------------------------------------
For the 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 operating activities:
Depreciation and amortization 71.8 56.1 36.6
Net realized gains on security sales (47.2) (11.4) (98.5)
Gain on sale of property and equipment (5.2) -- --
Changes in:
Unearned premiums 451.7 349.6 442.3
Loss and loss adjustment expense reserves 231.2 42.0 204.6
Accounts payable and accrued expenses 118.0 76.7 49.9
Policy cancellation reserve (11.3) (5.6) (8.6)
Prepaid reinsurance premiums (10.6) 2.1 33.3
Reinsurance recoverables 26.3 36.5 62.7
Premiums receivable (304.6) (295.4) (310.9)
Deferred acquisition costs (44.3) (39.5) (52.7)
Income taxes (17.8) (71.3) (67.8)
Other, net 21.9 21.5 43.8
- ---------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 775.1 618.0 734.7
- ---------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases:
Available-for-sale: fixed maturities (6,076.7) (3,998.8) (6,764.3)
equity securities (1,094.7) (942.9) (658.2)
Sales:
Available-for-sale: fixed maturities 5,182.5 3,210.2 5,840.0
equity securities 480.0 774.3 581.7
Maturities, paydowns, calls and other:
Available-for-sale: fixed maturities 361.4 419.9 578.0
equity securities 26.6 126.0 125.4
Net (purchases) sales of short-term investments 221.0 (32.5) (248.6)
(Receivable) payable on securities (19.1) 18.9 (2.0)
Purchases of property and equipment (147.5) (174.2) (121.9)
Sale of property and equipment 12.1 -- --
Purchase of subsidiaries, net of cash acquired (9.9) -- (48.0)
- ---------------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (1,064.3) (599.1) (717.9)
- ---------------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from exercise of stock options 12.6 11.5 14.1
Tax benefits from exercise of stock options 20.4 25.6 17.6
Proceeds from debt 301.4 -- --
Payments of debt (30.0) -- (20.4)
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 284.8 (23.6) (8.9)
- ---------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash (4.4) (4.7) 7.9
Cash, Beginning of year 18.6 23.3 15.4
- ---------------------------------------------------------------------------------------------------------------------
Cash, End of year $ 14.2 $ 18.6 $ 23.3
=====================================================================================================================
See notes to consolidated financial statements.
THE PROGRESSIVE CORPORATION AND SUBSIDIARIES
37
25
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999, 1998 and 1997
01 REPORTING AND ACCOUNTING POLICIES
NATURE OF OPERATIONS The Progressive Corporation, an insurance holding company
formed in 1965, owns 82 subsidiaries and has one mutual insurance company
affiliate. The companies provide personal automobile insurance and other
specialty property-casualty insurance and related services throughout the United
States.
BASIS OF CONSOLIDATION AND REPORTING The accompanying consolidated financial
statements include the accounts of The Progressive Corporation, its subsidiaries
and affiliate (the Company). All of the subsidiaries and the affiliate are
wholly owned or controlled. All intercompany accounts and transactions are
eliminated in consolidation.
INVESTMENTS Available-for-sale: fixed maturity securities are securities held
for indefinite periods of time, and may be used as a part of the Company's
asset/liability strategy or sold in response to changes in interest rates,
anticipated prepayments, risk/reward characteristics, liquidity needs or similar
economic factors. These securities are carried at market value with the
corresponding unrealized appreciation or depreciation, net of deferred income
taxes, reported in accumulated other comprehensive income. Market values are
obtained from a recognized pricing service or other quoted sources. The
asset-backed portfolio is accounted for under the retrospective method;
prepayment assumptions are based on market expectations.
Available-for-sale: equity securities include common stocks and nonredeemable
preferred stocks and are reported at quoted market values. Changes in the market
values of these securities, net of deferred income taxes, are reflected as
unrealized appreciation or depreciation in accumulated other comprehensive
income. Changes in value due to foreign currency exchange are limited by foreign
currency hedges; unhedged amounts are not material and changes in value are
recognized in income in the current period.
Trading securities are securities bought principally for the purpose of
selling them in the near term and are reported at market value. Changes in
market value are recognized in income in the current period. During the year,
the net activity in trading securities was not material to the Company's
financial position, cash flows or results of operations and was recognized in
the available-for-sale portfolio.
Derivative instruments, as defined by Statement of Financial Accounting
Standards (SFAS) 119, "Disclosures about Derivative Financial Instruments and
Fair Value of Financial Instruments," include futures, options, short positions,
forward positions, foreign currency forwards and interest rate swap agreements.
Derivative instruments held or issued for purposes other than trading include
derivative positions used for risk management purposes and hedge positions.
Derivative positions used for risk management are evaluated as to their
effectiveness to modify the Company's risk characteristics and enhance the
yields of the available-for-sale portfolios. Hedges are evaluated on established
criteria to determine the effectiveness of their correlation and ability to
reduce risk of specific securities or transactions. Those instruments held or
issued for risk management purposes are carried at market value in the
appropriate available-for-sale portfolio based on the nature of the derivative
instrument; changes in value of futures, options, foreign currency forwards and
short positions are recorded to income in the current period, and changes in the
value of forward positions and interest rate swaps are reflected in other
comprehensive income as unrealized appreciation or depreciation, net of deferred
income taxes. At disposition, changes in value of forward positions and interest
rate swap agreements are recognized in income as "net realized gains or losses
on security sales." Those instruments entered into for the purpose of hedging
are carried at market value; changes in value follow the recognition of the
asset being hedged. Gains or losses on closed hedge positions are recorded as
basis adjustments to the cost of the assets hedged and amortized over their
expected life. Unamortized amounts are recognized in income at the disposition
of the assets hedged. Gains and losses on instruments entered into for the
purpose of hedging anticipated transactions are deferred and amortized over the
life of the hedged transaction, beginning at the inception of the transaction.
Gains and losses on foreign currency hedges offset the foreign exchange gains
and losses on the foreign equity portfolio. The net hedged gain or loss is not
material and is recognized into income in the current period. Hedges that no
longer qualify for hedge accounting due to lack of correlation are reclassified
to derivative instruments held or issued for purposes other than trading and
used for risk management purposes. Those instruments held or issued for trading
purposes are carried at market value and include derivatives held or issued for
the specific purpose of generating profits and all other derivatives not meeting
the criteria for derivatives held or issued for other than trading purposes;
changes in value are recorded to income in the current period. During the year,
the net activity in derivative instruments held or issued for trading purposes
was not material to the Company's financial position, cash flows or results of
operations; gains or losses during the year were recognized in the
available-for-sale portfolio. See Note 4-Investments for further discussion.
Short-term investments include eurodollar deposits, commercial paper and other
securities maturing within one year and are reported at amortized cost, which
approximates market.
Investment securities are exposed to various risks such as interest rate,
market and credit. Market values of securities fluctuate based on the magnitude
of changing market conditions; significant changes in market conditions could
materially affect portfolio value in the near term.
Realized gains and losses on sales of securities are computed based on the
first-in first-out method and include write downs on available-for-sale
securities considered to have other than temporary declines in market value.
PROPERTY AND EQUIPMENT Property and equipment are recorded at cost. Depreciation
is provided over the estimated useful lives of the assets using accelerated
methods for computers and straight line for all other fixed assets. The useful
lives range from 3 to 4 years for computers, 10 to 31 years for buildings and
improvements and 5 to 6 years for all other property and equipment. Property and
equipment includes software capitalized for internal use.
As of December 31, 1999, the Company had contractual commitments related to
the Company's construction project in Mayfield Village, Ohio totalling $127.6
million, of which $60.9 million had been paid through 1999. Total interest
capitalized related to the Company's construction projects and capitalized
computer software costs was $3.4 million and $3.5 million in 1999 and 1998,
respectively.
THE PROGRESSIVE CORPORATION AND SUBSIDIARIES
38
26
INSURANCE PREMIUMS AND RECEIVABLES Insurance premiums written are earned
primarily on a pro rata basis over the period of risk. For products where more
than 50% cancellations are anticipated, premiums written and earned are reduced,
though cancellations have not yet occurred.The Company provides insurance and
related services to individuals, lenders and motor carriers throughout the
United States, and offers a variety of payment plans to meet individual customer
needs. Generally, premiums are collected in advance of providing risk coverage,
minimizing the Company's exposure to credit risk.
LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES Loss reserves represent the estimated
liability on claims reported to the Company, plus reserves for losses incurred
but not yet reported (IBNR). These estimates are reported net of amounts
recoverable from salvage and subrogation. Loss adjustment expense reserves
represent the estimated expenses required to settle these claims and losses. The
methods of making estimates and establishing these reserves are reviewed
regularly, and resulting adjustments are reflected in income currently. Such
loss and loss adjustment expense reserves could be susceptible to significant
change in the near term.
