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Q - DOES THE PROGRESSIVE CORPORATION HAVE ANY GOOD NEWS TO REPORT?
A - WE'RE GLAD YOU ASKED THAT QUESTION.
1993 PERFORMANCE HIGHLIGHTS 4 VISION, CORE VALUES AND OBJECTIVES
6 LETTER TO SHAREHOLDERS 13 FINANCIAL REVIEW 32
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Photograph: "Wheels Triptych," Zeke Berman, 1994
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FINANCIAL HIGHLIGHTS
(millions--except per share amounts)
Average Annual Compounded
Rate of Increase (Decrease)
FOR THE YEAR 1993 1992 % CHANGE 1989-1993 1984-1993
Direct premiums written . . . . . . . . . . . $ 1,966.4 $ 1,636.8 20 8 23
Net premiums written . . . . . . . . . . . . 1,819.2 1,451.2 25 7 22
Net premiums earned . . . . . . . . . . . . . 1,668.7 1,426.1 17 7 21
Total revenues . . . . . . . . . . . . . . . 1,954.8 1,738.9 12 8 22
Income before cumulative effect of
accounting change . . . . . . . . . . . . . 267.3 139.6 91 20 28
Net income . . . . . . . . . . . . . . . . . 267.3 153.8 74 20 26
Per share:
Income before cumulative effect of
accounting change . . . . . . . . . . . . 3.58 1.85 94 24 28
Net income . . . . . . . . . . . . . . . . 3.58 2.05 75 24 26
Underwriting margin . . . . . . . . . . . . . 10.7% 3.5%
AT YEAR-END
Consolidated shareholders' equity . . . . . . $ 997.9 $ 629.0 59 19 29
Common Shares outstanding . . . . . . . . . . 72.1 67.1 7 (2) --
Book Value per Common Share . . . . . . . . . $ 12.62 $ 7.94 59 20 27
Return on average shareholders' equity . . . 36.0% 34.7%
STOCK PRICE APPRECIATION 1 1-YEAR 5-YEAR 10-YEAR
Progressive . . . . . . . . . . . . . . . . . 39.8% 40.7% 28.2%
S&P 500 . . . . . . . . . . . . . . . . . . . 10.1% 14.6% 14.9%
<FN>
1 Assumes dividend reinvestment.
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1993 PERFORMANCE HIGHLIGHTS
Q - HOW DID PROGRESSIVE PERFORM AGAINST THE PROPERTY-CASUALTY INDUSTRY?
A - GREAT! OUR 10.7 PERCENT COMPANYWIDE UNDERWRITING PROFIT MARGIN
WAS ALMOST 20 POINTS BETTER THAN THE INDUSTRY, THE 5TH TIME IN 15 YEARS THAT
WE EXCEEDED THE INDUSTRY BY MORE THAN 15 POINTS.
Q - HOW DID THE CORE BUSINESS DO?
A - THE CORE BUSINESS CONTINUES TO GROW PROFITABLY, DESPITE MORE
COMPANIES TRYING TO WRITE IN THE NONSTANDARD AUTO NICHE. IN 1993, THE CORE
BUSINESS GREW 25 PERCENT WITH AN UNDERWRITING PROFIT OF 10 PERCENT.
ABOUT THE ART Five years ago, Progressive set out on the path of change.
Knowing we have to respond to consumers' dissatisfaction with auto insurance,
we are learning how to lower consumers' cost and improve their experience
sufficiently to turn their anger into delight. We have redefined our strategy,
driven by our strong belief that lower prices, more information, more options
and immediate service is what is needed to delight customers.
We commissioned artist Zeke Berman to respond visually to this strategy. Berman
constructed a series of images representing his unique interpretation of the
"car." His beautifully crafted diagrammatic tableaux are assembled into forms
that balance whimsy, illusion and invention. Berman's photographs will become
part of Progressive's growing collection of contemporary art.
Intrigued by the diagrammatic character of Berman's work and the concept of
redefinition, our annual report designers looked up the word "progressive" in
the dictionary. That inquiry inspired the use of the Merriam-Webster
illustrations and many of the graphic elements that appear throughout this
annual report.
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Q - IS PROGRESSIVE IN THE STANDARD/PREFERRED AUTO MARKET?
