1
Exhibit 13
3500 BC 2000 AD
THE INVENTION OF THE PROGRESSIVE
THE WHEEL CORPORATION
ANNUAL REPORT
WHAT
DO YOU
DAYDREAM
ABOUT?
2
CYCLES
In 1937, the Progressive insurance organization began business during a
difficult but hopeful era. From the start, the Company has been innovators --
growing into new markets and pioneering new ways to meet consumers' needs. In
1956, Progressive Casualty Insurance Company was founded to be among the first
specialty underwriters of nonstandard auto insurance. Today, The Progressive
Corporation, which owns 76 subsidiaries and one mutual insurance company
affiliate, provides all drivers throughout the United States with competitive
rates and 24-hour, in-person and online services.
As with any creative process, innovation and its results are often
cyclical. This year's Annual Report chronicles a very trying year in the cycle
of our company and the auto insurance industry. Progressive is often at the
leading edge of cycles. We expect to emerge stronger from the challenges of 2000
and look forward to opportunities ahead.
To illustrate this concept, we commissioned artist Greg Colson to
explore the theme of cycles. Using simple charts and statistical measures,
Colson's mixed media paintings probe our perceptions of the universe and provide
a whimsical snapshot of human desire, vocation and avocation. Colson's work will
become part of Progressive's growing collection of contemporary art.
3
2000 FINANCIAL HIGHLIGHTS
(millions - except per share amounts) 2000 1999 % CHANGE
------------------------------------- ---- ---- --------
FOR THE YEAR
Direct premiums written $ 6,402.1 $ 6,305.3 2%
Net premiums written 6,196.1 6,124.7 1
Net premiums earned 6,348.4 5,683.6 12
Total revenues 6,771.0 6,124.2 11
Operating income 55.4 266.7 (79)
Net income 46.1 295.2 (84)
Per share:(1)
Operating income .75 3.58 (79)
Net income .62 3.96 (84)
Underwriting margin (4.4)% 1.7%
AT YEAR-END
Consolidated shareholders' equity $ 2,869.8 $ 2,752.8 4
Common Shares outstanding 73.5 73.1 1
Book value per share $ 39.04 $ 37.66 4
Market capitalization $ 7,616.8 $ 5,345.4 42
Return on average shareholders' equity 1.7% 10.9%
1-YEAR
------
STOCK PRICE APPRECIATION (DEPRECIATION)(2)
Progressive 42.3%
S&P 500 (9.1)%
- ----------
(1) Presented on a diluted basis.
(2) Assumes dividend reinvestment.
4
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 roles and 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.
CORE VALUES
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.
5
FINANCIAL OBJECTIVES AND MEASUREMENTS
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 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 3.4% in 2000, and averaged 2.5% over the past five years and 2.7% over
the past ten years). If we believe we can earn such a profit, we will invest in
business operations. If we do not believe we can earn such a profit, we will
return underleveraged capital to our investors. We prefer share repurchases over
dividends as a means of returning capital. As appropriate, we will substitute
debt for equity in our capital structure to reduce our cost of capital. Our
return on equity was 1.7% in 2000, and averaged 13.4% over the past five years
and 16.3% over the past ten years.
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PROFITABILITY Our business focus has evolved substantially during the '90s from
a largely variable cost business with very short-term policy retention, to a set
of businesses each at differing levels of maturity with unique underlying cost
structures, customer mix, policy life expectancies and growth opportunities. The
balance and discipline implicit in managing this increasingly complex business
will be guided by Progressive's most important goal of producing an aggregate
calendar year 4% underwriting profit. Overall, we had an underwriting loss of
4.4% in 2000, and an underwriting profit of 3.2% for the past five years and
4.1% for the past ten years. Estimated industry results for the personal auto
insurance market for the same periods were underwriting losses of 8.7%, 2.9% and
2.5%.
GROWTH Progressive is a growth-oriented company and management incentives are
tied to profitable growth. In 2000, we made the decision to report Personal
Lines' results by channel -- Agent and Direct. This decision was made to give
shareholders a more accurate picture of the business dynamics of each
distribution method and their respective rates of growth. Aggregate expense
ratios and aggregate growth rates disguise the true nature and performance of
each business. As we considered the implications of the compounding effect of
any single growth goal and the dispersion around individual segment and
sub-segment growth rates, it became clear that the true goal is to grow as fast
as possible constrained only by our profitability objective and our ability to
provide high quality customer service.
The Agent channel net premiums written decreased 8% in 2000, while the Direct
channel volume grew 35%. During the year, the Company shifted to writing more
six-month policies, which distort the premium growth rates for the year.
Policies in force, which may be a more accurate measure, decreased 7% in Agent
Auto and increased 45% in Direct Auto. Total Personal Lines net premiums written
decreased 1% in 2000, compared to an estimated 2.8% growth in the personal auto
insurance market for the year.
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, 2000, with a market value of
$796,800, for a 22.8% compounded annual return, compared to the 9.1% return
achieved by investors in the Standard & Poor's 500 during the same period. In
addition, the shareholder received dividends of $2,076 in 2000, bringing total
dividends received to $22,341 since the shares were purchased.
In the ten years since December 31, 1990, Progressive shareholders have
realized compounded annual returns of 20.4%, compared to 17.4% for the S&P 500.
In the five years since December 31, 1995, Progressive shareholders' returns
were 16.5%, compared to 18.3% for the S&P 500. In 2000, the returns were 42.3%
on Progressive shares and negative 9.1% for 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 $632.1 million
repurchasing our shares, at an average cost of $9.34 per share. During 2000, we
repurchased 272,500 Common Shares in the open market at an average cost of
$58.09 per share, excluding 28,554 Common Shares repurchased to offset
obligations under various employee benefit plans.
7
LETTER TO SHAREHOLDERS
I feel a sweet sadness writing my 36th and last letter to shareholders as CEO. I
will miss being a key person in the day-to-day work of Progressive's becoming a
greater company. This valedictory letter covers the Company's 2000 results and
prospects. It is written in the context of my thoughts about the reasons
Progressive has produced extraordinary results for more than three decades and
why pursuing the same fundamentals will support Progressive continuing to
perform excellently in the process of becoming United States consumers' #1
choice for auto insurance.
The bedrock of Progressive's success is its Core Values, its Vision of
reducing the human trauma and economic costs of auto accidents and the
challenging Financial Objectives against which we evaluate performance. The
Vision, Values and Objectives provide the clarity that lets excellent people
perform well. The Vision affirms our benefit to society and drives our
single-minded focus on U.S. auto insurance buyers. The Values guide behavior.
The demanding Objectives attract the special people who enjoy working hard,
performing well, being rewarded competitively and growing constantly.
INSURANCE OPERATIONS
Regrettably, my last year as CEO produced unacceptable results. The
2000 combined ratio missed Progressive's four percent underwriting profit
objective by 8.4 points. This goal permeates our culture and its achievement is
required for senior operating managers to earn target bonuses. We also missed
our goal of growing premium volume at 15 percentage points greater than the rate
of inflation. Rate increases in late 1999 and throughout 2000 made Progressive
less competitive, resulting in one percent premium volume growth. This letter
identifies the causes of 2000's disappointing performance and what was
accomplished during 2000 so that 2001 results can be better.
I am proud of and comfortable with how I was succeeded. After 35 years
as CEO, passing age 65, being partially disabled and enjoying my good life
outside Progressive, I was ready to shed the furious pace, complex
responsibilities and agonizing people decisions required of a great CEO. Led by
me, the Board conducted a thoughtful, thorough and deliberate three-year process
that resulted in Glenn Renwick officially becoming CEO of The Progressive
Corporation on January 1, 2001. Glenn has broad, successful experience in most
areas of Progressive's operations. He was ready when he effectively became CEO
at the start of 2000 and has flourished through 2000's "baptism in the fire." I
remain involved as "coach and cheerleader," am in close touch with Glenn and
other managers, and am working to be an effective Chairman of an effective Board
of Directors.
Although each year's results are very important, the vagaries of
capital flows, natural disasters, competitive pressures and accounting estimates
make it more reasonable to evaluate achievement over consecutive five-year
periods. For the five years ending December 31, 2000, our average underwriting
profit margin was 3.2 percent and our average annual growth rate was 16 percent.
In 1999, Progressive became the #4 U.S. private passenger auto insurer based on
volume, by understanding the fundamentals and having the will and discipline to
stick with them. Our competition has changed as we have grown, and is tougher
now than ever. I believe that following these proven concepts may lead to
meeting our targets over the next five years.
8
Progressive knows about auto insurance cyclicality. After periods of
okay profit margins, competitors begin to price more for market share than for
underwriting profit. This starts a downward cycle, which often is amplified by
costs escalating faster than expected, and/or regulators inhibiting rate
increases, and/or high interest rates prompting careless underwriting, and/or
mistakes in rate making. Progressive does not intentionally price for market
share, and reacts fast when the other factors come into play. That is why we
grow less during unprofitable parts of the cycle, like during 2000.
Progressive people's creativity, a rapidly changing business milieu and
the value we attribute to continuous improvement drives constant innovation and
change, not always in the right direction. I attribute 2000's results less to
the cycle than to sub-optimal organizational and tactical decisions led or made
by me prior to 2000. As CEO-Insurance Operations during 2000, Glenn Renwick
accomplished an enormous amount to remedy these problems, to develop new
capabilities and to ready Progressive for a positive surge. The changes
conceived by Glenn and his leadership team greatly improve Progressive's future
prospects. Fast, decisive actions were required when profit margins deteriorated
in late 1999 and Glenn led us to take them!
Progressive believes in being unusually open and values people who look
for and disclose problems, and seek help to get them fixed. This constant search
for shortfall, combined with measuring almost everything, keeps us working on
problems, many of which were identified in my 1999 shareholders' letter. We
described the same issues in more detail in early 2000, at the first of what we
plan to be annual March meetings with security analysts and investors. I am
pleased to report the progress we have made against each of those changes.
9
Progressive's alternative to making a proper underwriting profit is not to do
business. Progressive's people understand that it is absolutely necessary always
to charge enough to earn our target returns and to raise rates immediately when
experience suggests the need. Ratemaking is subject to error. Our rates became
inadequate due to unanticipated increases in personal injury protection and
physical damage claim costs, because we changed profit objectives, and because
claim handling deteriorated.
In 2000, we returned to our historical 4 percent annual profit
objective, increased rates fast, began improving claim handling and studied how
better to anticipate loss trend changes. Increasing rates before competitors do
slows growth and causes our competitors to grow faster. While not growing, we
fix the processing problems that always arise during previous periods of fast
growth and change. Some competitors grow faster while both their underwriting
results and customer service deteriorate. Then competitors finally raise rates
and restrict acceptances to stem their losses. When this has happened, because
Progressive's rates had been adequate and our operations were running smoothly,
we grew, usually quite profitably. We will soon learn whether this long-time
dynamic still operates.
In 1998, we changed the basis for employee Gainsharing from 4 percent
annual profit margin to a 4 percent profit margin over the life of the policy.
This was based on an assumption, which turned out to be wrong, that we could
accurately calculate the future profits to be realized on policies written
currently. Upon understanding our mistake, we reverted to the annual profit
standard for 2000 and beyond. The Gainsharing payout declined from $55.6 million
for 1999 to $8.3 million for 2000. We made mistakes in product design that were
mostly corrected. In 1999, 35 percent of our policies were written for a
semiannual term. Now 80 percent of policies are being written for a six-month
term, which speeds by six months the effect of rate changes.
Progressive regularly reorganizes to adapt to new circumstances, which energizes
and challenges its people. Through the 1980s and 1990s, we managed growth by a
series of subdivisions into smaller geographic units each managed by a General
Manager (GM) who was responsible for profit and growth in his/her area. By 1999,
we had subdivided into 39 such units, with the new GMs' first objective being to
apply their creativity and energy to improve claim service and lower claim costs
in their communities -- yet many absorbed themselves in marketing activities.
That structure dissipated pricing talent and ineffectively matched corporate
pricing strategy to local market and regulatory conditions. In April 2000, Glenn
reorganized again -- this time functionally, with separate managers and
objectives for marketing agent-produced business and telephone/Internet-related
business.