REINSURANCE The Company's reinsurance transactions include premiums written
under state-mandated involuntary plans for commercial vehicles (Commercial Auto
Insurance Procedures-CAIP), for which the Company retains no indemnity risk (see
Note 7-Reinsurance for further discussion). The remaining reinsurance arises
from the Company seeking to reduce its loss exposure in its auto and non-auto
programs and its strategic alliance relationships. Prepaid reinsurance premiums
are recognized on a pro rata basis over the period of risk.
EARNINGS PER SHARE Basic earnings per share are computed using the weighted
average number of Common Shares outstanding. Diluted earnings per share include
common stock equivalents, such as stock options, assumed outstanding during the
period.
DEFERRED ACQUISITION COSTS Deferred acquisition costs include commissions,
premium taxes and other costs incurred in connection with writing business.
These costs are deferred and amortized over the period in which the related
premiums are earned. The Company considers anticipated investment income in
determining the recoverability of these costs. Based on current indications,
management believes that these costs will be fully recoverable in the near term.
The Company does not defer advertising costs.
SERVICE REVENUES AND EXPENSES Service revenues consist primarily of fees
generated from processing business for involuntary plans and are earned on a pro
rata basis over the term of the related policies; acquisition expenses are
deferred and amortized over the period in which the related revenues are earned.
SUPPLEMENTAL CASH FLOW INFORMATION Cash includes only bank demand deposits. The
Company paid income taxes of $116.5 million, $235.9 million and $166.9 million
in 1999, 1998 and 1997, respectively. Total interest paid was $72.4 million for
1999 and $63.8 million for both 1998 and 1997.
STOCK OPTIONS The Company follows the provisions of Accounting Principles Board
(APB) Opinion No. 25, "Accounting for Stock Issued to Employees," to account for
its stock option activity in the financial statements. The Company granted all
options currently outstanding at an exercise price equal to the market price at
the date of grant and, therefore, under APB 25, no compensation expense is
recorded. The Company follows the disclosure provisions of SFAS 123, "Accounting
for Stock-Based Compensation."
NEW ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board
issued SFAS 133, "Accounting for Derivative Instruments and Hedging Activities,"
which standardizes the accounting for derivative instruments and requires that
all derivatives be recognized at fair value on the balance sheet. Changes in
fair value are recorded in current period earnings or in other comprehensive
income if the derivative transaction is a qualified cash flow hedge. The
statement is effective for fiscal years beginning after June 15, 2000. The
Company is currently analyzing the impact of this statement, but estimates that
the net effect of all derivative transactions would not have been significant at
December 31, 1999.
ESTIMATES The Company is required to make estimates and assumptions when
preparing its financial statements and accompanying notes in conformity with
accounting principles generally accepted in the United States (GAAP). Actual
results could differ from those estimates.
02 LITIGATION
The Company is named as defendant in various lawsuits generally relating to its
insurance operations. All legal actions relating to claims made under insurance
policies or in connection with previous reinsurance agreements are considered by
the Company in establishing its loss and loss adjustment expense reserves.
Various other legal and regulatory actions are currently pending that involve
the Company and specific aspects of its conduct of business. The Company
believes that the ultimate disposition of these lawsuits in excess of amounts
currently reserved will not materially impact the Company's financial position,
cash flows or results of operations.
The Company is also named as defendant in a number of purported class action
lawsuits, such as those alleging damages as a result of the Company's use of
after-market parts or the alleged diminution of value to vehicles which are
involved in accidents, and cases challenging other aspects of the Company's
business. Other insurance companies face similar suits. The Company plans to
vigorously contest these suits, but is currently unable to estimate the
potential exposure.
03 CONTRACTUAL COMMITMENTS
The Company has operating lease commitments and licensing and service agreements
with terms greater than one year, some with options to renew at the end of the
contract periods. The minimum commitments under such noncancelable contracts at
December 31, 1999 are as follows (in millions): 2000-$61.0; 2001-$41.1;
2002-$19.8; 2003-$11.9; 2004-$5.5; and thereafter-$.2. Total expense incurred by
the Company for such purposes for 1999, 1998 and 1997 was $96.3 million, $93.1
million and $83.3 million, respectively.
39
27
04 INVESTMENTS
The components of pretax investment income and net realized gains on security
sales for the years ended December 31 were:
(millions)
- ---------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
Available-for-sale: fixed maturities $ 275.6 $ 233.9 $ 219.1
equity securities 53.4 34.1 24.6
Short-term investments 11.7 26.8 31.2
- ---------------------------------------------------------------------------------------------------------------------
Investment income 340.7 294.8 274.9
- ---------------------------------------------------------------------------------------------------------------------
Gross realized gains:
Available-for-sale: fixed maturities 35.4 34.6 56.9
equity securities 135.8 159.1 121.4
Short-term investments .1 .2 --
Gross realized losses:
Available-for-sale: fixed maturities (55.8) (37.1) (36.9)
equity securities (68.3) (145.4) (42.9)
- ---------------------------------------------------------------------------------------------------------------------
Net realized gains on security sales 47.2 11.4 98.5
- ---------------------------------------------------------------------------------------------------------------------
$ 387.9 $ 306.2 $ 373.4
=====================================================================================================================
The composition of the investment portfolio at December 31 was:
(millions)
GROSS GROSS
UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
- -------------------------------------------------------------------------------------------------------------------------
1999
Available-for-sale:
U.S. government obligations $ 322.6 $ -- $ (6.1) $ 316.5
State and local government obligations 1,352.9 8.8 (29.5) 1,332.2
Foreign government obligations 60.4 -- (1.4) 59.0
Corporate debt securities 935.3 .1 (25.0) 910.4
Asset-backed securities 1,897.3 .7 (66.9) 1,831.1
Other debt securities 82.4 1.6 (.5) 83.5
- -------------------------------------------------------------------------------------------------------------------------
4,650.9 11.2 (129.4) 4,532.7
Preferred stocks 425.4 2.4 (5.4) 422.4
Common stocks 1,127.8 195.0 (79.2) 1,243.6
Short-term investments 229.0 -- -- 229.0
- -------------------------------------------------------------------------------------------------------------------------
$ 6,433.1 $ 208.6 $ (214.0) $ 6,427.7
=================================================================
1998
Available-for-sale:
U.S. government obligations $ 610.8 $ 4.1 $ (.4) $ 614.5
State and local government obligations 1,649.0 44.9 (.3) 1,693.6
Foreign government obligations 52.9 .4 -- 53.3
Corporate debt securities 315.5 4.5 (1.8) 318.2
Asset-backed securities 1,491.4 19.8 (24.3) 1,486.9
Other debt securities 52.0 .7 (.2) 52.5
- -------------------------------------------------------------------------------------------------------------------------
4,171.6 74.4 (27.0) 4,219.0
Preferred stocks 374.3 14.0 (11.8) 376.5
Common stocks 512.2 144.3 (19.6) 636.9
Short-term investments 441.9 -- -- 441.9
- -------------------------------------------------------------------------------------------------------------------------
$ 5,500.0 $ 232.7 $ (58.4) $ 5,674.3
=========================================================================================================================
Included in the available-for-sale portfolio are trading securities. The net
activity in trading securities was not material to the Company's financial
position, cash flows or results of operations. At December 31, 1999 and 1998,
trading securities had a net market value of $50.2 million and $(.4) million,
respectively.
40
28
The composition of fixed maturities by maturity at December 31, 1999 was:
(millions)
- ---------------------------------------------------------------------------------------------------------
MARKET
COST VALUE
- ---------------------------------------------------------------------------------------------------------
Less than one year $ 389.6 $ 389.4
One to five years 3,039.3 2,983.0
Five to ten years 1,057.2 1,016.6
Ten years or greater 164.8 143.7
- ---------------------------------------------------------------------------------------------------------
$ 4,650.9 $ 4,532.7
=========================================================================================================
Asset-backed securities are reported based upon their projected cash flows. All
other securities which do not have a single maturity date are reported at
average maturity. Actual maturities may differ from expected maturities because
the issuers of the securities may have the right to call or prepay obligations
without prepayment penalties.
At December 31, 1999, bonds in the principal amount of $74.2 million were on
deposit with various regulatory agencies to meet statutory requirements.
Securities with a market value of $2.9 million were held at December 31, 1999,
by a bankruptcy remote subsidiary and are not available to the general creditors
of the Company.