A - YES, WE CONTINUE TESTING OUR STANDARD AND PREFERRED
PRODUCTS, AND, IN 1993, THESE PRODUCTS REPRESENTED 4.5 PERCENT OF OUR TOTAL
PRIVATE PASSENGER AUTO PREMIUMS. WE ARE THE NINTH LARGEST PRIVATE PASSENGER
AUTO INSURER IN THE COUNTRY.
Q - HOW DOES PROGRESSIVE DETERMINE HOW MUCH CAPITAL IT NEEDS?
A - WHEN WE ANTICIPATE SLOW GROWTH, WE CONSIDER REDUCING CAPITAL.
WHEN WE EXPECT RAPID GROWTH, WE INCREASE CAPITAL. OVER THE LAST 20 YEARS, OUR
GROWTH RATE HAS RANGED FROM SMALL DECLINES TO NEARLY 70 PERCENT GROWTH AND OUR
RATIO OF FUNDED DEBT TO CAPITAL RANGED FROM 61 PERCENT TO 24 PERCENT.
ABOUT PROGRESSIVE The Progressive insurance organization began business in
1937. Progressive Casualty Insurance Company was founded in 1956. The
Progressive Corporation, an insurance holding company formed in 1965, owns 52
operating subsidiaries and has one mutual insurance company affiliate. The
companies provide personal automobile insurance and other specialty
property-casualty insurance and related services sold primarily through
independent insurance agents in the United States and Canada. The 1993
estimated industry premiums, which include personal auto insurance in the U.S.
and Ontario, Canada, as well as insurance for commercial vehicles, were $115
billion and Progressive's share was 1.5 percent.
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VISION, CORE VALUES AND OBJECTIVES
Communicating a clear picture of who we are, what we strive to achieve
(Vision), what guides our behavior (Core Values), how we measure our
performance (Objectives), and how we will achieve them (Strategies) permits
all people associated with Progressive to understand and help us achieve our
vision and objectives.
VISION We seek to be an excellent, innovative, growing and enduring business by
reducing the human trauma and economic costs of auto accidents in
cost-effective and profitable ways that delight customers. We seek to earn a
superior return on equity and to provide a positive environment to attract
quality people and achieve ambitious growth plans.
CORE VALUES Progressive's Core Values are pragmatic statements of what works
best for us in the real world. Core Values govern our decisions and behavior.
We want them understood and embraced by all Progressive people. Core Values are
standards by which we measure ourselves. Growth and change provide new
perspective and require regular refinement of Core Values.
INTEGRITY. We revere honesty. We adhere to high ethical standards, report
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 be clear and open about 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. "Quality" is
Progressive's process for teaching and encouraging our people to improve
performance and reduce the costs of what they do for customers. We base reward
on results and promotion on ability.
PROFIT. The free-enterprise system rewards most those who most enhance the
health and happiness of their customers, communities and people. Profit
motivates Progressive to invest in new ways to do this. Enhancing people's
health and happiness is the ultimate goal, and healthy, happy people do it
best.
Q - IF I SPENT $1,800 TO BUY 100 SHARES OF PROGRESSIVE STOCK IN THE INITIAL
PUBLIC OFFERING IN 1971, WHAT WOULD IT BE WORTH TODAY?
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A - WHAT A GREAT INVESTMENT. AT THE END OF 1993, AFTER ALL OF THE STOCK
SPLITS, YOU WOULD HAVE 7,689 SHARES WORTH OVER $311,000 AND RECEIVED OVER
$9,000 IN DIVIDENDS -- A 25.5 PERCENT ANNUAL RETURN.
FINANCIAL OBJECTIVES
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 successive
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.
Most Progressive businesses are managed by a product manager, who is
responsible to a Division President. Each business has different capital
requirements, risks, growth rate, potential, competition, regulatory issues,
cash flows and investment income. We consider these differences when reaching
agreement with the product manager and Division President on their volume and
profit plans.
RETURN ON SHAREHOLDERS' EQUITY Our most important financial goal is to achieve
an after-tax return on shareholders' equity that is at least 15 percentage
points greater than the rate of inflation (measured by the GDP deflator which
was 2.8 percent in 1993, and averaged 3.9 percent over the past five years and
ten years). Return on equity was 36.0 percent in 1993, averaged 24.8 percent
over the past five years and 25.3 percent over the past ten years.