Progressive's people are the reason for Progressive's superior
performance and exciting prospects. Retaining people was difficult in 2000, as
our folks were faced with disappointing results, minimal or no Gainsharing and a
vibrant employment market. Employee turnover predictably escalated from 18.4
percent in 1999 to 22.4 percent in 2000. Some of the increase was due to
Company-initiated departures after the claim diagnostic review and the
reorganization.
Progressive's leaders understand profoundly that claim service is the
principal service we deliver. The reorganization made Claims a separate
department, with the head of Claims reporting to Glenn. The claims head and a
team of 15 people, six of whom are regional General Managers covering the U.S.,
implement strategies they develop as a team. These 16 folks have an average of
16 years of Progressive experience, mostly in claims, with some great successes
as GMs. This organization eliminates roadblocks to decision making and standard
setting.
10
The new claim management team's first step was self-critically to examine our
own claim handling from the customers' viewpoint. We learned that concentrating
on delivering fast claim service had led us to divide tasks and involve too many
people in each claim, diminishing our customers' experience and increasing total
cost. Speed is but one essential factor in a well-handled claim. Future customer
interactions will be more personal and caring with corresponding improvements in
speed of final resolution and payment accuracy. Our claim handlers will be more
helpers and less investigators/negotiators.
A number of valuable changes are already in place as a byproduct of
this claim review, including a new claim file-by-claim file quality calibration
process that lets us better evaluate individual claim handlers and overall claim
handling. We moved experienced claim managers from largely administrative duties
to working with their people on day-to-day file handling. We are testing an
array of techniques to bring us closer yet to our customers and will further
differentiate our claim service so that it becomes an even more recognized and
important part of our continuously developing brand.
Concern that loss reserves might have become deficient was another 2000
problem. Achieving "accurate" reserves is like balancing a scale where what's
being weighed continuously changes and exact balance (exactly accurate reserves)
is elusive and accuracy is ephemeral. Progressive's reserving philosophy is
never to be inadequate. Historically, we set reserves near the high end of the
reasonable range of reserves to ensure we didn't slip below balance. Our
attempts through the '90s to reduce reserve redundancy put us disconcertingly
close to or even under balance and shook manager confidence. In 2000, we applied
more energy to studying reserves and we increased them. We will soon publish the
first detailed analysis of our own loss reserves since 1995, in order to help
those who follow Progressive to better understand and critique our thinking,
process and detailed reserve segments.
Other important accomplishments resulted from our constant effort to improve.
Glenn and his team focused early on expense management, achieving reductions for
the Agency group whose expenses were down to 18.8 percent of premiums earned
from 20.7 percent last year. This was due in part to an increase in percentage
of renewals, the reduced Gainsharing payout and no longer charging brand
advertising to the Agency business. The Direct business expense ratio was
reduced to 29.6 percent from 38.5 percent by more expertly buying advertising
and an increase in the percentage of renewal policies. We changed focus from
brand building and internal process orientation to making it easier and more
comfortable for customers to be with us. As part of a concerted 2001 effort to
increase renewal persistency, Glenn articulated a standard for handling every
aspect of every customer experience -- "Virtually Perfect." We will move
inexorably toward that standard.
Progressive's long-time intense focus on changing U.S. auto insurance
to make it easier and less costly for consumers led us to Immediate Response(R)
claims service, 24/7 in-person delivery of all Progressive services, free
comparative rates, distributing all ways consumers want to buy, the first
Internet "buy button" and more. Our open, flexible, creative approach to the
business continued in 2000 and more firsts, including making progressive.com the
first auto insurance site available on Web-enabled cellular phones, promising
tests of new ways to handle physical damage losses and confidence-building
progress in our Internet-related business. We received the Gomez award for the
No. 1 online insurance carrier for the last three consecutive quarters in 2000
and continued volume increases causing Internet business to be 15 percent of
Direct business net premiums written, up from 7 percent in 1999, and to be 3
percent of total Company volume, up from 1 percent in 1999.
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CAPITAL MANAGEMENT AND INVESTING
Although investment returns are an important part of our operations, any premium
in Progressive's stock price depends on continuing profitable growth in the auto
insurance business. This is the reason previous shareholder letters have dealt
more with operations than with capital and investing. This will be my first and
final discourse on why Progressive manages capital and invests as it does.
Our primary objective of capital and investment management is always to
have sufficient capital to support all the insurance we can profitably
underwrite. Other objectives include financing growth internally and maintaining
a senior debt rating of at least A. The fundamental drivers are the same as in
operations -- Core Values, high standards and excellent people paid well for
achieving challenging objectives. Capital and investment management objectives,
processes and controls have evolved based on experience garnered from over 35
years of trying hard to do both well. Managing these functions requires the
ability to attract the best people, to decide what to do about conflicting
objectives, to communicate unfamiliar and complex ideas, and to make major
decisions quickly.
CAPITAL MANAGEMENT Capital Management Policy is established by the CEO, CFO and
Chairman. By producing a proper underwriting profit, growing premium volume at
the targeted rate and managing capital aggressively but prudently, we have
posted a return on equity that met our goal of exceeding the inflation rate by
15 percentage points in 18 of the past 25 years.
Auto insurance customers pay in advance so a profitable, growing
company could theoretically operate with no capital, by paying yesterday's bills
with today's premium receipts. Because insurance companies hold customers' money
against a promise to deliver future service and indemnity and are not always
profitable, sensible regulation requires companies to have "adequate" capital,
generally defined by the National Association of Insurance Commissioners (NAIC).
Our desire to fall within NAIC parameters establishes Progressive's minimum
capital level.
12
We want to have more than the minimum capital to support excellent
debt, claim paying and A.M. Best ratings, to fund dramatic growth if it comes,
to deal with catastrophic losses and unforeseen surprises, and to be able to
take advantage of unforeseen opportunities. Being conservative assures capital
adequacy. The questions are how much capital is required for these purposes, how
much excess do we have and what do we do about it?
Progressive is special because our objectives are tough to achieve,
particularly all of them every year. We discipline our use of capital by
requiring ourselves to produce an excellent return on it. To become U.S.
consumers' #1 choice for auto insurance, we expect to expand market share and
volume for the foreseeable future, in part because we are not distracted by any
other business and in part because we will continue to spend millions each year
for the systems, training and facilities required to achieve and manage such
growth. These "investments" in business capacity are funded from current
operations, not from capital. Currently, we see no attractive alternatives,
including acquisition, to deploy excess capital.
Progressive's 2000 return on equity was 1.7 percent, compared to 10.9
percent in 1999 and 16.7 percent under the objective, because we produced too
little profit on too much capital. We are working hard on addressing the "too
little profit" issue. Repurchasing our shares is our strong preference for
reducing capital. In 2000, we repurchased 272,500 shares at an average price of
$58.09, compared to no open market purchases in 1999. In 2001, we will
repurchase shares when our capital position, view of the future and the stock's
price make it attractive to do so. In December, we paid off $300 million of 10
percent and 10.125 percent maturing debt. At December 31, our ratio of debt to
total debt plus equity was 20.7 percent.
13
INVESTING Progressive's investment objectives, beyond having sufficient
capital, include maximizing total investment return, managing to predetermined
risk levels and maintaining adequate liquidity. Although responsible for
managing Progressive's assets since they were less than $10 million, I
concentrated on insurance operations and didn't develop the skills to be a
competent, confident buyer and seller of financial assets. Instead, we hired
investment specialists, either employees or fee/incentive-paid outside managers,
whose recommendations and reasoning were debated by a committee of specialized
"experts," directors and senior managers who spent too much time coming to
sub-optimal consensus decisions.
The lessons we learned from this experience follow and are implicit in
how we manage investing today.
- - Excellent investment professionals are unusually intelligent,
articulate, confident and persuasive. We organize and operate in ways
that attract people with those qualities.
- - Our way is but one of many "right ways" to invest. We stay open to
considering new and different approaches.
- - Progressive's culture requires carefully researched and well-
rationalized investing that is understood by interested operating
people. Intuitive esoteric investing is not possible for us.
- - Asset allocation is the biggest investment decision. We seek and
consider input from senior managers and Directors before making it.
- - Occasionally, extraordinary investors produce consistently superior
results. These investors usually invest mostly for themselves, and the
results are difficult, if not impossible, to replicate. We take big
risks in our operating business, but not in our investment business.
Our objective is to achieve market returns on the high-grade, short
duration, fixed-income debt securities that comprise 85% of our assets
as well as on equities and other investments.
- - Business, investing and capital strategies are inextricable, mutually
informing and driven by change. We review, re-evaluate and revise these
strategies as circumstances dictate.
- - Regulation, risk appetite and operating need make fixed-income
securities our major investment vehicle. Most of Progressive's
investment time and talent is devoted to such instruments.
- - Asset values seem to plummet at the least comfortable times. We don't
assume different asset classes will necessarily move in different
directions, and we carefully consider "worst case" outcomes.
- - Progressive is not great at buying, nor interested in operating,
businesses that do not directly support its strategy.
The Board's investment committee approves asset allocation ranges,
investment objectives, risk parameters and an evolving list of investing
constraints. Progressive employs portfolio managers who manage the fixed-income
securities in a process that prompts them to move assets from weakening to
strengthening bond categories. For the equity securities, 57.6 percent are
managed internally, with the remainder primarily indexed to the Russell 3000 by
an outside manager.
In 2000, Progressive earned an 8.6 percent total return on its
portfolio. The fixed-income return was 11.1 percent for the year. We benefited
from a timely lengthening of duration in mid-year. At December 31, our
fixed-income portfolio duration was 3.5 years and our average credit quality was
AA-. In 2000, the internally managed equity return was 1.1 percent, in line with
results achieved by value oriented active equity managers. All other risk
assets, which include high yield and distressed debt, private equities and
warrants, and mezzanine investments, comprise 2 percent of total invested assets
and had a total return of negative 7.8 percent.
14
REVELATION AND THANKS
My perspective results from 35 years of on-the-job CEO training at Progressive,
throughout which I felt unsure and unqualified to deal with the constant,
unpredictable issues raised by continuous fast growth and change. I relied on
trial and error and often was wrong. We prospered because I searched for,
acknowledged and fixed (or ended) mistakes, and worked hard to nurture a few
good decisions into profitable growth. Progressive benefits from a culture that
makes acknowledging one's own shortfall a positive learning experience.
Thanks to every person who ever contributed energy and intelligence to
Progressive. Neither the Company nor I would be where we are without you. Thanks
to the 19,490 men and women who will take Progressive into 2001 and beyond for
your contributions in 2000. We deeply appreciate the nearly 8 million customers
we are privileged to serve. Thanks for your business. Thanks to the agents in
the more than 30,000 Independent Insurance Agencies who did business with
Progressive in 2000. Thanks to our shareholders for their confidence.
I honor the people who founded Progressive and got it started -- my
dad, Joe Lewis, founder and first CEO; Jack Green, co-founder and second CEO; my
grandmother, Irma Rosenfeld who put up the first capital; my mom, Helen
Rosenfeld Lewis Bialosky, who, in 1965, financed the two of us when we acquired
control of Progressive and my brother, Dan Lewis, who has served superbly in a
variety of senior Progressive roles over the past 14 years.
Progressive's pace and aspirations demand boundless energy, commitment
and hard work. In my new role, I have the unique opportunity to continue to
influence Progressive as it approaches a future which I believe will be even
greater than its illustrious past. This is my last letter as CEO, but it's not
good-bye. Take care of yourselves. Be well and happy.