The components of derivative financial instruments held or issued for purposes
other than trading at December 31 were:
(millions)
- --------------------------------------------------------------------------------------------------------------------
MARKET VALUE/ CONTRACT/
CARRYING VALUE AT NOTIONAL VALUE AT
DECEMBER 31, DECEMBER 31,
- --------------------------------------------------------------------------------------------------------------------
1999 1998 1999 1998
- --------------------------------------------------------------------------------------------------------------------
Forward and future positions:
Assets $ 1.3 $ 2.8 $ 2.1 $ 30.9
Call options:
Liabilities (.9) -- 16.5 --
Anticipatory debt issuance hedges:
Short futures position -- 4.4 -- 203.7
Interest rate swap hedge -- (11.0) -- 150.0
Foreign currency forward and future positions:
Liabilities (1.3) (.5) 16.1 31.8
- --------------------------------------------------------------------------------------------------------------------
$ (.9) $ (4.3) $ 34.7 $ 416.4
====================================================================================================================
Derivative instruments classified as held or issued for purposes other than
trading are used to manage the Company's risks and enhance the yields of the
available-for-sale portfolio. This is accomplished by modifying the basis,
duration, interest rate or foreign currency characteristics of the portfolio,
hedged securities or hedged cash flows. During 1998, anticipatory debt issuance
hedges were entered into to hedge against possible rises in interest rates prior
to the issuance of debt under the Company's outstanding $300 million shelf
registration, which is intended to replace debt expiring in December 2000.
During 1999, the $300 million debt was issued and the hedges were closed. During
the life of the hedge, 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.
The short futures position recognized a net realized gain of $8.1 million in
1999, and a net realized loss of $9.2 million in 1998.
Derivative instruments may also be used for trading purposes. The Company had
net losses of $1.8 million (gross gains of $4.4 million; gross losses of $6.2
million) during 1999 and net losses of $1.2 million (gross gains of $9.9
million; gross losses of $11.1 million) during 1998 from derivatives used for
trading purposes; these losses were not material to the Company's results of
operations and are included in the results of the available-for-sale portfolio.
At December 31, 1999, the Company had trading positions in treasury forwards and
call and put options with net market values of $(.1) million and notional values
of $129.4 million; the average market value for long positions was $(.4) million
and the average market value for short positions was less than $.1 million in
1999. At December 31, 1998, the Company had short trading positions in foreign
currency and treasury forwards with net market values of $(.4) million and
notional values of $31.5 million; the average market values for long and short
positions in 1998 were $(.2) million and $.5 million, respectively.
For all derivative positions, net cash requirements are limited to changes in
market values, which may vary based upon changes in interest rates, currency
exchange rates and other factors. Exposure to credit risk is limited to the
carrying value; unless otherwise noted, collateral is not required to support
the credit risk.
As of December 31, 1999, the Company had open investment funding commitments
of $34.6 million. The Company had no uncollateralized lines or letters of credit
as of December 31, 1999 or 1998.
41
29
05 STATUTORY FINANCIAL INFORMATION
At December 31, 1999, $278.5 million of consolidated statutory policyholders'
surplus represents net admitted assets of the Company's insurance subsidiaries
that are required to meet minimum statutory surplus requirements in the
subsidiaries' states of domicile. The subsidiaries may be licensed in states,
other than their states of domicile, which may have higher minimum statutory
surplus requirements. Generally, the net admitted assets of insurance
subsidiaries that, subject to other applicable insurance laws and regulations,
are available for transfer to the parent company cannot include the net admitted
assets required to meet the minimum statutory surplus requirements of the states
where the subsidiaries are licensed.
During 1999, the insurance subsidiaries paid aggregate cash dividends of $89.6
million to the parent company. Based on the dividend laws currently in effect,
the insurance subsidiaries may pay aggregate dividends of $200.3 million in 2000
without prior approval from regulatory authorities.
Statutory policyholders' surplus was $2,258.9 million and $2,029.9 million at
December 31, 1999 and 1998, respectively. Statutory net income was $199.3
million, $330.4 million and $274.7 million for the years ended December 31,
1999, 1998 and 1997, respectively.
In 1998, the National Association of Insurance Commissioners (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.
06 LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES
Activity in the loss and loss adjustment expense reserves, prepared in
accordance with GAAP, is summarized as follows:
(millions)
- --------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------
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
- --------------------------------------------------------------------------------------------------------------------
Net balance at January 1 1,945.8 1,867.5 1,532.9
- --------------------------------------------------------------------------------------------------------------------
Net reserves of subsidiary purchased -- -- 82.2
- --------------------------------------------------------------------------------------------------------------------
Incurred related to:
Current year 4,286.2 3,560.5 3,070.8
Prior years (29.8) (184.2) (103.3)
- --------------------------------------------------------------------------------------------------------------------
Total incurred 4,256.4 3,376.3 2,967.5
- --------------------------------------------------------------------------------------------------------------------
Paid related to:
Current year 2,919.2 2,376.0 1,971.5
Prior years 1,082.8 922.0 743.6
- --------------------------------------------------------------------------------------------------------------------
Total paid 4,002.0 3,298.0 2,715.1
- --------------------------------------------------------------------------------------------------------------------
Net balance at December 31 2,200.2 1,945.8 1,867.5
Plus reinsurance recoverables on unpaid losses 216.0 242.8 279.1
- --------------------------------------------------------------------------------------------------------------------
Balance at December 31 $ 2,416.2 $ 2,188.6 $ 2,146.6
====================================================================================================================
The Company establishes case and IBNR reserves near the midpoint of the
reasonable range of reserves. 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.
Because the Company is primarily an insurer of motor vehicles, it has limited
exposure for environmental, product and general liability claims. The Company
has established reserves for these exposures, in amounts which it believes to be
adequate based on information currently known by it. The Company does not
believe that these claims will have a material impact on the Company's
liquidity, financial condition, cash flows or results of operations.
The Company writes auto insurance in the coastal states, which could be
exposed to natural catastrophes, such as hurricanes. Although the occurrence of
a major catastrophe could have a significant impact on the Company's quarterly
results, the Company believes such an event would not be so material as to
disrupt the overall normal operations of the Company. The Company is unable to
predict if any such events will occur in the near term.
07 REINSURANCE
Reinsurance contracts do not relieve the Company from its obligations
to policyholders. Failure of reinsurers to honor their obligations could result
in losses to the Company. The Company evaluates the financial condition of its
reinsurers and monitors concentrations of credit risk to minimize its exposure
to significant losses from reinsurer insolvencies.
As of December 31, 1999 and 1998, 26% and 36%, respectively, of the "prepaid
reinsurance premiums" and 49% and 56%, respectively, of the "reinsurance
recoverables" relate to CAIP, for which the Company retains no indemnity risk.
42
30
The effect of reinsurance on premiums written and earned as of December 31 was
as follows:
(millions)
- --------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
WRITTEN EARNED WRITTEN EARNED WRITTEN EARNED
- --------------------------------------------------------------------------------------------------------------------------
Direct premiums $ 6,305.3 $ 5,853.5 $ 5,451.3 $ 5,100.5 $ 4,825.2 $ 4,382.9
Ceded (180.6) (169.9) (151.6) (152.5) (160.1) (193.4)
- --------------------------------------------------------------------------------------------------------------------------
Net premiums $ 6,124.7 $ 5,683.6 $ 5,299.7 $ 4,948.0 $ 4,665.1 $ 4,189.5
==========================================================================================================================
Losses and loss adjustment expenses are net of reinsurance ceded of $132.8
million in 1999, $131.9 million in 1998 and $150.8 million in 1997.
08 INCOME TAXES
Significant components of the Company's income tax provision were as follows:
(millions)
- -----------------------------------------------------------------------------------------------------------------
1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------
Current tax provision $ 136.2 $ 237.1 $ 241.6
Deferred tax benefit (19.2) (32.7) (63.1)
- -----------------------------------------------------------------------------------------------------------------
Total income tax provision $ 117.0 $ 204.4 $ 178.5
=================================================================================================================
The provision for income taxes in the accompanying consolidated statements of
income differed from the statutory rate as follows:
(millions)
- ---------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------------
Income before income taxes $ 412.2 $ 661.1 $ 578.5
=======================================================================
Tax at statutory rate $ 144.3 35% $ 231.4 35% $ 202.5 35%
Tax effect of:
Exempt interest income (22.1) (5) (23.1) (3) (19.6) (3)
Dividends received deduction (6.1) (2) (6.6) (1) (7.0) (1)
Other items, net .9 -- 2.7 -- 2.6 --
- ---------------------------------------------------------------------------------------------------------------------------------
$ 117.0 28% $ 204.4 31% $ 178.5 31%
=================================================================================================================================
Deferred income taxes reflect the impact for financial statement reporting
purposes of temporary differences between the financial statement carrying
amounts and the tax bases of assets and liabilities. At December 31, 1999 and
1998, the components of the net deferred tax assets were as follows:
(millions)
- -----------------------------------------------------------------------------------------------------------------
1999 1998
- -----------------------------------------------------------------------------------------------------------------
Deferred tax assets:
Unearned premiums reserve $ 194.5 $ 161.2
Non-deductible accruals 45.8 43.1
Capitalized expenditures 1.9 10.9
Loss reserves 115.7 109.5
Other 20.3 18.7
Deferred tax liabilities:
Deferred acquisition costs (120.2) (104.7)
Unrealized (gains) losses 2.0 (61.0)
- -----------------------------------------------------------------------------------------------------------------
Net deferred tax assets $ 260.0 $ 177.7
=================================================================================================================
The Company is able to demonstrate that the benefit of its deferred tax assets
is fully realizable.