Joy Love and Peace
/s/ Peter B. Lewis
Peter B. Lewis
Chairman of the Board
15
Financial Review 2000
Consolidated Financial Statements 26 Management's Discussion and Analysis 42
Quarterly Financial and Common Share Data 47 Ten Year Summaries 48 Quantitative Market Risk Disclosures 52
Analysis of Loss and LAE Development 54 Direct Premiums Written by State 55
25
16
Consolidated Statements of Income
(millions - except per share amounts)
For the years ended December 31, 2000 1999 1998
- -------------------------------- ---- ---- ----
NET PREMIUMS WRITTEN $ 6,196.1 $ 6,124.7 $ 5,299.7
========= ========= =========
REVENUES
Premiums earned $ 6,348.4 $ 5,683.6 $ 4,948.0
Investment income 385.2 340.7 294.8
Net realized gains on security sales 16.9 47.2 11.4
Service revenues 20.5 47.5 38.2
Other income(1) -- 5.2 --
--------- --------- ---------
Total revenues 6,771.0 6,124.2 5,292.4
--------- --------- ---------
EXPENSES
Losses and loss adjustment expenses 5,279.4 4,256.4 3,376.3
Policy acquisition costs 788.0 745.0 659.9
Other underwriting expenses 559.3 583.8 495.8
Investment expenses 9.1 9.5 7.4
Service expenses 21.4 40.9 30.8
Interest expense 77.8 76.4 61.1
Non-recurring item(2) 4.2 -- --
--------- --------- ---------
Total expenses 6,739.2 5,712.0 4,631.3
--------- --------- ---------
NET INCOME
Income before income taxes 31.8 412.2 661.1
Provision (benefit) for income taxes (14.3) 117.0 204.4
--------- --------- ---------
Net income $ 46.1 $ 295.2 $ 456.7
========= ========= =========
COMPUTATION OF EARNINGS PER SHARE
Basic:
Average shares outstanding 73.2 72.9 72.5
========= ========= =========
Per share $ .63 $ 4.05 $ 6.30
========= ========= =========
Diluted:
Average shares outstanding 73.2 72.9 72.5
Net effect of dilutive stock options 1.1 1.7 2.2
--------- --------- ---------
Total equivalent shares 74.3 74.6 74.7
========= ========= =========
Per share $ .62 $ 3.96 $ 6.11
========= ========= =========
(1) See Note 12 - Related Party Transaction for discussion.
(2) Represents the realization of the foreign currency translation loss
associated with the substantial liquidation of the Company's foreign
subsidiary.
See notes to consolidated financial statements.
26 The Progressive Corporation and Subsidiaries
17
Consolidated Balance Sheets
(millions)
December 31, 2000 1999
- ------------ ---- ----
ASSETS
Investments:
Available-for-sale:
Fixed maturities, at market (amortized cost: $4,741.9 and $4,650.9) $ 4,784.1 $ 4,532.7
Equity securities, at market:
Preferred stocks (cost: $806.3 and $425.4) 813.7 422.4
Common stocks (cost: $1,141.3 and $1,127.8) 1,198.7 1,243.6
Short-term investments, at amortized cost (market: $186.8 and $229.0) 186.8 229.0
--------- ---------
Total investments 6,983.3 6,427.7
Cash 8.9 14.2
Accrued investment income 64.2 54.0
Premiums receivable, net of allowance for doubtful accounts of $42.0 and $42.9 1,567.0 1,760.8
Reinsurance recoverables 237.7 254.7
Prepaid reinsurance premiums 95.7 88.3
Deferred acquisition costs 309.9 343.4
Income taxes 241.1 273.7
Property and equipment, net of accumulated depreciation of $315.5 and $243.8 504.5 447.7
Other assets 39.3 40.2
--------- ---------
Total assets $10,051.6 $ 9,704.7
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
Unearned premiums $ 2,636.5 $ 2,781.4
Loss and loss adjustment expense reserves 2,986.4 2,416.2
Accounts payable, accrued expenses and other liabilities 810.1 705.7
Debt 748.8 1,048.6
--------- ---------
Total liabilities 7,181.8 6,951.9
--------- ---------
Shareholders' equity:
Common Shares, $1.00 par value (authorized 300.0, issued 83.1,
including treasury shares of 9.6 and 10.0) 73.5 73.1
Paid-in capital 511.2 481.6
Accumulated other comprehensive income:
Net unrealized appreciation (depreciation) on investment securities 69.5 (3.4)
Other (4.8) (9.0)
Retained earnings 2,220.4 2,210.5
--------- ---------
Total shareholders' equity 2,869.8 2,752.8
--------- ---------
Total liabilities and shareholders' equity $10,051.6 $ 9,704.7
========= =========
See notes to consolidated financial statements.
The Progressive Corporation and Subsidiaries 27
18
Consolidated Statements of Changes in Shareholders' Equity
(millions - except per share amounts)
For the years ended December 31, 2000 1999 1998
- -------------------------------- ---- ---- ----
RETAINED EARNINGS
Balance, Beginning of year $2,210.5 $1,932.6 $1,534.8
Net income 46.1 $ 46.1 295.2 $ 295.2 456.7 $ 456.7
------- ------- -------
Cash dividends on Common Shares
($.27, $.26 and $.25 per share) (19.8) (19.0) (18.1)
Treasury shares purchased (15.5) (.6) (39.8)
Other, net (.9) 2.3 (1.0)
-------- -------- --------
Balance, End of year $2,220.4 $2,210.5 $1,932.6
-------- -------- --------
ACCUMULATED OTHER COMPREHENSIVE
INCOME (LOSS), NET OF TAX
Balance, Beginning of year $ (12.4) $ 103.7 $ 116.0
Change in unrealized 72.9 (116.7) (9.0)
appreciation (depreciation)
Other 4.2 .6 (3.3)
------- ------- -------
Other comprehensive income (loss) 77.1 77.1 (116.1) (116.1) (12.3) (12.3)
-------- ------- -------- ------- -------- -------
Balance, End of year $ 64.7 $ (12.4) $ 103.7
-------- ------- -------- ------- -------- -------
COMPREHENSIVE INCOME $ 123.2 $ 179.1 $ 444.4
======= ======= =======
COMMON SHARES, $1.00 PAR VALUE
Balance, Beginning of year $ 73.1 $ 72.5 $ 72.3
Stock options exercised .7 .6 .6
Treasury shares purchased (.3) -- (.4)
-------- -------- --------
Balance, End of year $ 73.5 $ 73.1 $ 72.5
-------- -------- --------
PAID-IN CAPITAL
Balance, Beginning of year $ 481.6 $ 448.3 $ 412.8
Stock options exercised 17.9 12.0 10.9
Tax benefits on stock
options exercised 11.3 20.4 25.6
Treasury shares purchased (2.0) -- (2.4)
Other 2.4 .9 1.4
-------- -------- --------
Balance, End of year $ 511.2 $ 481.6 $ 448.3
-------- -------- --------
TOTAL SHAREHOLDERS' EQUITY $2,869.8 $2,752.8 $2,557.1
======== ======== ========
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.
28 The Progressive Corporation and Subsidiaries
19
Consolidated Statements of Cash Flows
(millions)
For the years ended December 31, 2000 1999 1998
- -------------------------------- ---- ---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 46.1 $ 295.2 $ 456.7
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 77.6 71.8 56.1
Net realized gains on security sales (16.9) (47.2) (11.4)
Gain on sale of property and equipment -- (5.2) --
Realized foreign currency translation loss 4.2 -- --
Changes in:
Unearned premiums (144.9) 451.7 349.6
Loss and loss adjustment expense reserves 570.2 231.2 42.0
Accounts payable, accrued expenses and other liabilities 40.1 106.7 71.1
Prepaid reinsurance premiums (7.4) (10.6) 2.1
Reinsurance recoverables 17.0 26.3 36.5
Premiums receivable 193.8 (304.6) (295.4)
Deferred acquisition costs 33.5 (44.3) (39.5)
Income taxes (6.9) (17.8) (71.3)
Tax benefits from exercise of stock options 11.3 20.4 25.6
Other, net 4.7 21.0 20.1
-------- -------- --------
Net cash provided by operating activities 822.4 794.6 642.2
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases:
Available-for-sale: fixed maturities (5,259.2) (6,076.7) (3,998.8)
equity securities (1,227.2) (1,094.7) (942.9)
Sales:
Available-for-sale: fixed maturities 4,728.3 5,182.5 3,210.2
equity securities 837.5 480.0 774.3
Maturities, paydowns, calls and other:
Available-for-sale: fixed maturities 406.7 361.4 419.9
equity securities 27.0 26.6 126.0
Net (purchases) sales of short-term investments 42.2 221.0 (32.5)
(Receivable) payable on securities 64.3 (19.1) 18.9
Purchases of property and equipment (130.3) (147.5) (174.2)
Sale of property and equipment -- 12.1 --
Purchase of subsidiaries, net of cash acquired -- (9.9) --
-------- -------- --------
Net cash used in investing activities (510.7) (1,064.3) (599.1)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from exercise of stock options 18.6 12.6 11.5
Proceeds from debt -- 301.4 --
Payments of debt (300.4) (30.0) --
Dividends paid to shareholders (19.8) (19.0) (18.1)
Acquisition of treasury shares (17.8) (.6) (42.6)
Other, net 2.4 .9 1.4
-------- -------- --------
Net cash provided by (used in) financing activities (317.0) 265.3 (47.8)
-------- -------- --------
Decrease in cash (5.3) (4.4) (4.7)
Cash, Beginning of year 14.2 18.6 23.3
-------- -------- --------
Cash, End of year $ 8.9 $ 14.2 $ 18.6
======== ======== ========
See notes to consolidated financial statements.
The Progressive Corporation and Subsidiaries 29
20
Notes to Consolidated Financial Statements
December 31, 2000, 1999 and 1998
1 REPORTING AND ACCOUNTING POLICIES
NATURE OF OPERATIONS The Progressive Corporation, an insurance holding company
formed in 1965, owns 76 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.
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 of America (GAAP).
Actual results could differ from those estimates.
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 of foreign equities 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. There were no foreign currency hedges outstanding at December 31, 2000.
Trading securities are securities bought principally for the purpose of
sale in the near term and are reported at market value in the available-for-sale
portfolio. 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 or cash flows; the effect on results of
operations is separately disclosed in Note 2 - Investments.
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 reported in the
available-for-sale portfolio. See Note 2 - 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.
30 The Progressive Corporation and Subsidiaries
21
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 40 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. At December 31,
2000 and 1999, land and buildings comprised 71% and 66%, respectively, of total
property and equipment.
As of December 31, 2000, the Company had contractual commitments
related to the Company's construction project in Mayfield Village, Ohio
totalling $124.1 million, of which $114.2 million had been paid through 2000.
Total interest capitalized was $3.3 million, $3.4 million and $3.5 million in
2000, 1999 and 1998, respectively, relating to both the Company's construction
projects and capitalized computer software costs.
INSURANCE PREMIUMS AND RECEIVABLES Insurance premiums written are earned
primarily on a pro rata basis over the period of risk. The Company provides
insurance and related services to individuals, lenders and small commercial
accounts 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 14 - 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 variable 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 $13.8 million, $116.5 million and $235.9 million in
2000, 1999 and 1998, respectively. Total interest paid was $81.6 million for
2000, $72.4 million for 1999 and $63.8 million for 1998.
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,"
as amended by SFAS 138, both of which standardize the accounting for derivative
instruments and require 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 estimates that the net effect of all derivative transactions
would not have been significant at December 31, 2000. The Company does not
engage in significant hedging activities.
RECLASSIFICATIONS Certain amounts in the financial statements for prior periods
were classified to conform with the 2000 presentation
31
22
2 INVESTMENTS
The composition of the investment portfolio at December 31 was:
GROSS GROSS
UNREALIZED UNREALIZED MARKET
(millions) COST GAINS LOSSES VALUE
---------- ---- ----- ------ -----
2000
Available-for-sale:
U.S. government obligations $ 447.8 $ 4.0 $ (1.1) $ 450.7
State and local government obligations 1,006.8 22.9 (4.3) 1,025.4
Foreign government obligations 39.0 .1 (.3) 38.8
Corporate debt securities 1,050.6 18.0 (14.4) 1,054.2
Asset-backed securities 2,187.1 40.0 (22.6) 2,204.5
Other debt securities 10.6 .2 (.3) 10.5
-------- -------- -------- --------
4,741.9 85.2 (43.0) 4,784.1
Preferred stocks 806.3 22.8 (15.4) 813.7
Common stocks 1,141.3 192.0 (134.6) 1,198.7
Short-term investments 186.8 -- -- 186.8
-------- -------- -------- --------
$6,876.3 $ 300.0 $ (193.0) $6,983.3
======== ======== ======== ========
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
======== ======== ======== ========
The components of pretax investment income and net realized gains on security
sales for the years ended December 31 were:
(millions) 2000 1999 1998
---- ---- ----
Available-for-sale: fixed maturities $ 296.8 $ 275.6 $ 233.9
equity securities 63.6 53.4 34.1
Short-term investments 24.8 11.7 26.8
------- ------- -------
Investment income 385.2 340.7 294.8
------- ------- -------
Gross realized gains:
Available-for-sale: fixed maturities 41.3 35.4 34.6
equity securities 159.4 135.8 159.1
Short-term investments .7 .1 .2
Gross realized losses:
Available-for-sale: fixed maturities (43.8) (55.8) (37.1)
equity securities (140.7) (68.3) (145.4)
------- ------- -------
Net realized gains on security sales 16.9 47.2 11.4
------- ------- -------
$ 402.1 $ 387.9 $ 306.2
======= ======= =======
During 2000, the Company wrote down $46.5 million in securities determined to
have an other than temporary decline in market value, compared to $16.3 million
and $32.1 million in 1999 and 1998, respectively.
32
23
In the available-for-sale portfolio are trading securities, including derivative
instruments used for trading purposes. At December 31, 2000, trading securities
had a net market value of $2.3 million, compared to $50.2 million at December
31, 1999. Net realized gains (losses) on trading securities for the years ended
December 31, 2000, 1999 and 1998 were $(18.7) million, $.8 million and $(1.2)
million, respectively, including the change in net unrealized gains (losses) of
$(12.6) million, $(1.5) million and $1.1 million, respectively.
The composition of fixed maturities by maturity at December 31, 2000 was:
MARKET
(millions) COST VALUE
- ---------- ---- -----
Less than one year $ 384.9 $ 383.0
One to five years 2,611.4 2,637.7
Five to ten years 1,502.4 1,527.0
Ten years or greater 243.2 236.4
-------- --------
$4,741.9 $4,784.1
======== ========
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, 2000, bonds in the principal amount of $78.6 million
were on deposit with various regulatory agencies to meet statutory
requirements.
The components of derivative financial instruments held or issued for
purposes other than trading at December 31 were:
MARKET VALUE/ CONTRACT/
CARRYING VALUE AT NOTIONAL VALUE AT
DECEMBER 31, DECEMBER 31,
------------ ------------
(millions) 2000 1999 2000 1999
---------- ---- ---- ---- ----
Forward/future positions: Assets $ -- $ 1.3 $ -- $ 2.1
Options:
Assets - Puts 2.3 -- 40.4 --
Liabilities - Calls (4.9) (.9) 97.8 16.5
Foreign currency forward/future positions: Liabilities (.7) (1.3) 4.5 16.1
------ ------ ------ ------
$ (3.3) $ (.9) $142.7 $ 34.7
====== ====== ====== ======
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, the Company entered into a
short futures position as part of an anticipatory debt hedge relating to the
then outstanding $300 million shelf registration. Driven by changing economic
conditions, the futures position 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 gains of $.3 million (gross gains of $5.6 million; gross losses
of $5.3 million) during 2000 and net losses of $1.8 million (gross gains of $4.4
million; gross losses of $6.2 million) during 1999 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, 2000, the Company had trading positions in call and put options
with net market values of $(1.4) million and notional values of $18.7 million;
the average market value for long positions was $.2 million and the average
market value for short positions was $(.4) million in 2000. 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 values for long and short positions in 1999 were
$(.4) million and less than $.1 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, 2000, the Company had open investment funding
commitments of $39.0 million. The Company had no uncollateralized lines or
letters of credit as of December 31, 2000 or 1999.
33
24
3 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) 2000 1999 1998
---------- ---- ---- ----
Balance at January 1 $ 2,416.2 $ 2,188.6 $ 2,146.6
Less reinsurance recoverables on unpaid losses 216.0 242.8 279.1
--------- --------- ---------
Net balance at January 1 2,200.2 1,945.8 1,867.5
--------- --------- ---------
Incurred related to:
Current year 5,203.6 4,286.2 3,560.5
Prior years 75.8 (29.8) (184.2)
--------- --------- ---------
Total incurred 5,279.4 4,256.4 3,376.3
--------- --------- ---------
Paid related to:
Current year 3,447.7 2,919.2 2,376.0
Prior years 1,246.6 1,082.8 922.0
--------- --------- ---------
Total paid 4,694.3 4,002.0 3,298.0
--------- --------- ---------
Net balance at December 31 2,785.3 2,200.2 1,945.8
Plus reinsurance recoverables on unpaid losses 201.1 216.0 242.8
--------- --------- ---------
Balance at December 31 $ 2,986.4 $ 2,416.2 $ 2,188.6
========= ========= =========
The Company establishes case and IBNR reserves near the middle of the reasonable
range of reserves. Prior to 2000, the Company's reserves developed
conservatively. Beginning in 1999 and continuing throughout 2000, the Company
experienced an increase in severity trends which led to adverse development on
prior accident years in 2000, as compared to 1999 and 1998.
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. 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.
4 STATUTORY FINANCIAL INFORMATION
At December 31, 2000, $285.0 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 2000, the insurance subsidiaries paid aggregate cash dividends
of $159.5 million to the parent company. Based on the dividend laws currently in
effect, the insurance subsidiaries may pay aggregate dividends of $171.0
million in 2001 without prior approval from regulatory authorities.
Statutory policyholders' surplus was $2,177.0 million and $2,258.9 million at
December 31, 2000 and 1999, respectively. Statutory net income was $33.8
million, $199.3 million and $330.4 million for the years ended December 31,
2000, 1999 and 1998, respectively.
The Company files statutory-basis financial statements with state
insurance departments in all states in which the Company is licensed. On January
1, 2001, significant changes to the statutory basis of accounting will become
effective. The cumulative effect of these changes, known as the Codification
guidance, will be recorded as a direct adjustment to statutory surplus. The
effect of adoption is expected to increase statutory surplus by approximately
$300 million; the Company expects that statutory surplus after adoption will
continue to be in excess of the regulatory risk-based capital requirements.
34
25
5 INCOME TAXES
Significant components of the Company's income tax provision (benefit) were as
follows:
(millions) 2000 1999 1998
- ---------- ---- ---- ----
Current tax provision $ 25.0 $ 136.2 $ 237.1
Deferred tax benefit (39.3) (19.2) (32.7)
------- ------- -------
Total income tax provision (benefit) $ (14.3) $ 117.0 $ 204.4
======= ======= =======
The provision (benefit) for income taxes in the accompanying consolidated
statements of income differed from the statutory rate as follows:
(millions) 2000 1999 1998
---------- ---- ---- ----
Income before income taxes $ 31.8 $412.2 $661.1
====== === ====== ==== ====== ====
Tax at statutory rate $ 11.1 35% $144.3 35% $231.4 35%
Tax effect of:
Exempt interest income (17.6) (55) (22.1) (5) (23.1) (3)
Dividends received deduction (10.3) (32) (6.1) (2) (6.6) (1)
Goodwill amortization 1.4 4 1.6 -- 1.2 --
Foreign currency translation loss 1.4 4 -- -- -- --
Other items, net (.3) (1) (.7) -- 1.5 --
------ --- ------ ---- ------ ----
$(14.3) (45)% $117.0 28% $204.4 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, 2000 and
1999, the components of the net deferred tax assets were as follows:
(millions) 2000 1999
---- ----
Deferred tax assets:
Unearned premiums reserve $ 183.8 $ 194.5
Non-deductible accruals 59.6 45.8
Loss reserves 134.2 115.7
Other 28.3 22.2
Deferred tax liabilities:
Deferred acquisition costs (108.5) (120.2)
Unrealized (gains) losses (37.5) 2.0
------- -------
Net deferred tax assets $ 259.9 $ 260.0
======= =======
The Company is able to demonstrate that the benefit of its deferred tax assets
is fully realizable.
35
26
6 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 $9.3 million in 2000, $8.0
million in 1999 and $6.5 million in 1998.
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 $12.9 million in 2000, $11.3 million in 1999 and $9.9 million
in 1998.
The Company had 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 benefit 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.
During 2000, the Company terminated this plan and recognized $3.2 million in
settlement expenses. In addition, the Company recognized pension expense of $2.8
million in 2000, $2.3 million in 1999 and income of $.1 million in 1998.
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 $6.6 million at December 31, 2000, compared to $2.4 million in 1999.
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
both 2000 and 1999 and $.7 million in 1998. 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, 2000 and 1999, the trust
held assets of $17.6 million and $18.8 million, respectively, of which $3.4
million and $2.3 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 years ended December
31 follows:
2000 1999 1998
---- ---- ----
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 4,458,463 $ 58.20 4,705,811 $ 46.07 4,968,964 $ 35.52
Add (deduct):
Granted 1,085,789 59.01 476,850 139.18 441,210 124.61
Exercised (678,924) 25.59 (552,473) 22.54 (641,013) 16.99
Cancelled (339,936) 80.80 (171,725) 65.50 (63,350) 61.03
--------- -------- --------- -------- --------- -----------
End of year 4,525,392 $ 61.60 4,458,463 $ 58.20 4,705,811 $ 46.07
========= ======== ========= ======== ========= ===========
Exercisable, end of year 1,544,614 $ 30.91 1,571,538 $ 25.15 1,342,801 $ 20.26
========= ======== ========= ======== ========= ===========
Available, end of year 3,625,569 4,371,422 4,676,547
========= ========= =========
36
27
The following employee options were outstanding or exercisable as of December
31, 2000:
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
- --------------- ------ ---------------- -------------- ------ --------------
$ 13-20 275,950 1.00 years $ 15.46 275,950 $ 15.46
21-40 1,220,251 3.16 years 33.33 1,220,251 33.33
41-60 1,601,428 7.33 years 53.33 29,962 45.97
61-80 613,480 6.20 years 68.69 15,277 69.19
81-125 413,673 7.14 years 119.39 2,664 106.54
126-161 400,610 7.97 years 141.96 510 154.00
- -------- --------- ---------- -------- --------- ---------
$ 13-161 4,525,392 1,544,614
- -------- ========= =========
Under SFAS 123, the Company uses the Black-Scholes pricing model to calculate
the fair value of the options awarded, including 90,156 options awarded to
directors. This model produced a value of 41.6% for 2000 awards, 44.3% for 1999
awards and 40.6% for 1998 awards. The following assumptions were used to derive
the ratio: an option term of 6 years for 2000 and 7 years for both 1999 and
1998; an annualized volatility rate of .314 for 2000, .284 for 1999 and .259 for
1998; a risk-free rate of return of 6.40% for 2000, 6.18% for 1999 and 5.49% for
1998; and a dividend yield of .50% for 2000, .18% for 1999 and .20% for 1998.
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) 2000 1999 1998
- ------------------------------------- ---- ---- ----
PRO FORMA
Net income $ 34.0 $ 283.9 $ 447.3
====== ======= =======
Earnings per share
Basic $ .46 $ 3.90 $ 6.17
Diluted .46 3.81 6.00
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 $8.3 million in 2000, $55.6 million in
1999 and $107.5 million in 1998.
7 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 total loss
evaluation methodology, 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
37
28
8 SEGMENT INFORMATION
The Company writes personal automobile and other specialty property-casualty
insurance and related services throughout the United States. The Company's
Personal Lines business consists predominantly of auto insurance and is either
generated by an agent or written directly by the Company. The Personal
Lines-Agent channel includes business primarily written by the Company's network
of more than 30,000 Independent Insurance Agencies while the Personal
Lines-Direct channel business is generated primarily through the telephone or
Internet. The Personal Lines business areas, which include Agent and Direct, are
managed at a local level and structured into six regions. Each business area has
a business leader and a product team, with local product managers at the state
or regional level.