43
31
09 EMPLOYEE BENEFIT PLANS
RETIREMENT PLANS The Company has a two-tiered Retirement Security Program. The
first tier is a defined contribution pension plan covering all employees who
meet requirements as to age and length of service. Contributions vary from 1% to
5% of annual eligible compensation up to the Social Security wage base, based on
years of eligible service. Company contributions were $8.0 million in 1999, $6.5
million in 1998 and $5.1 million in 1997.
The second tier is a long-term savings plan under which the Company matches,
into a Company stock account, amounts contributed to the plan by an employee up
to a maximum of 3% of the employee's eligible compensation. Company
contributions were $11.3 million in 1999, $9.9 million in 1998 and $7.3 million
in 1997.
The Company has a defined benefit pension plan which covered employees hired
before January 1, 1989, who met requirements as to age and length of service.
This plan and future benefit accruals were frozen on December 31, 1993; the
benefits accruals through the date the plan was frozen were based on years of
service and career average compensation up to the Social Security tax base. As
of December 31, 1999, the Company had a net pension asset of $4.9 million,
compared to $3.5 million in 1998, and $2.0 million in 1997. The Company
recognized expense of $2.3 million in 1999 and income of $.1 million in both
1998 and 1997. The Company's funding policy is to contribute annually the
minimum amount required by the Employee Retirement Income Security Act of 1974,
as amended. There is no past service liability requiring funding by the Company.
POSTEMPLOYMENT BENEFITS The Company provides various postemployment benefits to
former or inactive employees who meet eligibility requirements, their
beneficiaries and covered dependents. Postemployment benefits include salary
continuation and disability-related benefits including workers' compensation
and, if elected, continuation of health-care benefits. The Company's liability
was $2.4 million at December 31, 1999, compared to $1.8 million in 1998.
POSTRETIREMENT BENEFITS The Company provides postretirement health and life
insurance benefits to all employees who met requirements as to age and length of
service at December 31, 1988. The Company recognized expenses of $.4 million in
1999, $.7 million in 1998 and $.2 million in 1997. The Company's funding policy
is to contribute annually the maximum amount that can be deducted for Federal
income tax purposes. Contributions are intended to provide not only for benefits
attributed to services to date, but also for those expected to be earned in the
future.
DEFERRED COMPENSATION The Company maintains The Progressive Corporation
Executive Deferred Compensation Plan (Deferral Plan), which permits eligible
executives to defer receipt of some or all of their annual bonuses or other
incentive awards. These deferred amounts are deemed invested in one or more
investment funds, including Common Shares of the Company, offered under the
Deferral Plan. All distributions from the Deferral Plan will be made in cash,
except that distributions representing amounts deemed invested in Common Shares
will be made in Common Shares. The Company reserved 300,000 Common Shares for
issuance under the Deferral Plan. The Company established an irrevocable grantor
trust to provide a source of funds to assist the Company in meeting its
liabilities under the Deferral Plan. At December 31, 1999 and 1998, the trust
held assets of $18.8 million and $14.6 million, respectively, of which $2.3
million and $3.9 million were held in Common Shares, to cover its liabilities.
INCENTIVE COMPENSATION PLANS The Company's 1989 Incentive Plan and 1995
Incentive Plan provide for the granting of stock options and other stock-based
awards to key employees of the Company. The 1989 Incentive Plan has 6,500,000
shares authorized and the 1995 Incentive Plan has 5,000,000 shares authorized.
In addition to the Incentive Plans, the Company registered 1,425,000 and 650,000
Common Shares relating to stock options granted to key employees and directors
of the Company, respectively. The nonqualified stock options granted are for
periods up to ten years, become exercisable at various dates not earlier than
six months after the date of grant, and remain exercisable for specified periods
thereafter. All options granted have an exercise price equal to the market value
of the Common Shares on the date of grant.
A summary of all employee stock option activity during the three years ended
December 31 follows:
- ----------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------------
WEIGHTED WEIGHTED WEIGHTED
NUMBER OF AVERAGE NUMBER OF AVERAGE NUMBER OF AVERAGE
OPTIONS OUTSTANDING SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
- ----------------------------------------------------------------------------------------------------------------------------------
Beginning of year 4,705,811 $ 46.07 4,968,964 $ 35.52 5,109,390 $ 28.09
Add (deduct):
Granted 476,850 139.18 441,210 124.61 726,889 69.82
Exercised (552,473) 22.54 (641,013) 16.99 (758,580) 17.44
Cancelled (171,725) 65.50 (63,350) 61.03 (108,735) 41.07
- ----------------------------------------------------------------------------------------------------------------------------------
End of year 4,458,463 $ 58.20 4,705,811 $ 46.07 4,968,964 $ 35.52
===============================================================================================
Exercisable, end of year 1,571,538 $ 25.15 1,342,801 $ 20.26 1,497,050 $ 15.53
===============================================================================================
Available, end of year 4,371,422 4,676,547 5,054,407
==================================================================================================================================
44
32
The following employee options were outstanding or exercisable as of December
31, 1999:
- -------------------------------------------------------------------------------------------------------------------------
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
- -------------------------------------------------------------------------------------------------------------------------
WEIGHTED AVERAGE WEIGHTED WEIGHTED
RANGE OF NUMBER OF REMAINING AVERAGE NUMBER OF AVERAGE
EXERCISE PRICES SHARES CONTRACTUAL LIFE EXERCISE PRICE SHARES EXERCISE PRICE
- -------------------------------------------------------------------------------------------------------------------------
$ 13 - 20 610,615 1.71 years 15.70 610,615 $15.70
21 - 40 1,548,235 4.20 years 33.53 934,685 30.60
41 - 60 761,012 5.98 years 47.19 23,012 45.58
61 - 80 644,602 7.00 years 68.58 2,127 66.12
81 - 125 434,839 8.02 years 121.21 589 114.19
126 - 161 459,160 8.97 years 141.92 510 154.00
- -------------------------------------------------------------------------------------------------------------------------
$ 13 - 161 4,458,463 1,571,538
=========================================================================================================================
Under SFAS 123, the Company uses the Black-Scholes pricing model to calculate
the fair value of the options awarded, including 144,207 options awarded to
directors. This model produced a value of 44.3% for 1999 awards, 40.6% for 1998
awards and 43.2% for 1997 awards. The following assumptions were used to derive
the ratio: a 7-year option term; an annualized volatility rate of .284 for 1999,
.259 for 1998 and .255 for 1997; a risk-free rate of return of 6.18% for 1999,
5.49% for 1998 and 6.63% for 1997; and a dividend yield of .18% for 1999, .20%
for 1998 and .25% for 1997. The Company elected to account for terminations when
they occur rather than include an attrition factor into its model.
If compensation cost had been measured based on the fair-value based accounting
method under SFAS 123, the following would have been disclosed for December 31:
(millions-except per share amounts)
- -------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------------
PRO FORMA
Net income $ 283.9 $ 447.3 $ 393.5
=============================================
Earnings per share
Basic $ 3.90 $ 6.17 $ 5.46
Diluted 3.81 6.00 5.22
- -------------------------------------------------------------------------------------------------------------------------
The amounts charged to income for incentive compensation plans, including
executive cash bonus programs for key members of management and a gainsharing
program for all other employees, were $55.6 million in 1999, $107.5 million in
1998 and $85.8 million in 1997.
10 DEBT
Debt at December 31 consisted of:
(millions)
- --------------------------------------------------------------------------------------------------------------------------------
1999 1998
- --------------------------------------------------------------------------------------------------------------------------------
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: $150.0, December 1988) 149.8 154.5 149.7 162.4
Other debt 7.7 7.7 -- --
- --------------------------------------------------------------------------------------------------------------------------------
$ 1,048.6 $ 1,001.1 $ 776.6 $ 821.6
================================================================================================================================
Debt includes amounts the Company 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.
45
33
The Company's 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 Company entered into a revolving credit arrangement with
National City Bank, which is reviewed by the bank annually. Under this
agreement, the Company has the right to borrow up to $10.0 million. By selecting
from available credit options, the Company may elect to pay interest at rates
related to the London interbank offered rate, the bank's base rate or at a money
market rate. A commitment fee is payable on any unused portion of the committed
amount at the rate of .125 percent per annum. The Company had no borrowings
under this arrangement at December 31, 1999 or 1998.