The Company's other lines of business include insurance for small
fleets of commercial vehicles, lenders' collateral protection, directors' and
officers' liability and related services, including processing business for
involuntary plans. The other lines of business accounted for 7% of the Company's
2000 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
underwriting and service profit (loss). 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 $77.6 million in 2000, $71.8 million in 1999 and $56.1
million in 1998. 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,
2000 1999 1998
----------------------- ----------------------- ------------------------
PRETAX PRETAX PRETAX
(millions) REVENUES PROFIT (LOSS) REVENUES PROFIT (LOSS) REVENUES PROFIT (LOSS)
- ---------- -------- ------------- -------- ------------- -------- -------------
Personal Lines - Agent $4,643.4 $ (176.0) $4,548.7 $ 161.2 $4,177.5 $ 391.7
Personal Lines - Direct(1) 1,220.6 (128.7) 745.4 (98.0) 403.2 (30.2)
-------- -------- -------- -------- -------- --------
Total Personal Lines(2) 5,864.0 (304.7) 5,294.1 63.2 4,580.7 361.5
Other(3) 504.9 21.3 442.2 47.0 405.5 61.9
Investments(4) 402.1 393.0 387.9 378.4 306.2 298.8
Interest expense -- (77.8) -- (76.4) -- (61.1)
-------- -------- -------- -------- -------- --------
$6,771.0 $ 31.8 $6,124.2 $ 412.2 $5,292.4 $ 661.1
======== ======== ======== ======== ======== ========
(1) Internet sales accounted for 15%, 7% and 2% of Personal Lines - Direct
net premiums written in 2000, 1999 and 1998, respectively.
(2) Personal automobile insurance accounted for 93% of the total Personal
Lines segment net premiums written in 2000, compared to 94% in both
1999 and 1998.
(3) For 2000, pretax profit includes the realization of a $4.2 million
foreign currency translation loss associated with the substantial
liquidation of the Company's foreign subsidiary. 1999 revenues and
pretax profit include a $5.2 million gain on the sale of the corporate
aircraft; see Note 12 - Related Party Transaction for discussion.
(4) Revenues represent recurring investment income and net realized
gains/losses on security sales; pretax profit is net of investment
expenses.
9 COMMITMENTS AND CONTINGENCIES
The Company has operating lease commitments 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, 2000 are as follows (in millions): 2001 - $66.0; 2002 - $50.6; 2003 - $22.6;
2004 - $11.0; 2005 - $2.6; and thereafter - $.1. Total expense incurred by the
Company for such purposes for 2000, 1999 and 1998 was $100.0 million, $96.3
million and $93.1 million, respectively.
During 2000, the Company accrued $20.0 million related to the termination of a
Strategic Alliance partnership. As a result of the dissolution of this joint
venture, a related reinsurance agreement will terminate and the Company is
entitled to the run-off of all of the premium written by the joint venture. The
amount accrued represents the Company's best estimate of the share of the net
present value of the future profit on that business that its partner is entitled
to receive upon this termination. This estimate is susceptible to change in the
near term.
38
29
10 FAIR VALUE OF FINANCIAL INSTRUMENTS
Information about specific valuation techniques and related fair value detail is
provided in Note 1 - Reporting and Accounting Policies, Note 2 - Investments and
Note 13 - Debt. The cost and market value of the financial instruments as of
December 31 are summarized as follows:
2000 1999
---- ----
MARKET MARKET
(millions) COST VALUE COST VALUE
---------- ---- ----- ---- -----
Investments:
Available-for-sale: fixed maturities $4,741.9 $4,784.1 $4,650.9 $4,532.7
preferred stocks 806.3 813.7 425.4 422.4
common stocks 1,141.3 1,198.7 1,127.8 1,243.6
Short-term investments 186.8 186.8 229.0 229.0
Debt (748.8) (712.0) (1,048.6) (1,001.1)
11 OTHER COMPREHENSIVE INCOME
The components of other comprehensive income (loss) for the years ended December
31 were as follows:
2000 1999 1998
----------------------------- ------------------------------- ------------------------------
TAX TAX TAX
(PROVISION) AFTER (PROVISION) AFTER (PROVISION) AFTER
(millions) PRETAX BENEFIT TAX PRETAX BENEFIT TAX PRETAX BENEFIT TAX
- ---------- ------ ------- --- ------ ------- --- ------ ------- ---
Unrealized gains (losses)
arising during period:
Available-for-sale:
fixed maturities $191.3 $(67.0) $124.3 $(150.7) $ 52.8 $(97.9) $ 2.8 $ (1.0) $ 1.8
equity securities (69.8) 24.4 (45.4) 25.7 (9.0) 16.7 64.3 (22.5) 41.8
Reclassification adjustment:(1)
Available-for-sale:
fixed maturities (30.9) 10.7 (20.2) (14.9) 5.2 (9.7) (10.0) 3.5 (6.5)
equity securities 21.8 (7.6) 14.2 (39.8) 14.0 (25.8) (71.2) 25.1 (46.1)
------ ------ ------ ------- ------ ------- ------ ------- ------
Net unrealized gains (losses) 112.4 (39.5) 72.9 (179.7) 63.0 (116.7) (14.1) 5.1 (9.0)
Other(2) 4.2 -- 4.2 .6 -- .6 (3.3) -- (3.3)
------ ------ ------ ------- ------ ------- ------ ------- ------
Other comprehensive
income (loss) $116.6 $(39.5) $ 77.1 $(179.1) $ 63.0 $(116.1) $(17.4) $ 5.1 $(12.3)
====== ====== ====== ======= ====== ======= ====== ======= ======
(1) Represents adjustments for gains (losses) realized in net income.
(2) Other includes foreign currency translation adjustments, which have no
tax effect.
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, and
then 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.
39
30
13 DEBT
Debt at December 31 consisted of:
2000 1999
---- ----
MARKET MARKET
(millions) COST VALUE COST VALUE
- ---------- ---- ----- ---- -----
6 5/8% Senior Notes due 2029 (issued: $300.0, March 1999) $ 293.8 $ 257.4 $ 293.7 $ 254.1
7.30% Notes due 2006 (issued: $100.0, May 1996) 99.7 102.4 99.7 98.0
6.60% Notes due 2004 (issued: $200.0, January 1994) 199.4 200.3 199.3 193.7
7% Notes due 2013 (issued: $150.0, October 1993) 148.6 144.6 148.5 138.8
10% Notes due 2000 (issued: $150.0, December 1988) -- -- 149.9 154.3
10 1/8% Subordinated Notes due 2000 (issued: $150.0, December 1988) -- -- 149.8 154.5
Other debt 7.3 7.3 7.7 7.7
-------- -------- -------- --------
$ 748.8 $ 712.0 $1,048.6 $1,001.1
======== ======== ======== ========
Debt includes amounts the Company has borrowed and contributed to the capital of
its insurance subsidiaries or borrowed for other long-term purposes. Market
values are obtained from publicly quoted sources.
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. During 2000, the Company borrowed
$2.5 million for one day at an average annual interest rate of 7%. The Company
had no borrowings under this arrangement at December 31, 2000 or 1999.
Aggregate principal payments on debt outstanding at December 31, 2000,
are $.4 million for 2001, $0 for 2002, $.9 million for 2003, $206.0 million for
2004, $0 for 2005 and $550.0 million thereafter.
14 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, 2000 and
1999, approximately 60% of the "prepaid reinsurance premiums" and "reinsurance
recoverables" are comprised of CAIP, for which the Company retains no indemnity
risk, and the Company's Strategic Alliance partnerships. See Note 9 -
Commitments and Contingencies regarding a Strategic Alliance partnership
termination.
The effect of reinsurance on premiums written and earned as of December 31 was
as follows:
2000 1999 1998
---- ---- ----
(millions) WRITTEN EARNED WRITTEN EARNED WRITTEN EARNED
- ---------- ------- ------ ------- ------ ------- ------
Direct premiums $6,402.1 $6,547.0 $6,305.3 $5,853.5 $5,451.3 $5,100.5
Ceded (206.0) (198.6) (180.6) (169.9) (151.6) (152.5)
-------- -------- -------- -------- -------- --------
Net premiums $6,196.1 $6,348.4 $6,124.7 $5,683.6 $5,299.7 $4,948.0
======== ======== ======== ======== ======== ========
Losses and loss adjustment expenses are net of reinsurance ceded of $161.0
million in 2000, $132.8 million in 1999 and $131.9 million in 1998.
40
31
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 its subsidiaries at December 31, 2000 and 1999, and
the results of their operations and their cash flows for each of the three years
in the period ended December 31, 2000, in conformity with accounting principles
generally accepted in the United States of America. 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 of America 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 our opinion.
/s/ PricewaterhouseCoopers LLP
Cleveland, Ohio
January 24, 2001
The Progressive Corporation and Subsidiaries 41
32
Management's Discussion and Analysis of Financial Condition and Results of
Operations
The consolidated financial statements and the related notes on pages 26 through
40, together with the supplemental information on pages 47 through 55, should be
read in conjunction with the following discussion of the consolidated financial
condition and results of operations.
FINANCIAL CONDITION The Progressive Corporation is a holding company and does
not have any revenue producing operations of its own. It receives cash through
borrowings, equity sales, subsidiary dividends and other transactions, and may
use the proceeds to contribute to the capital of its insurance subsidiaries in
order to support premium growth, to repurchase its Common Shares, to retire its
outstanding indebtedness, to pay dividends and for other business purposes.
During 2000, the Company repurchased 301,054 of its Common Shares at a total
cost of $17.9 million (average $59.31 per share), including 28,554 Common Shares
(average $70.97 per share) repurchased to satisfy obligations under the
Company's benefit plans. During the three-year period ended December 31, 2000,
the Company repurchased 711,177 of its Common Shares at a total cost of $61.0
million (average $85.72 per share), including 45,677 Common Shares (average
$89.32 per share) repurchased to satisfy obligations under the Company's benefit
plans. During the same period, The Progressive Corporation received $167.5
million of dividends from its subsidiaries, net of capital contributions made to
these subsidiaries. The regulatory restrictions on subsidiary dividends are
described in Note 4 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
65/8% Senior Notes due 2029. The net proceeds of $293.7 million were used to
repay current outstanding debt upon its maturity. During 2000 and 1999, the
Company repaid $300 million and $30 million, respectively, of maturing debt. The
Company also has available a $10.0 million revolving credit agreement. The
Company's debt to total capital ratio is 21%; 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, 2000, operations generated positive cash
flows of $2,259.2 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, 2000,
aggregated $452.0 million. The Company is constructing a five building, 732,300
square foot, corporate office complex in Mayfield Village, Ohio. The estimated
cost is $129.0 million, of which $119.1 million has been paid as of December
31, 2000. Four buildings and the parking garage are completed. The fifth
building is scheduled to be completed in the first quarter 2001. In February
1999, the Company completed the third and final building of a 307,000 square
foot regional call center in Tampa, Florida. The cost of this project was $45.5
million. These construction projects are 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.
The market value of the portfolio was as follows:
(millions) DECEMBER 31, 2000 DECEMBER 31, 1999
- ---------- ----------------- -----------------
Investment-Grade Fixed Maturities:
Short/Intermediate-Term $4,470.0 64.0% $4,417.7 68.7%
Long-Term 406.3 5.8 96.0 1.5
Non-Investment-Grade Fixed Maturities 94.6 1.4 248.0 3.9
-------- ----- -------- -----
4,970.9 71.2 4,761.7 74.1
-------- ----- -------- -----
Common Stocks:
Domestic Equities(1) 905.0 13.0 825.2 12.8
Term Trust Certificates(2) 220.4 3.2 230.2 3.6
Foreign Equities(3) -- -- 84.2 1.3
Other Equity Investments(4) 73.3 1.0 104.0 1.6
-------- ----- -------- -----
1,198.7 17.2 1,243.6 19.3
Preferred Stocks(5) 813.7 11.6 422.4 6.6
-------- ----- -------- -----
Total Portfolio $6,983.3 100.0% $6,427.7 100.0%
======== ===== ======== =====
(1) Domestic equities are traded on nationally recognized securities
exchanges.
(2) Term trust certificates, the common shares of closed-end bond funds,
have the risk and reward characteristics of the underlying bonds.
(3) Foreign equities may include stock index futures and foreign currency
forwards.
(4) Includes private equities, warrants, mezzanine investments and
partnership investments.
(5) Comprised of over 95% and 89%, respectively, of fixed-rate preferred
stocks with mechanisms that are expected to provide an opportunity to
liquidate at par.
42 The Progressive Corporation and Subsidiaries
33
As of December 31, 2000, the Company's portfolio had $107.0 million in
unrealized gains, compared to $5.4 million in unrealized losses in 1999. This
increase in value was the result of increasing duration and modest rate
declines, and the equity portfolio's outperformance relative to the Russell
3000, due to overweighting in the value sector. The weighted average fully
taxable equivalent book yield of the portfolio was 6.4% for the year ended
December 31, 2000, and 6.3% for 1999 and 1998. The pretax recurring investment
yield of the portfolio was 5.7%, 5.6% and 5.5% for the years ended December 31,
2000, 1999 and 1998, respectively.
The majority of the portfolio is invested in high-grade, fixed-maturity
securities. Long-term investment-grade securities include the scheduled
principal paydowns, of asset-backed securities, that are greater than 10 years.
Non-investment-grade fixed-maturity securities 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 quality distribution of the fixed-income portfolio, which includes
fixed-maturity securities and preferred stocks, was as follows:
RATING DECEMBER 31, 2000 DECEMBER 31, 1999
------ ----------------- -----------------
AAA 50.6% 54.7%
AA 11.7 14.2
A 25.3 20.0
BBB 8.1 5.1
Non Rated/Other 4.3 6.0
----- -----
100.0% 100.0%
===== =====
The duration of the fixed-income portfolio was 3.5 years at December 31, 2000,
compared to 3.0 years at December 31, 1999.
The Company held asset-backed securities at December 31, 2000, which were
comprised of the following:
MARKET DURATION UNREALIZED
(millions) VALUE (YEARS) RATING(1) GAINS (LOSSES)(2)
---------- ----- ------- --------- -----------------
Collateralized Mortgage Obligations (CMO):
Sequential Bonds $ 252.1 3.32 AAA $ 3.2
Planned Amortization Class Bonds 236.7 4.67 AAA 4.9
--------- ------
488.8 3.98 AAA 8.1
--------- ------
Commercial Mortgage-Backed Obligations (CMB):
Interest-Only Certificates 221.3 3.42 AAA- (2.0)
Other 768.8 4.40 AA 5.0
--------- ------
990.1 4.18 AA+ 3.0
--------- ------
Other asset-backed securities(3) 725.6 2.31 AA 6.3
--------- ------
Total asset-backed securities(4) $ 2,204.5 3.52 AA+ $ 17.4
========= ======
(1) Weighted average Moody's or Standard & Poor's rating.
(2) The single largest unrealized loss in any individual CMO security was
$.3 million and in any CMB security was $4.5 million at December 31,
2000.
(3) The remainder of the asset-backed portfolio was invested primarily in
auto loan and other asset-backed securities.
(4) The majority of asset-backed securities are liquid with available
market quotes and contain no residual interests.
Investments in the Company's portfolio have varying degrees of risk. The primary
market risk exposure to the fixed-income portfolio is interest rate risk, which
is limited by managing duration to a defined range of 1.8 to 5 years. The
distribution of maturities and convexity are monitored on a regular basis.
Common stocks, excluding term trust certificates, and other risk assets, which
generally have greater risk and volatility of market value, may range from 0 to
25% of the portfolio; at December 31, 2000, these securities comprised 14.6% of
the portfolio. 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
43
34
evaluated individually and as a whole, considering the effects of cross
correlation. For the quantitative market risk disclosures, see page 52. On a
quarterly basis, the Company 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. During 2000, the
Company wrote down $46.5 million in securities determined to have an other than
temporary decline in market value, compared to $16.3 million and $32.1 million
in 1999 and 1998, respectively.
Trading securities, including derivative instruments held or issued for
trading, are entered into for the purpose of near-term profit generation. At
December 31, 2000, trading securities had a net market value of $2.3 million,
compared to $50.2 million at December 31, 1999. Net realized gains (losses) on
trading securities for the years ended December 31, 2000, 1999 and 1998 were
$(18.7) million, $.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 a short futures position as part of an anticipatory hedge
relating to the then outstanding $300 million shelf registration. Driven by
changing economic conditions, the futures position 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 $55.4 million, or $.75 per
share, in 2000, $266.7 million, or $3.58 per share, in 1999 and $449.3 million,
or $6.01 per share, in 1998. The GAAP combined ratio (CR) was 104.4 in 2000,
98.3 in 1999 and 91.6 in 1998. The one-time items for 2000 included a $20.0
million, $.17 per share or .3 points, accrual related to the estimated cost of
terminating a Strategic Alliance partnership (see Note 9), $3.2 million, $.03
per share or .1 points, additional expense associated with the termination of
the Company's defined benefit pension plan (see Note 6), $1.7 million, $.01 per
share, of severance costs associated with the Company's reorganization at the
general manager level and a $4.2 million, $.06 per share, loss related to the
realization of the foreign currency translation loss associated with the
substantial liquidation of the Company's Canadian subsidiary. For 1999, the
one-time items included $7.5 million, $.07 per share or .1 points, additional
expenses associated with previous advertising commitments that will no longer be
realized due to changes in marketing strategy, $1.2 million, $.01 per share,
reserve for the wind down of the Company's Canadian operations, and a $5.2
million, $.05 per share, gain on the sale of the corporate aircraft (see Note
12). There were no one-time items in 1998. The deterioration in results was due
to several factors as discussed below.
Direct premiums written increased 2% to $6,402.1 million in 2000,
compared to $6,305.3 million in 1999 and $5,451.3 million in 1998. Net premiums
written increased 1% in 2000, compared to 16% in 1999 and 14% in 1998. 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 $50.9 million in 2000, $49.7
million in 1999 and $60.7 million in 1998, 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 12% in 2000, compared to 15% in 1999 and
18% in 1998.
The Company's Personal Lines business units write insurance for private
passenger automobiles and recreation vehicles and currently represent 91% of the
Company's total premiums written. Personal Lines volume declined 1% in 2000 and
grew 16% and 15% in 1999 and 1998, respectively. The reduction in volume for
2000 is discussed below while increases for 1999 and 1998 primarily reflect an
increase in unit sales.
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 Agencies and through Strategic
Alliance business relationships (other insurance companies, financial
institutions, employers and national brokerage agencies). 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.
In addition to its Personal Lines business, 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.
44
35
Underwriting results for the Company's Personal Lines, including its
channel components, and the other lines of business were as follows:
(millions) 2000 1999 1998
---------- ---- ---- ----
NET PREMIUMS WRITTEN (NPW)
Personal Lines - Agent $ 4,358.4 $ 4,746.5 $4,390.4
Personal Lines - Direct 1,293.1 955.9 531.9
----------- ----------- --------
Total Personal Lines 5,651.5 5,702.4 4,922.3
Other Lines 544.6 422.3 377.4
----------- ----------- --------
Companywide $ 6,196.1 $ 6,124.7 $5,299.7
=========== =========== ========
NET PREMIUMS EARNED
Personal Lines - Agent $ 4,643.4 $ 4,548.7 $4,177.5
Personal Lines - Direct 1,220.6 745.4 403.2
----------- ----------- --------
Total Personal Lines 5,864.0 5,294.1 4,580.7
Other Lines 484.4 389.5 367.3
----------- ----------- --------
Companywide $ 6,348.4 $ 5,683.6 $4,948.0
=========== =========== ========
STANDARD/PREFERRED SALES AS A % OF PERSONAL LINES NPW 54% 47% 35%
=========== =========== ========
INTERNET SALES AS % OF PERSONAL LINES - DIRECT NPW 15% 7% 2%
=========== =========== ========
PERSONAL LINES - AGENT CR
Loss & loss adjustment expense ratio 85.0 75.8 68.9
Underwriting expense ratio 18.8 20.7 21.7
----------- ----------- --------
103.8 96.5 90.6
=========== =========== ========
PERSONAL LINES - DIRECT CR
Loss & loss adjustment expense ratio 80.9 74.6 70.8
Underwriting expense ratio 29.6 38.5 36.7
----------- ----------- --------
110.5 113.1 107.5
=========== =========== ========
PERSONAL LINES - TOTAL CR
Loss & loss adjustment expense ratio 84.1 75.6 69.1
Underwriting expense ratio 21.1 23.2 23.0
----------- ----------- --------
105.2 98.8 92.1
=========== =========== ========
OTHER LINES - CR
Loss & loss adjustment expense ratio 71.3 65.1 57.7
Underwriting expense ratio 23.2 25.8 27.5
----------- ----------- --------
94.5 90.9 85.2
=========== =========== ========
COMPANYWIDE GAAP CR
Loss & loss adjustment expense ratio 83.2 74.9 68.2
Underwriting expense ratio 21.2 23.4 23.4
----------- ----------- --------
104.4 98.3 91.6
=========== =========== ========
COMPANYWIDE ACCIDENT YEAR
Loss & loss adjustment expense ratio 82.0 75.4 71.9
=========== =========== ========
45
36
The Agent channel net premiums written decreased 8% in 2000, as expected,
compared to increases of 8% and 9% in 1999 and 1998, respectively. The decrease
in 2000 was primarily a result of the rate increases filed by the Company in
almost every state during the last year as well as the shift in business to
six-month terms, while the prior year increases were primarily due to increases
in unit sales. The Company has been raising rates for 15 months and its current
need for even higher rates vary considerably by state. Agent auto policies in
force decreased 7% in 2000, driven by these rate increases, primarily in New
York and Florida. The Company's Direct channel net premiums written increased
35% in 2000, 80% in 1999 and 109% in 1998. For 2000, the Direct business
policies in force increased 45%. Recognizing seasonal variations, the quote
volume on the Direct business remained steady for the second half of 2000, but
increased relative to the first six months. The Company continues to see an
increase in the number of quotes generated via the Internet. Conversion rates on
the Direct business decreased slightly through the third quarter 2000, with some
minor increases in the fourth quarter due to seasonality.
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 83% in 2000, compared
to 75% in 1999 and 68% in 1998. The increase in the loss ratios were driven
primarily by three factors discussed below: rate level, trend and loss reserve
adequacy.
The first factor impacting the increase in loss ratios is rate level.
In 2000, the Company generated underwriting profits in just under half of the
states in which it writes business, with the remaining states still generating
combined ratios over 100, reflecting the Company's failure to raise rates
sufficiently to keep current with loss cost trends. In particular, New York
currently represents the most significant challenge to the Company. It is
estimated that the turnaround time to bring this state back to profitability
will be considerably longer than in the other states. The Company will continue
to monitor and adjust rates as needed to meet its financial goals. Over the past
year, the Company has been committed to ensuring that a majority of its new and
renewal policies have six-month terms, which speeds by six months the effect of
rate changes. At December 2000, 80% of new auto policies written had six-month
terms, compared to 35% for 1999 and 37% for 1998; the Company expects this
number to increase into 2001.
The second factor contributing to the increase in claim costs is the
increase in severity trend that the Company is experiencing. Based on industry
data from the National Association of Independent Insurers and review of other
insurance company filings, it appears that the escalation in loss costs this
year is impacting many other carriers as well. Although the Company's loss costs
are increasing, the rate of increase has slowed throughout 2000, but the Company
does not expect these costs to level off in the near future.
The third factor facing the Company is loss reserve adequacy. During
2000, the Company experienced $75.8 million, or 1.2 points, of adverse loss
reserve development relating to prior accident years, compared to $29.8 million,
or .5 points, of favorable development in 1999, and $184.2 million, or 3.7
points, of favorable development in 1998. The Company conducts extensive
quarterly reviews to help ensure that the Company is meeting its objective of
maintaining adequate loss reserves.