Aggregate principal payments on debt outstanding at December 31, 1999, are
$300.4 million for 2000, $.4 million for 2001, $0 for 2002, $.9 million for
2003, $206.0 million for 2004 and $550.0 million thereafter.
11 SEGMENT INFORMATION
During 1998, the Company adopted SFAS 131, "Disclosures about Segments of an
Enterprise and Related Information," which requires companies to report
financial and descriptive information about their reportable operating segments.
The Company writes personal automobile and other specialty property-casualty
insurance and related services throughout the United States. The Company's
Personal Lines business is predominantly auto insurance and is organized by
states. The Company's 39 state/community managers are located in or near the
market served. These managers are measured and paid based on profit and growth
in their state(s)/community and manage claims, distribution, advertising,
budgets, price levels, agent development, regulation and community relations for
their area.
The Company's other lines of business include insurance for commercial
vehicles, lenders' collateral protection, directors' and officers' liability and
related services, including processing business for involuntary plans and claim
services to fleet owner and other insurance companies. The other businesses
accounted for 7% of the Company's 1999 consolidated revenues. All revenues are
generated from external customers and the Company does not have a reliance on
any major customer.
The Company evaluates segment profitability based on pretax operating profit.
Expense allocations are based on certain assumptions and estimates; stated
segment operating results would change if different methods were applied. The
Company does not allocate assets, investment income, interest expense or income
taxes to operating segments. In addition, the Company does not separately
identify depreciation and amortization expense by segment and such disclosure
would be impracticable. Companywide depreciation and amortization expense was
$71.8 million in 1999, $56.1 million in 1998 and $36.6 million in 1997. The
accounting policies of the operating segments are the same as those described in
Note 1-Reporting and Accounting Policies.
For the years ended December 31,
(millions)
- --------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------------------------------------------------
PRETAX PRETAX PRETAX
REVENUES PROFIT (LOSS) REVENUES PROFIT (LOSS) REVENUES PROFIT (LOSS)
- --------------------------------------------------------------------------------------------------------------------------
Personal Lines (1) $ 5,294.1 $ 63.2 $ 4,580.7 $ 361.5 $ 3,832.7 $ 243.0
Other (2) 442.2 47.0 405.5 61.9 402.1 36.6
Investments (3) 387.9 378.4 306.2 298.8 373.4 363.5
Interest Expense -- (76.4) -- (61.1) -- (64.6)
- --------------------------------------------------------------------------------------------------------------------------
$ 6,124.2 $ 412.2 $ 5,292.4 $ 661.1 $ 4,608.2 $ 578.5
==========================================================================================================================
(1) 94% of the Personal Lines segment is personal automobile insurance.
(2) 1999 amounts include a $5.2 million gain on sale of corporate aircraft. See
Note 12-Related Party Transaction for discussion.
(3) Revenues represent recurring investment income and net realized gains/losses
on security sales; pretax profit is net of investment expenses.
12 RELATED PARTY TRANSACTION
On April 23, 1999, the Company sold its corporate aircraft to a company
independently owned by Peter B. Lewis, the Company's Chairman of the Board,
President and Chief Executive Officer. The airplane had a net book value of $6.9
million and was sold to Mr. Lewis for $12.1 million, the fair market value of
the airplane as determined by an independent appraiser.
46
34
13 FAIR VALUE OF FINANCIAL INSTRUMENTS
Information about specific valuation techniques and related fair value detail is
provided in Note 1-Reporting and Accounting Policies, Note 4-Investments and
Note 10-Debt. Pursuant to SFAS 119, the cost and market value of the financial
instruments as of December 31 are summarized as follows:
(millions)
- ------------------------------------------------------------------------------------------------------------------------
1999 1998
- ------------------------------------------------------------------------------------------------------------------------
MARKET MARKET
COST VALUE COST VALUE
- ------------------------------------------------------------------------------------------------------------------------
Investments:
Available-for-sale: fixed maturities $ 4,650.9 $ 4,532.7 $ 4,171.6 $ 4,219.0
preferred stocks 425.4 422.4 374.3 376.5
common stocks 1,127.8 1,243.6 512.2 636.9
Short-term investments 229.0 229.0 441.9 441.9
Debt (1,048.6) (1,001.1) (776.6) (821.6)
- ------------------------------------------------------------------------------------------------------------------------
14 OTHER COMPREHENSIVE INCOME
During 1998, the Company adopted SFAS 130, "Reporting Comprehensive Income,"
which requires disclosure of comprehensive income and its components in the
financial statements. The components of other comprehensive income (loss) for
the years ended December 31 were as follows:
(millions)
- -----------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997
- -----------------------------------------------------------------------------------------------------------------------------------
TAX TAX TAX
(PROVISION) AFTER (PROVISION) AFTER (PROVISION) AFTER
PRETAX BENEFIT TAX PRETAX BENEFIT TAX PRETAX BENEFIT TAX
- -----------------------------------------------------------------------------------------------------------------------------------
Unrealized gains (losses)
arising during period:(1)
Available-for-sale:
fixed maturities $(150.7) $ 52.8 $ (97.9) $ 2.8 $ (1.0) $ 1.8 $ 29.5 $ (10.3) $ 19.2
equity securities 25.7 (9.0) 16.7 64.3 (22.5) 41.8 44.8 (15.7) 29.1
Reclassification adjustment:(2)
Available-for-sale:
fixed maturities (14.9) 5.2 (9.7) (10.0) 3.5 (6.5)
equity securities (39.8) 14.0 (25.8) (71.2) 25.1 (46.1)
- -----------------------------------------------------------------------------------------------------------------------------------
Net unrealized gains (losses) (179.7) 63.0 (116.7) (14.1) 5.1 (9.0) 74.3 (26.0) 48.3
Other(3) .6 -- .6 (3.3) -- (3.3) -- (.7) (.7)
- -----------------------------------------------------------------------------------------------------------------------------------
Other comprehensive
income (loss) $(179.1) $ 63.0 $(116.1) $(17.4) $ 5.1 $ (12.3) $ 74.3 $ (26.7) $ 47.6
===================================================================================================================================
(1) Amounts for 1997 reflect changes in net unrealized gains (losses).
(2) Represents adjustments for gains (losses) realized in net income;
reclassification adjustments for 1997 are not available.
(3) Other includes foreign currency translation adjustments, which have no tax
effect, and minimum pension liability, which is taxed at the statutory
rate.
47
35
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The consolidated financial statements and the related notes on pages 34 through
47, together with the supplemental information on pages 51 through 58, should be
read in conjunction with the following discussion of the consolidated financial
condition and results of operations.
FINANCIAL CONDITION The Progressive Corporation is a holding company and does
not have any revenue producing operations of its own. It receives cash through
borrowings, equity sales, subsidiary dividends and other transactions, and may
use the proceeds to contribute to the capital of its insurance subsidiaries in
order to support premium growth, to repurchase its Common Shares, 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 Note 5 to the financial statements.
The Company has substantial capital resources and is unaware of any trends,
events or circumstances that are reasonably likely to affect its capital
resources in a material way. 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
current 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 February 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 all 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.
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.
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 SFAS 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of
48
36
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, 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%; 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. 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 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
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
currently represent 93% of the Company's 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 the majority of the
policies are annual, 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 ratios 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.
49
37
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.
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.
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 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, RISKS 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); DRIVING PATTERNS; 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.
50
38
QUARTERLY FINANCIAL AND COMMON SHARE DATA
(not covered by report of independent accountants)
(millions-except per share amounts)
- -----------------------------------------------------------------------------------------------------------------------------------
Net Income Operating Income(1) Stock Price(2)
- -----------------------------------------------------------------------------------------------------------------------------------
Operating Per Per Rate of Dividends
Quarter Revenues(3) Total(4) Share(5) Total(4) Share(5) High-Low Close Return(6) Per Share
- -----------------------------------------------------------------------------------------------------------------------------------
1999
1 $ 1,333.3 $ 105.3 $ 1.41 $ 104.0 $ 1.39 $174 1/4 - 115 7/16 $143 1/2 $ .065
2 1,416.8 112.1 1.50 98.5 1.32 152 1/8 - 12 3/8 145 .065
3 1,474.5 74.0 .99 59.5 .80 144 15/16 - 81 1/2 81 11/16 .065
4 1,506.5 3.8(7) .05(7) 4.7(7) .06(7) 97 5/8 - 68 1/2 73 1/8 .065
- -----------------------------------------------------------------------------------------------------------------------------------
$ 5,731.1 $ 295.2 $ 3.96 $ 266.7 $ 3.58 $174 1/4 - 68 1/2 $731 (56.7)% $ .260
===================================================================================================================================
1998
1 $ 1,156.2 $ 120.1 $ 1.58 $ 102.8 $ 1.35 $135 1/2 - 106 11/16 $134 11/16 $.060
2 1,237.2 123.0 1.61 109.1 1.43 150 - 126 1/2 141 .060
3 1,290.9 135.1 1.81 134.4 1.80 156 3/4 - 95 112 3/4 .065
4 1,301.9 78.5(8) 1.05(8) 103.1 1.38 172 - 94 169 3/8 .065
- -----------------------------------------------------------------------------------------------------------------------------------
$ 4,986.2 $ 456.7 $ 6.11 $ 449.3 $ 6.01 $172 - 94 $169 3/8 41.6% $.250
===================================================================================================================================
1997
1 $ 905.7 $ 76.5 $ 1.02 $ 78.6 $ 1.05 $ 73 5/8 - 63 7/8 $ 63 7/8 $.060
2 1,020.9 102.1 1.36 82.8 1.10 87 3/8 - 61 1/2 87 .060
3 1,090.1 116.2 1.54 89.3 1.18 111 7/8 - 86 1/2 107 1/8 .060
4 1,218.1 105.3 1.39 85.3 1.13 120 7/8 - 99 119 7/8 .060
- -----------------------------------------------------------------------------------------------------------------------------------
$ 4,234.8 $ 400.0 $ 5.31 $ 336.0 $ 4.46 $120 7/8 - 61 1/2 $119 7/8 78.4% $.240
===================================================================================================================================
(1) Represents net income less realized gains and losses on security sales and
one-time items.