Policy acquisition and other underwriting expenses as a percentage of
premiums earned were 21% in 2000, and 23% in both 1999 and 1998. For the Agent
channel, the expense ratio decrease was driven primarily by lower incentive
compensation costs and lower commission expenses as a result of the mix of
business shifting toward more renewals, which have lower commission expenses
associated with it. For the Direct business, the decrease was driven by higher
productivity in our Direct sales call centers, more efficient purchases of
television media and a greater percentage of renewal business, which has lower
expenses associated with it.
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.
The Company is named as defendant in a number of purported class action
lawsuits, such as those alleging damages as a result of the Company's total loss
evaluation methodology, 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.
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, uncertainties related
to estimates, assumptions and projections generally; changes in economic
conditions (including changes in interest rates and financial markets); pricing
competition and other initiatives by competitors; legislative and regulatory
developments; weather conditions (including the severity and frequency of
storms, hurricanes, snowfalls, hail and winter conditions); driving patterns;
court decisions and trends in litigation and health care costs; 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.
46
37
Quarterly Financial and Common Share Data
(not covered by report of independent accountants)
(millions - except per share amounts)
NET INCOME OPERATING
(LOSS) INCOME (LOSS)(1) STOCK PRICE(2)
-------------------- -------------------- -------------------------------------------
OPERATING PER PER RATE OF DIVIDENDS
QUARTER REVENUES(3) TOTAL SHARE(5) TOTAL(4) SHARE(5) HIGH LOW CLOSE RETURN(6) PER SHARE
- ------- ----------- ----- -------- -------- -------- ---- --- ----- --------- ---------
2000
1 $1,526.2 $(46.6) $(.64) $(36.6) $(.50) $ 85.75 $ 45.00 $ 76.06 $.065
2 1,584.9 (14.1) (.19) 4.0 .06 100.00 60.00 74.00 .065
3 1,620.5 58.8 .79 37.9 .51 85.38 62.25 81.88 .070
4 1,637.3 48.0 .64 50.1 .67 111.00 69.63 103.63 .070
- --- -------- ------ ----- ------ ----- ------- ------- ------- ---- -----
$6,368.9 $ 46.1 $ .62 $ 55.4 $ .75 $111.00 $ 45.00 $103.63 42.3% $.270
=== ======== ====== ===== ====== ===== ======= ======= ======= ==== =====
1999
1 $1,333.3 $105.3 $1.41 $104.0 $1.39 $174.25 $115.44 $143.50 $.065
2 1,416.8 112.1 1.50 98.5 1.32 152.13 127.38 145.00 .065
3 1,474.5 74.0 .99 59.5 .80 144.94 81.50 81.69 .065
4 1,506.5 3.8(7) .05(7) 4.7(7) .06(7) 97.63 68.50 73.13 .065
- --- -------- ------ ----- ------ ----- ------- ------- ------- ---- -----
$5,731.1 $295.2 $3.96 $266.7 $3.58 $174.25 $ 68.50 $ 73.13 (56.7)% $.260
=== ======== ====== ===== ====== ===== ======= ======= ======= ==== =====
1998
1 $1,156.2 $120.1 $1.58 $102.8 $1.35 $135.50 $106.69 $134.69 $.060
2 1,237.2 123.0 1.61 109.1 1.43 150.00 126.50 141.00 .060
3 1,290.9 135.1 1.81 134.4 1.80 156.75 95.00 112.75 .065
4 1,301.9 78.5(8) 1.05(8) 103.1 1.38 172.00 94.00 169.38 .065
- --- -------- ------ ----- ------ ----- ------- ------- ------- ---- -----
$4,986.2 $456.7 $6.11 $449.3 $6.01 $172.00 $ 94.00 $169.38 41.6% $.250
=== ======== ====== ===== ====== ===== ======= ======= ======= ==== =====
(1) Represents net income less realized gains (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 47
38
Ten Year Summary -- Financial Highlights
(not covered by report of independent accountants)
(millions - except per share amounts and number of people employed) 2000 1999
- ------------------------------------------------------------------- ---- ----
INSURANCE COMPANIES SELECTED FINANCIAL INFORMATION AND OPERATING
STATISTICS -- STATUTORY BASIS
Reserves:
Loss and loss adjustment expense(1) $ 2,785.3 $ 2,200.2
Unearned premiums 2,542.4 2,694.5
Policyholders' surplus(1) 2,177.0 2,258.9
Ratios:
Net premiums written to policyholders' surplus 2.8 2.7
Loss and loss adjustment expense reserves to policyholders' surplus 1.3 1.0
Loss and loss adjustment expense 83.2 75.0
Underwriting expense 21.0 22.1
---------- ----------
Statutory combined ratio 104.2 97.1
SELECTED CONSOLIDATED FINANCIAL INFORMATION -- GAAP BASIS
Total revenues $ 6,771.0 $ 6,124.2
Total assets 10,051.6 9,704.7
Total shareholders' equity(2) 2,869.8 2,752.8
Common Shares outstanding 73.5 73.1
Common Share price
High $ 111.00 $ 174.25
Low 45.00 68.50
Close(3) 103.63 73.13
Market capitalization $ 7,616.8 $ 5,345.4
Book value per Common Share(2) $ 39.04 $ 37.66
Return on average common shareholders' equity(4) 1.7% 10.9%
Debt outstanding $ 748.8 $ 1,048.6
Ratios:
Debt to total capital 21% 28%
Earnings to fixed charges(5) 1.3x 5.7x
Price to earnings(6) 138 20
Price to book 2.7 1.9
GAAP underwriting margin(2) (4.4)% 1.7%
Number of people employed 19,490 18,753
(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/average common
shareholders' equity.
(5) 1995 and prior represents the ratio of earnings to combined fixed
charges and preferred share dividends.
(6) Represents the closing stock price/operating earnings per share.
All share and per share amounts were adjusted for the December 1992, 3 for 1
stock split.
48 The Progressive Corporation and Subsidiaries
39
1998 1997 1996 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ---- ---- ----
$ 1,945.8 $ 1,867.5 $ 1,532.9 $ 1,314.4 $ 1,100.2 $ 1,053.7 $ 994.7 $ 901.7
2,253.3 1,901.9 1,382.9 1,140.4 954.8 688.9 538.5 513.6
2,029.9 1,722.9 1,292.4 1,055.1 945.1 701.9 658.3 676.7
2.6 2.7 2.7 2.8 2.6 2.6 2.2 2.0
1.0 1.1 1.2 1.2 1.2 1.5 1.5 1.3
68.5 71.1 70.2 71.6 64.2 62.6 68.3 65.7
22.4 20.7 19.8 21.4 22.4 25.4 29.8 33.5
- ---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
90.9 91.8 90.0 93.0 86.6 88.0 98.1 99.2
$ 5,292.4 $ 4,608.2 $ 3,478.4 $ 3,011.9 $ 2,415.3 $ 1,954.8 $ 1,738.9 $ 1,493.1
8,463.1 7,559.6 6,183.9 5,352.5 4,675.1 4,011.3 3,440.9 3,317.2
2,557.1 2,135.9 1,676.9 1,475.8 1,151.9 997.9 629.0 465.7
72.5 72.3 71.5 72.1 71.2 72.1 67.1 63.3
$ 172.00 $ 120.88 $ 72.25 $ 49.50 $ 40.50 $ 46.13 $ 29.38 $ 20.63
94.00 61.50 40.38 34.75 27.75 26.63 14.75 15.00
169.38 119.88 67.38 48.88 35.00 40.50 29.13 18.00
$ 12,279.7 $ 8,667.0 $ 4,817.3 $ 3,523.9 $ 2,492.0 $ 2,920.1 $ 1,954.3 $ 1,139.4
$ 35.27 $ 29.54 $ 23.45 $ 19.31 $ 14.97 $ 12.62 $ 7.94 $ 5.83
19.3% 20.9% 20.5% 19.6% 27.4% 36.0% 34.7% 6.7%
$ 776.6 $ 775.9 $ 775.7 $ 675.9 $ 675.6 $ 477.1 $ 568.5 $ 644.0
23% 27% 32% 31% 37% 32% 47% 58%
10.2x 9.2x 7.7x 5.6x 6.1x 7.1x 3.7x 1.5x
28 27 16 17 13 15 17 15
4.8 4.1 2.9 2.5 2.3 3.2 3.7 3.1
8.4% 6.6% 8.5% 5.7% 11.5% 10.7% 3.5% (3.7)%
15,735 14,126 9,557 8,025 7,544 6,101 5,591 6,918
49
40
Ten Year Summary -- GAAP Consolidated Operating Results
(not covered by report of independent accountants)
(millions - except per share amounts) 2000 1999
------------------------------------- ---- ----
Direct premiums written:
Personal lines $ 5,773.2 $ 5,799.4
All other lines 628.9 505.9
---------- ----------
Total direct premiums written 6,402.1 6,305.3
Reinsurance assumed -- --
Reinsurance ceded (206.0) (180.6)
---------- ----------
Net premiums written 6,196.1 6,124.7
Net change in unearned premiums reserve(1) 152.3 (441.1)
---------- ----------
Premiums earned 6,348.4 5,683.6
---------- ----------
Expenses:
Losses and loss adjustment expenses(2) 5,279.4 4,256.4
Policy acquisition costs 788.0 745.0
Other underwriting expenses 559.3 583.8
---------- ----------
Total underwriting expenses 6,626.7 5,585.2
---------- ----------
Underwriting profit (loss) before taxes (278.3) 98.4
Provision (benefit) for income taxes (97.4) 34.4
---------- ----------
Underwriting profit (loss) after taxes (180.9) 64.0
Service operations profit (loss) after taxes (.6) 4.3
---------- ----------
(181.5) 68.3
Investment income after taxes 278.3 249.6
Net realized gains on security sales after taxes 11.0 30.7
Interest expense after taxes (50.6) (49.7)
Non-recurring items after taxes(8) (4.2) --
Other income (expenses) after taxes(3) (6.9) (3.7)
---------- ----------
Income before tax adjustments and cumulative
effect of accounting change 46.1 295.2
Tax adjustments(4) -- --
Cumulative effect of accounting change(5) -- --
---------- ----------
Net income $ 46.1 $ 295.2
========== ==========
Operating income(6) $ 55.4 $ 266.7
========== ==========
Per share(7)
Net income(2) $ .62 $ 3.96
Operating income .75 3.58
Dividends .270 .260
Average equivalent shares
Basic 73.2 72.9
Diluted 74.3 74.6
(1) Amount represents change in unearned premiums reserve less change in
prepaid reinsurance premiums.
(2) In 1994, the "supplemental reserve" was eliminated, resulting in a
one-time decrease to losses and loss adjustment expenses of $71.0
million, or $.62 per share.
(3) Reflects investment expenses after taxes and other tax adjustments.
Other income includes a $5.2 million pretax gain on the sale of the
corporate aircraft in 1999 and $106.0 million of pretax income for the
Proposition 103 reserve reduction in 1992.
(4) Reflects a deferred tax asset write-down.
(5) Reflects adoption of SFAS 109, "Accounting for Income Taxes."
(6) Represents net income less net realized gains (losses) on security
sales and one-time items.
(7) Presented on a diluted basis. In 1997, the Company adopted SFAS 128,
"Earnings Per Share," and, as a result, restated prior periods per
share amounts, if applicable.
(8) 2000 reflects a foreign currency translation loss; 1993 reflects a
charge on debt extinguishment; 1992 reflects the termination of an
investment management agreement and the end of an employment agreement
with the then Chairman of the Company's Board of Directors.
All share and per share amounts were adjusted for the December 1992, 3 for 1
stock split.