(2) Prices as reported on the consolidated transaction reporting system. The
Company's Common Shares are listed on the New York Stock Exchange.
(3) Represents premiums earned plus service revenues.
(4) The sum may not equal the total due to rounding in the individual periods.
Each period is properly stated.
(5) Presented on a diluted basis. The sum may not equal the total because the
average equivalent shares differ in the periods.
(6) Represents annual rate of return, including quarterly dividend
reinvestment.
(7) During the fourth quarter 1999, the Company increased loss reserves $33
million, $.29 per share, primarily relating to the 1999 accident year and
recognized $7 million, $.06 per share, of losses related to Hurricane
Irene. The remainder of the decline was primarily attributable to
increased loss severity.
(8) During the fourth quarter 1998, the Company wrote down $24.5 million,
$.21 per share, on investment securities considered to have other than
temporary declines in market value and realized a $9.2 million, $.08 per
share, net loss on an anticipatory hedge.
THE PROGRESSIVE CORPORATION AND SUBSIDIARIES
51
39
TEN YEAR SUMMARY--FINANCIAL HIGHLIGHTS
(not covered by report of independent accountants)
(millions--except per share amounts and number of people employed)
- -------------------------------------------------------------------------------------------------------------------------
1999 1998
- -------------------------------------------------------------------------------------------------------------------------
INSURANCE COMPANIES SELECTED FINANCIAL INFORMATION
AND OPERATING STATISTICS--STATUTORY BASIS
Reserves:
Loss and loss adjustment expense(1) $ 2,200.2 $ 1,945.8
Unearned premiums 2,694.5 2,253.3
Policyholders' surplus(1) 2,258.9 2,029.9
Ratios:
Net premiums written to policyholders' surplus 2.7 2.6
Loss and loss adjustment expense reserves to policyholders' surplus 1.0 1.0
Loss and loss adjustment expense 75.0 68.5
Underwriting expense 22.1 22.4
- -------------------------------------------------------------------------------------------------------------------------
Statutory combined ratio 97.1 90.9
SELECTED CONSOLIDATED FINANCIAL INFORMATION--GAAP BASIS
Total revenues $ 6,124.2 $ 5,292.4
Total assets 9,704.7 8,463.1
Total shareholders' equity(2) 2,752.8 2,557.1
Common Shares outstanding 73.1 72.5
Common Share price
High $ 174 1/4 $ 172
Low 68 1/2 94
Close(3) 73 1/8 169 3/8
Market capitalization $ 5,345.4 $ 12,279.7
Book value per Common Share(2) $ 37.66 $ 35.27
Return on average common shareholders' equity(4) 10.9% 19.3%
Debt outstanding $ 1,048.6 $ 776.6
Ratios:
Debt to total capital 28% 23%
Price to earnings(5) 20 28
Price to book 1.9 4.8
GAAP underwriting margin(2) 1.7 8.4
Number of people employed 18,753 15,735
- -------------------------------------------------------------------------------------------------------------------------
(1) During 1994, the Company began accruing salvage and subrogation
recoverables.
(2) In 1994, the $71.0 million "supplemental reserve" was eliminated,
increasing book value per share $.65, underwriting profit margin 3.2% and
shareholders' equity $46.2 million.
(3) Represents the closing price at December 31.
(4) Net income minus preferred share dividends divided by average common
shareholders' equity.
(5) Represents the closing stock price divided by operating earnings per share.
All share and per share amounts were adjusted for the December 1992, 3 for 1
stock split.
THE PROGRESSIVE CORPORATION AND SUBSIDIARIES
52
40
- -----------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990
- -----------------------------------------------------------------------------------------------------------------------------------
$ 1,867.5 $ 1,532.9 $ 1,314.4 $ 1,100.2 $ 1,053.7 $ 994.7 $ 901.7 $ 827.4
1,901.9 1,382.9 1,140.4 954.8 688.9 538.5 513.6 474.1
1,722.9 1,292.4 1,055.1 945.1 701.9 658.3 676.7 636.7
2.7 2.7 2.8 2.6 2.6 2.2 2.0 1.9
1.1 1.2 1.2 1.2 1.5 1.5 1.3 1.3
71.1 70.2 71.6 64.2 62.6 68.3 65.7 62.1
20.7 19.8 21.4 22.4 25.4 29.8 33.5 31.1
- -----------------------------------------------------------------------------------------------------------------------------------
91.8 90.0 93.0 86.6 88.0 98.1 99.2 93.2
$ 4,608.2 $ 3,478.4 $ 3,011.9 $ 2,415.3 $ 1,954.8 $ 1,738.9 $ 1,493.1 $ 1,376.2
7,559.6 6,183.9 5,352.5 4,675.1 4,011.3 3,440.9 3,317.2 2,912.4
2,135.9 1,676.9 1,475.8 1,151.9 997.9 629.0 465.7 408.5
72.3 71.5 72.1 71.2 72.1 67.1 63.3 69.3
$ 120 7/8 $ 72 1/4 $ 49 1/2 $ 40 1/2 $ 46 1/8 $ 29 3/8 $ 20 5/8 $ 18 3/4
61 1/2 40 3/8 34 3/4 27 3/4 26 5/8 14 3/4 15 11
119 7/8 67 3/8 48 7/8 35 40 1/2 29 1/8 18 17 1/8
$ 8,667.0 $ 4,817.3 $ 3,523.9 $ 2,492.0 $ 2,920.1 $ 1,954.3 $ 1,139.4 $ 1,186.8
$ 29.54 $ 23.45 $ 19.31 $ 14.97 $ 12.62 $ 7.94 $ 5.83 $ 5.89
20.9% 20.5% 19.6% 27.4% 36.0% 34.7% 6.7% 21.5%
$ 775.9 $ 775.7 $ 675.9 $ 675.6 $ 477.1 $ 568.5 $ 644.0 $ 644.4
27% 32% 31% 37% 32% 47% 58% 61%
27 16 17 13 15 17 15 11
4.1 2.9 2.5 2.3 3.2 3.7 3.1 2.9
6.6 8.5 5.7 11.5 10.7 3.5 (3.7) 1.0
14,126 9,557 8,025 7,544 6,101 5,591 6,918 6,370
- -----------------------------------------------------------------------------------------------------------------------------------
53
41
TEN YEAR SUMMARY--GAAP CONSOLIDATED OPERATING RESULTS
(not covered by report of independent accountants)
(millions-except per share amounts)
- ----------------------------------------------------------------------------------------------------------------------------------
1999 1998
- -----------------------------------------------------------------------------------------------------------------------------------
Direct premiums written:
Personal lines $ 5,799.4 $ 4,987.1
All other lines 505.9 464.2
- -----------------------------------------------------------------------------------------------------------------------------------
Total direct premiums written 6,305.3 5,451.3
Reinsurance assumed -- --
Reinsurance ceded (180.6) (151.6)
- -----------------------------------------------------------------------------------------------------------------------------------
Net premiums written 6,124.7 5,299.7
Net change in unearned premiums reserve(1) (441.1) (351.7)
- -----------------------------------------------------------------------------------------------------------------------------------
Premiums earned 5,683.6 4,948.0
- -----------------------------------------------------------------------------------------------------------------------------------
Expenses:
Losses and loss adjustment expenses(2) 4,256.4 3,376.3
Policy acquisition costs 745.0 659.9
Other underwriting expenses 583.8 495.8
- -----------------------------------------------------------------------------------------------------------------------------------
Total underwriting expenses 5,585.2 4,532.0
- -----------------------------------------------------------------------------------------------------------------------------------
Underwriting profit (loss) before taxes 98.4 416.0
Provision (benefit) for income taxes 34.4 145.6
- -----------------------------------------------------------------------------------------------------------------------------------
Underwriting profit (loss) after taxes 64.0 270.4
Service operations profit (loss) after taxes 4.3 4.8
- -----------------------------------------------------------------------------------------------------------------------------------
68.3 275.2
Investment income after taxes 249.6 221.3
Net realized gains (losses) on security sales after taxes 30.7 7.4
Interest expense after taxes (49.7) (39.7)
Proposition 103 reserve reduction after taxes -- --
Non-recurring items after taxes -- --
Other income (expenses) after taxes(3) (3.7) (7.5)
- -----------------------------------------------------------------------------------------------------------------------------------
Income before tax adjustments and cumulative
effect of accounting change 295.2 456.7
Tax adjustments(4) -- --
Cumulative effect of accounting change(5) -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Net income $ 295.2 $ 456.7
===================================================================================================================================
Operating income $ 266.7 $ 449.3
===================================================================================================================================
Per share(6)
Net income(2) $ 3.96 $ 6.11
Operating income 3.58 6.01
Dividends .260 .250
Average equivalent shares
Basic 72.9 72.5
Diluted 74.6 74.7
- -----------------------------------------------------------------------------------------------------------------------------------
(1) Amount represents change in unearned premiums reserve less change in
prepaid reinsurance premiums.
(2) In 1994, the "supplemental reserve" was eliminated, resulting in a one-time
decrease to losses and loss adjustment expenses of $71.0 million, or $.62
per share.
(3) Reflects other income and investment expenses after taxes and other tax
adjustments.
(4) 1991 reflects a deferred tax asset write-down and 1990 reflects a fresh
start tax benefit.
(5) Reflects adoption of SFAS 109, "Accounting for Income Taxes."
(6) Presented on diluted basis. In 1997, the Company adopted SFAS 128,
"Earnings Per Share," and, as a result, restated prior periods per share
amounts, if applicable.
All share and per share amounts were adjusted for the December 1992, 3 for 1
stock split.
THE PROGRESSIVE CORPORATION AND SUBSIDIARIES
54
42
- ----------------------------------------------------------------------------------------------------------------------------------
1997 1996 1995 1994 1993 1992 1991 1990
- ----------------------------------------------------------------------------------------------------------------------------------
$ 4,355.9 $ 3,165.4 $ 2,644.6 $ 2,181.7 $ 1,548.9 $ 1,214.6 $ 1,047.4 $ 876.0
469.3 473.0 424.3 463.4 417.5 422.2 489.4 482.8
- ----------------------------------------------------------------------------------------------------------------------------------
4,825.2 3,638.4 3,068.9 2,645.1 1,966.4 1,636.8 1,536.8 1,358.8
-- 3.8 .1 2.9 9.2 4.3 .1 .1
(160.1) (200.5) (156.2) (190.8) (156.4) (189.9) (212.3) (162.6)
- ----------------------------------------------------------------------------------------------------------------------------------
4,665.1 3,441.7 2,912.8 2,457.2 1,819.2 1,451.2 1,324.6 1,196.3
(475.6) (242.4) (185.6) (266.1) (150.5) (25.1) (37.7) (5.1)
- ----------------------------------------------------------------------------------------------------------------------------------
4,189.5 3,199.3 2,727.2 2,191.1 1,668.7 1,426.1 1,286.9 1,191.2
2,967.5 2,236.1 1,943.8 1,397.3 1,028.0 930.9 858.0 762.9
607.8 482.6 459.6 391.5 311.6 304.1 313.7 292.7
336.0 208.5 167.2 150.8 151.3 141.5 162.1 123.7
- ----------------------------------------------------------------------------------------------------------------------------------
3,911.3 2,927.2 2,570.6 1,939.6 1,490.9 1,376.5 1,333.8 1,179.3
- ----------------------------------------------------------------------------------------------------------------------------------
278.2 272.1 156.6 251.5 177.8 49.6 (46.9) 11.9
97.4 95.2 54.8 88.0 62.2 16.9 (15.9) 4.0
- ----------------------------------------------------------------------------------------------------------------------------------
180.8 176.9 101.8 163.5 115.6 32.7 (31.0) 7.9
.9 2.8 5.6 6.5 4.4 (2.8) (1.4) 2.8
- ----------------------------------------------------------------------------------------------------------------------------------
181.7 179.7 107.4 170.0 120.0 29.9 (32.4) 10.7
205.3 175.6 156.2 131.2 107.1 110.4 121.1 126.4
64.0 4.6 30.4 15.5 70.1 9.6 4.9 (8.4)
(42.0) (40.0) (37.1) (35.9) (25.8) (29.4) (31.6) (32.0)
-- -- -- -- -- 70.0 -- --
-- -- -- -- (2.6) (42.6) -- --
(9.0) (6.2) (6.4) (6.5) (1.5) (8.3) (14.9) (13.2)
- ----------------------------------------------------------------------------------------------------------------------------------
400.0 313.7 250.5 274.3 267.3 139.6 47.1 83.5
-- -- -- -- -- -- (14.2) 9.9
-- -- -- -- -- 14.2 -- --
- ----------------------------------------------------------------------------------------------------------------------------------
$ 400.0 $ 313.7 $ 250.5 $ 274.3 $ 267.3 $ 153.8 $ 32.9 $ 93.4
==================================================================================================================================
$ 336.0 $ 309.1 $ 220.1 $ 212.7 $ 197.3 $ 129.8 $ 85.1 $ 127.9
==================================================================================================================================
$ 5.31 $ 4.14 $ 3.26 $ 3.59 $ 3.59 $ 2.08 $ .41 $ 1.20
4.46 4.12 2.85 2.76 2.62 1.74 1.19 1.62
.240 .230 .220 .210 .200 .191 .172 .160
72.0 71.6 71.8 71.6 69.3 60.7 65.4 72.3
75.3 74.2 74.2 74.0 71.8 70.9 66.6 81.9
- ----------------------------------------------------------------------------------------------------------------------------------
55
43
QUANTITATIVE MARKET RISK DISCLOSURES
(not covered by report of independent accountants)
Quantitative market risk disclosures are only presented for market risk
categories when risk is considered material. Materiality is determined based on
the fair value of the financial instruments at December 31, 1999, and the
potential for near term losses from reasonably possible near term changes in
market rates or prices.
OTHER THAN TRADING FINANCIAL INSTRUMENTS
Financial instruments subject to interest rate risk as of December 31, 1999
were:
(millions)
- ----------------------------------------------------------------------------------------------------------------------------------
MARKET VALUE
- ----------------------------------------------------------------------------------------------------------------------------------
-200 BPS -100 BPS +100 BPS +200 BPS
CHANGE CHANGE ACTUAL CHANGE CHANGE
- ----------------------------------------------------------------------------------------------------------------------------------
U.S. Government obligations $ 346.0 $ 331.3 $ 316.5 $ 301.8 $ 287.0
State and local government obligations 1,371.3 1,351.8 1,332.2 1,312.6 1,293.0
Asset-backed securities 1,927.3 1,883.7 1,831.1 1,771.8 1,721.4
Other debt securities 1,121.2 1,086.4 1,052.9 1,020.6 989.3
Preferred stocks 417.3 407.6 397.9 387.3 376.7
Term trust certificates 234.8 232.5 230.2 227.9 225.6
Short-term investments 229.5 229.3 229.0 228.8 228.6
- ----------------------------------------------------------------------------------------------------------------------------------
$ 5,647.4 $ 5,522.6 $ 5,389.8 $ 5,250.8 $ 5,121.6
==================================================================================================================================
Exposure to risk is represented in terms of changes in fair value due to
selected hypothetical movements in market rates. Bonds and preferred stocks are
individually priced to yield to the worst case scenario. State and local
government obligations, including lease deals and super sinkers, are assumed to
hold their prepayment patterns. Asset-backed securities are priced assuming deal
specific prepayment scenarios, considering the deal structure, prepayment
penalties, yield maintenance agreements and the underlying collateral. Over 89%
of the preferred stocks have mechanisms that are expected to provide an
opportunity to liquidate at par.
Financial instruments subject to equity market risk as of December 31, 1999
were:
(millions)
- ----------------------------------------------------------------------------------------------------------------------------------
HYPOTHETICAL
MARKET CHANGES
- ----------------------------------------------------------------------------------------------------------------------------------
MARKET
VALUE +10% -10%
- ----------------------------------------------------------------------------------------------------------------------------------
Common stocks $ 987.7 $ 1,079.7 $ 898.8
- ----------------------------------------------------------------------------------------------------------------------------------
THE PROGRESSIVE CORPORATION AND SUBSIDIARIES
56
44
The model represents the estimated value of the Company's common stock portfolio
given a + (-) 10% change in the market, based on the common stock portfolio's
weighted average beta of .89. The beta is derived from recent historical
experience, using the S&P 500 as the market surrogate. The historical
relationship of the common stock portfolio's beta to the S&P 500 is not
necessarily indicative of future correlation, as individual company or industry
factors may affect price movement. Betas are not available for all securities.