50 The Progressive Corporation and Subsidiaries
41
1998 1997 1996 1995 1994 1993 1992 1991
---- ---- ---- ---- ---- ---- ---- ----
$ 4,987.1 $ 4,355.9 $ 3,165.4 $ 2,644.6 $ 2,181.7 $ 1,548.9 $ 1,214.6 $ 1,047.4
464.2 469.3 473.0 424.3 463.4 417.5 422.2 489.4
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
5,451.3 4,825.2 3,638.4 3,068.9 2,645.1 1,966.4 1,636.8 1,536.8
-- -- 3.8 .1 2.9 9.2 4.3 .1
(151.6) (160.1) (200.5) (156.2) (190.8) (156.4) (189.9) (212.3)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
5,299.7 4,665.1 3,441.7 2,912.8 2,457.2 1,819.2 1,451.2 1,324.6
(351.7) (475.6) (242.4) (185.6) (266.1) (150.5) (25.1) (37.7)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
4,948.0 4,189.5 3,199.3 2,727.2 2,191.1 1,668.7 1,426.1 1,286.9
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
3,376.3 2,967.5 2,236.1 1,943.8 1,397.3 1,028.0 930.9 858.0
659.9 607.8 482.6 459.6 391.5 311.6 304.1 313.7
495.8 336.0 208.5 167.2 150.8 151.3 141.5 162.1
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
4,532.0 3,911.3 2,927.2 2,570.6 1,939.6 1,490.9 1,376.5 1,333.8
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
416.0 278.2 272.1 156.6 251.5 177.8 49.6 (46.9)
145.6 97.4 95.2 54.8 88.0 62.2 16.9 (15.9)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
270.4 180.8 176.9 101.8 163.5 115.6 32.7 (31.0)
4.8 .9 2.8 5.6 6.5 4.4 (2.8) (1.4)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
275.2 181.7 179.7 107.4 170.0 120.0 29.9 (32.4)
221.3 205.3 175.6 156.2 131.2 107.1 110.4 121.1
7.4 64.0 4.6 30.4 15.5 70.1 9.6 4.9
(39.7) (42.0) (40.0) (37.1) (35.9) (25.8) (29.4) (31.6)
-- -- -- -- -- (2.6) (42.6) --
(7.5) (9.0) (6.2) (6.4) (6.5) (1.5) 61.7 (14.9)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
456.7 400.0 313.7 250.5 274.3 267.3 139.6 47.1
-- -- -- -- -- -- -- (14.2)
-- -- -- -- -- -- 14.2 --
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
$ 456.7 $ 400.0 $ 313.7 $ 250.5 $ 274.3 $ 267.3 $ 153.8 $ 32.9
========== ========== ========== ========== ========== ========== ========== ==========
$ 449.3 $ 336.0 $ 309.1 $ 220.1 $ 212.7 $ 197.3 $ 129.8 $ 85.1
========== ========== ========== ========== ========== ========== ========== ==========
$ 6.11 $ 5.31 $ 4.14 $ 3.26 $ 3.59 $ 3.59 $ 2.08 $ .41
6.01 4.46 4.12 2.85 2.76 2.62 1.74 1.19
.250 .240 .230 .220 .210 .200 .191 .172
72.5 72.0 71.6 71.8 71.6 69.3 60.7 65.4
74.7 75.3 74.2 74.2 74.0 71.8 70.9 66.6
51
42
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, 2000, 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, 2000
were:
MARKET VALUE
------------
-200 BPS -100 BPS +100 BPS +200 BPS
(millions) CHANGE CHANGE ACTUAL CHANGE CHANGE
- ---------- ------ ------ ------ ------ ------
U.S. Government obligations $ 505.7 $ 477.3 $ 450.7 $ 425.9 $ 402.5
State and local government obligations 1,107.8 1,065.6 1,025.4 987.2 951.4
Asset-backed securities 2,298.6 2,273.0 2,204.5 2,133.6 2,056.2
Other debt securities 1,174.6 1,137.3 1,103.5 1,070.1 1,037.7
Preferred stocks 868.5 841.1 813.7 786.2 758.8
Term trust certificates 222.6 221.5 220.4 219.3 218.1
Short-term investments 186.8 186.8 186.8 186.8 186.8
---------- --------- --------- --------- ---------
$ 6,364.6 $ 6,202.6 $ 6,005.0 $ 5,809.1 $ 5,611.5
========== ========= ========= ========= =========
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 95%
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, 2000
were:
HYPOTHETICAL MARKET CHANGES
---------------------------
MARKET
(millions) VALUE +10% -10%
- ---------- ----- ---- ----
Common stocks $ 978.3 $ 1,071.6 $ 885.0
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 .95. 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%. There were no stock index futures in the common stock
portfolio at December 31, 2000. The model does not include term trust
certificates, which comprised $220.4 million of the common stock portfolio at
the end of 2000, as these securities are subject to interest rate risk rather
than equity market risk.
52 The Progressive Corporation and Subsidiaries
43
Financial instruments subject to foreign currency risk as of December 31, 2000
were:
MARKET NOTIONAL HYPOTHETICAL
(millions) VALUE VALUE GAIN (LOSS)
---------- ----- ----- -----------
Canadian fixed income investments $ 40.0 N/A $ (4.0)
Other foreign fixed income investments 2.2 N/A (.2)
Foreign currency forwards - liabilities (.6) 4.9 .5
------ --- ------
$ 41.6 N/A $ (3.7)
====== === ======
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, 2000, the
Company did not have any cross currency exposures.
TRADING FINANCIAL INSTRUMENTS
At December 31, 2000, the Company had trading securities, including derivative
instruments used for trading purposes, with a net market value of $2.3 million.
During 2000, net activity in the trading portfolio was not material to the
Company's financial position or cash flows.
For 2000, the Company realized $18.7 million of net losses on trading
securities. Exposure to loss from open trading positions was not material
individually or in the aggregate.
53
44
Analysis of Loss and Loss Adjustment Expenses (LAE) Development
(not covered by report of independent accountants)
(millions)
For the years ended
December 31, 1990 1991 1992 1993 1994(3) 1995 1996 1997 1998 1999 2000
- ------------ ---- ---- ---- ---- ------- ---- ---- ---- ---- ---- ----
Loss and LAE
reserves(1) $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 $2,785.3
Re-estimated
reserves as of:
One year later 748.8 810.0 857.9 869.9 1,042.1 1,208.6 1,429.6 1,683.3 1,916.0 2,276.0
Two years later 726.5 771.9 765.5 837.8 991.7 1,149.5 1,364.5 1,668.5 1,910.6
Three years later 712.7 718.7 737.4 811.3 961.2 1,118.6 1,432.3 1,673.1
Four years later 683.7 700.1 725.2 794.6 940.6 1,137.7 1,451.0
Five years later 666.3 695.1 717.3 782.9 945.5 1,153.3
Six years later 664.8 692.6 711.1 780.1 952.7
Seven years later 664.5 688.2 709.2 788.6
Eight years later 661.4 687.9 714.6
Nine years later 660.4 690.3
Ten years later 665.9
Cumulative redundancy/
(deficiency) $125.7 $171.2 $241.8 $ 223.8 $ 146.0 $ 161.1 $ 81.9 $ 194.4 $ 35.2 $ (75.8)
Percentage(2) 15.9 19.9 25.3 22.1 13.3 12.3 5.3 10.4 1.8 (3.4)
The chart represents the development of the property-casualty loss and LAE
reserves for 1990 through 1999. The reserves are re-estimated based on
experience as of the end of each succeeding year and are increased or decreased
as more information becomes known about the frequency and severity of claims for
individual years. The cumulative redundancy/(deficiency) represents the
aggregate change in the estimates over all prior years.
(1) Represents loss and LAE reserves net of reinsurance recoverables on
unpaid losses at the balance sheet date.
(2) Cumulative redundancy/(deficiency)/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."
54 The Progressive Corporation and Subsidiaries
45
Direct Premiums Written by State
(not covered by report of independent accountants)
(millions) 2000 1999 1998 1997 1996
- ---------- ---- ---- ---- ---- ----
Florida $ 773.2 12.1% $ 895.6 14.2% $ 784.4 14.4% $ 663.0 13.7% $ 467.4 12.9%
Ohio 563.2 8.8 528.1 8.4 447.7 8.2 404.3 8.4 340.8 9.4
Texas 532.6 8.3 557.6 8.8 518.6 9.5 509.4 10.6 349.9 9.6
New York 425.6 6.6 600.4 9.5 522.2 9.6 446.3 9.2 358.0 9.8
California 376.6 5.9 416.0 6.6 343.2 6.3 291.7 6.0 171.6 4.7
Georgia 368.6 5.8 301.9 4.8 277.8 5.1 261.9 5.4 212.1 5.8
Pennsylvania 312.3 4.9 322.3 5.1 292.3 5.4 248.3 5.1 201.3 5.5
All other 3,050.0 47.6 2,683.4 42.6 2,265.1 41.5 2,000.3 41.6 1,537.3 42.3
-------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total $6,402.1 100.0% $6,305.3 100.0% $5,451.3 100.0% $4,825.2 100.0% $3,638.4 100.0%
======== ===== ======== ===== ======== ===== ======== ===== ======== =====
The Progressive Corporation and Subsidiaries 55
46
DIRECTORS Stephen R. Hardis(2),(4) Norman S. Matthews(3) CORPORATE OFFICERS
Chairman of the Board, Consultant,
Milton N. Allen(1),(2) Axcelis Technologies, Inc. formerly President, Peter B. Lewis
Consultant and Trustee, (manufacturing) Federated Department Stores, Inc. Chairman
Profit and Nonprofit (retailing)
Organizations Janet Hill(1) Glenn M. Renwick
Vice President, Glenn M. Renwick President and
B. Charles Ames(1) Alexander & Associates, Inc. President and Chief Executive Officer
Partner, (management consulting) Chief Executive Officer
Clayton, Dubilier & Rice, Inc. Charles E. Jarrett
(investment banking) Jeffrey D. Kelly(4) Donald B. Shackelford(3) Secretary
Executive Vice President and Chairman,
James E. Bennett III(3) Chief Financial Officer, Fifth Third Bank, Central Ohio W. Thomas Forrester
President and National City Corporation (commercial bank) Treasurer
Chief Executive Officer, (commercial banking)
EmployOn.com LLC Jeffrey W. Basch
(online recruiting) Peter B. Lewis(2),(4) (1) Audit Committee member Vice President
Chairman of the Board
Charles A. Davis(4) (2) Executive Committee member Thomas A. King
President and Vice President
Chief Executive Officer, (3) Executive Compensation
MMC Capital, Inc. Committee member
(private equity investing)
(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
20, 2001, at 10:00 a.m. There were 3,766 shareholders of record on December 31,
2000.
PRINCIPAL OFFICE
The principal office of The Progressive Corporation is at 6300 Wilson Mills
Road, Mayfield Village, Ohio 44143.
Web site: progressive.com
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. The 2001 quarterly dividend record dates, subject to Board approval,
are as follows: March 9, June 8, September 14 and December 14.
SHAREHOLDER/INVESTOR RELATIONS
The Progressive Corporation does not maintain a mailing list for distribution of
shareholders' reports. To view Progressive's publicly filed documents as well as
its earnings releases, shareholders can access the Company's Web site:
www.progressive.com/investors.
To request copies of public financial information on the Company, write to: The
Progressive Corporation, Investor Relations, 6300 Wilson Mills Road, Box W33,
Mayfield Village, Ohio 44143, e-mail: investor_relations@progressive.com or
call: 1-440-446-7165.
For specific questions on financial information, call: 1-440-446-2851 or e-mail:
investor_relations@progressive.com.
For stock ownership account information, call National City Bank at:
1-800-622-6757.
For all other Company information, call: 1-440-461-5000 or e-mail:
webmaster@progressive.com.
INTERACTIVE ANNUAL REPORT
The Progressive Corporation's 2000 Annual Report, in an interactive format, can
be found at: www.progressive.com/annualreport.
56
47
(C) 2001 The Progressive Corporation
Design Nesnadny + Schwartz, Cleveland + New York + Toronto
Artwork Greg Colson, represented by Griffin Contemporary and Sperone Westwater
Printing Fortran Printing
48
THE PROGRESSIVE 6300 WILSON MILLS ROAD
CORPORATION MAYFIELD VILLAGE, OHIO 44143
WWW.PROGRESSIVE.COM
440.461.5000
[PROGRESSIVE LOGO]