In such cases, the change in market value reflects a direct + (-) 10% change;
the number of securities without betas is less than 25%. The common stock
portfolio includes stock index futures with a market value of $1.3 million. The
model does not include term trust certificates, which comprised $230.2 million
of the common stock portfolio at the end of 1999, as these securities are
subject to interest rate risk rather than equity market risk.
Financial instruments subject to foreign currency risk as of December 31, 1999
were:
(millions)
MARKET NOTIONAL HYPOTHETICAL
VALUE VALUE GAIN (LOSS)
- ----------------------------------------------------------------------------------------------------------------------
Canadian fixed income investments $ 71.0 N/A $ 7.1
Other foreign fixed income investments 11.8 N/A 1.2
Foreign equity investments 79.7 N/A 8.0
Foreign currency forwards-liabilities (.8) (13.7) (.1)
- ----------------------------------------------------------------------------------------------------------------------
$ 161.7 N/A $ 16.2
======================================================================================================================
N/A = not applicable; notional value pertains only to derivative instruments
The foreign equity portfolio, which may include stock index futures,
foreign currency forwards and foreign preferred stocks, is comprised of numerous
currencies, none of which are individually material. Therefore, sensitivity
results are presented by class of financial instrument. The model calculates a
gain or loss in market value if the U.S. dollar depreciates by 10% to the
respective currency. The model does not attempt to reflect the correlation of
multiple currencies to changes in the U.S. dollar. At December 31, 1999, the
Company did not have any cross currency exposures.
TRADING FINANCIAL INSTRUMENTS
At December 31, 1999, the Company had trading positions with a net market value
of $50.2 million. During 1999, net activity in the trading portfolio was not
material to the Company's financial position, cash flows or results of
operations and exposure to loss from open trading positions was not material
individually or in the aggregate.
57
45
ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSES (LAE) DEVELOPMENT
(not covered by report of independent accountants)
(millions)
- -----------------------------------------------------------------------------------------------------------------------------------
For the years ended 1989 1990 1991 1992 1993 1994(3) 1995 1996 1997 1998 1999
December 31,
- -----------------------------------------------------------------------------------------------------------------------------------
Loss and LAE
reserves(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
Re-estimated
reserves as of:
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
Percentage(2) 14.3 16.6 20.2 25.8 22.9 13.9 13.4 6.6 10.7 1.5
- -----------------------------------------------------------------------------------------------------------------------------------
The chart represents the development of the property-casualty loss and LAE
reserves for 1989 through 1998. The reserves are re-estimated based on
experience as of the end of each succeeding year and are increased or decreased
as more information becomes known about the frequency and severity of claims for
individual years. The cumulative redundancy represents the aggregate change in
the estimates over all prior years.
(1) Represents loss and LAE reserves net of reinsurance recoverables on unpaid
losses at the balance sheet date.
(2) Cumulative redundancy divided by loss and LAE reserves.
(3) In 1994, based on a review of its total loss reserves, the Company
eliminated its $71.0 million "supplemental reserve."
DIRECT PREMIUMS WRITTEN BY STATE
(not covered by report of independent accountants)
(millions)
- ----------------------------------------------------------------------------------------------------------------------------------
1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
Florida $ 895.6 14.2% $ 784.4 14.4% $ 663.0 13.7% $ 467.4 12.9% $ 421.9 13.7%
New York 600.4 9.5 522.2 9.6 446.3 9.2 358.0 9.8 225.6 7.4
Texas 557.6 8.8 518.6 9.5 509.4 10.6 349.9 9.6 313.2 10.2
Ohio 528.1 8.4 447.7 8.2 404.3 8.4 340.8 9.4 284.1 9.3
California 416.0 6.6 343.2 6.3 291.7 6.0 171.6 4.7 126.6 4.1
Pennsylvania 322.3 5.1 292.3 5.4 248.3 5.1 201.3 5.5 184.9 6.0
Georgia 301.9 4.8 277.8 5.1 261.9 5.4 212.1 5.8 155.1 5.1
All other 2,683.4 42.6 2,265.1 41.5 2,000.3 41.6 1,537.3 42.3 1,357.5 44.2
- ----------------------------------------------------------------------------------------------------------------------------------
Total $ 6,305.3 100.0% $5,451.3 100.0% $ 4,825.2 100.0% $ 3,638.4 100.0% $ 3,068.9 100.0%
==================================================================================================================================
58
46
DIRECTORS CORPORATE OFFICERS
Milton N. Allen(1),(2) Peter B. Lewis
Director, Chairman, President and
various companies Chief Executive Officer
B. Charles Ames(1) Charles B. Chokel
Partner, Chief Executive Officer -
Clayton, Dubilier & Rice, Inc. Investments and
(investment banking) Capital Management
James E. Bennett III(3) Glenn M. Renwick
Senior Executive Vice President Chief Executive Officer -
KeyCorp Insurance Operations
(banking)
R. Steven Kestner
Charles B. Chokel Secretary
Chief Executive Officer -
Investments and Capital W. Thomas Forrester
Management Treasurer
Charles A. Davis(4) Jeffrey W. Basch
President and Vice President
Chief Executive Officer
Marsh & McLennan Capital, Inc. Janet A. Dolohanty
(investment banking) Vice President
Stephen R. Hardis(2),(4) Thomas A. King
Chairman of the Board and Vice President
Chief Executive Officer
Eaton Corporation
(manufacturing)
Janet Hill(1)
Vice President
Alexander & Associates, Inc.
(management consulting)
and President,
Staubach Alexander Hill, LLC
(commercial real estate
consulting)
Peter B. Lewis(2),(4)
Chairman of the Board,
President and
Chief Executive Officer
Norman S. Matthews(3)
Consultant,
formerly President,
Federated Department Stores, Inc.
(retailing)
Glenn M. Renwick
Chief Executive Officer -
Insurance Operations
Donald B. Shackelford(3)
Chairman,
Fifth Third Bank of Central Ohio
(commercial bank)
(1) Audit Committee member
(2) Executive Committee member
(3) Executive Compensation Committee member
(4) Investment and Capital Committee member
ANNUAL MEETING
The Annual Meeting of Shareholders will be held at the offices of The
Progressive Corporation, 6671 Beta Drive, Mayfield Village, Ohio 44143 on April
21, 2000, at 10:00 a.m. There were 3,877 shareholders of record on December 31,
1999.
PRINCIPAL OFFICE
The principal office of the Progressive Corporation is at 6300 Wilson Mills
Road, Mayfield Village, Ohio 44143
TOLL-FREE TELEPHONE NUMBERS
For assistance after an accident or to report a claim, 24 hours a day, 7 days a
week, call: 1-800-274-4499
To check rates available to you from Progressive and up to three other leading
auto insurance companies, call: 1-800-AUTO-PRO(R)(1-800-288-6776) or visit:
progressive.com
For 24 Hour Policy Service, call: 1-800-888-7764
COUNSEL
Baker & Hostetler LLP, Cleveland, Ohio
TRANSFER AGENT AND REGISTRAR
If you have questions about a specific stock ownership account, write or call:
Corporate Trust Customer Service, National City Bank, 1900 East Ninth Street,
Cleveland, Ohio 44114. Phone: 1-800-622-6757
COMMON SHARES
The Progressive Corporation's Common Shares (symbol PGR) are traded on the New
York Stock Exchange. Dividends are customarily paid on the last day of each
quarter.
SHAREHOLDER/INVESTOR RELATIONS
The Progressive Corporation does not maintain a mailing list for distribution of
shareholders' reports. To hear the text of the latest earnings release, receive
key financial information for the past several quarters, receive dividend and
other information, shareholders can call 1-800-879-PROG. This toll-free
shareholder services line is available 24 hours a day, 7 days a week. Such
information is also available from the Company's Web site: progressive.com.
To request copies of public financial information on the Company, shareholders
and potential investors may call the Company's shareholders services line at
1-800-879-PROG or write to: The Progressive Corporation, Investor Relations,
6300 Wilson Mills Road, Box W33, Mayfield Village, Ohio 44143.
For specific questions on financial or other Company information call:
440-446-2851.
59
47
(C)2000 The Progressive Corporation
Design: Nesnadny + Schwartz, Cleveland + New York + Toronto
Artwork: All pieces are untitled.(C)1999 Gregory Crewdson
Printing: Fortran Printing, Cleveland Printed on Recycled Paper