PROFITABILITY Progressive is driven by the goal of producing a four percent
underwriting profit. The Core businesses had an underwriting profit of 10.5
percent in 1993, an underwriting profit of 5.8 percent for the past five years
and 6.4 percent for the past ten years. Estimated industry results for the
personal auto insurance market for the same periods were underwriting losses
of 2.0 percent, 5.1 percent and 6.4 percent. Profitability in our Diversified
businesses, which include service operations, is measured on a return on
revenue basis. We seek a minimum of a ten percent return on revenue in these
businesses. For 1993, the return on revenue was 33.7 percent.
GROWTH We seek increases in volume that are at least 15 percentage points
greater than the rate of inflation. For the Core business, volume is measured
by net premiums written, which increased 25.5 percent in 1993, 13.3 percent
compounded annually over the past five years and 22.5 percent over the past
ten years. Net premiums written in the personal auto insurance market for the
same periods grew 5.2 percent, 6.0 percent and 8.7 percent. For Diversified
businesses, volume is measured by operating revenues (net premiums earned plus
service revenue). Operating revenues decreased 17.1 percent in 1993, decreased
14.7 percent compounded annually over the past five years and increased 22.1
percent over the past ten years.
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 at our first public stock
offering on April 15, 1971, owned 7,689 shares on December 31, 1993, with a
market value of $311,000, for a 25.5 percent annual return, compared to the
seven percent return achieved by investors in the Standard & Poor's 500 during
the same period. In addition, the shareholder received dividends, which were
$1,500 in 1993.
In the ten years since December 31, 1983, Progressive shareholders have
realized compound returns of 28.2 percent, compared to 14.9 percent for the
S&P 500. In the five years since December 31, 1988, Progressive shareholders'
returns were 40.7 percent, compared to 14.6 percent for the S&P 500. In 1993,
the returns were 39.8 percent on Progressive shares and 10.1 percent on the
S&P 500.
The repurchase of Progressive stock is another way the Company increases
shareholder value. Over the years, when we have adequate capital and
Progressive's stock is attractively priced, we have repurchased our shares.
Since 1971, we spent $492.2 million to repurchase shares, at an average cost
of $6.15 per share.
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RETURN ON SHAREHOLDERS' EQUITY 1993 LAST 5 YEARS LAST 10 YEARS
Goal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17.8% 18.9% 18.9%
Companywide . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36.0 24.8 25.3
UNDERWRITING PROFIT
Goal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4.0 4.0 4.0
Core Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.5 5.8 6.4
Industry-Personal Auto Insurance Market . . . . . . . . . . . . . . . . (2.0) (5.1) (6.4)
GROWTH (ANNUALIZED)
Goal . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17.8 18.9 18.9
Net Premiums Written
Core Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25.5 13.3 22.5
Industry-Personal Auto Insurance Market . . . . . . . . . . . . . . . 5.2 6.0 8.7
Operating Revenues
Diversified Businesses . . . . . . . . . . . . . . . . . . . . . . . (17.1) (14.7) 22.1
Q - WHAT IS PROGRESSIVE'S MOST IMPORTANT FINANCIAL OBJECTIVE?
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Photograph: "Three Wheels," Zeke Berman, 1994
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Photograph: "Tires Diptych," Zeke Berman, 1993
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Photograph: "Tires Diptych," Zeke Berman, 1993
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Photograph: "Hubcap Diptych," Zeke Berman, 1993
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LETTER TO SHAREHOLDERS 12 - 13
RESULTS
I am proud to describe Progressive's best ever financial results. We had record
annual earnings and insurance premium volume, and achieved the 22nd annual
underwriting profit since our founding in 1965. Return on shareholders' equity
was 36.0 percent, compared to 34.7 percent in 1992. Net income increased 74
percent to $267.3 million, or $3.58 per share, compared to $153.8 million, or
$2.05 per share, in 1992. Operating income increased 52 percent to $197.3
million, or $2.61 per share, compared to $129.8 million, or $1.72 per share,
in 1992. Net premiums written increased 25 percent to $1,819.2 million,
compared to $1,451.2 million in 1992. We achieved a 10.7 percent underwriting
profit, compared to 3.5 percent in 1992. We reduced underwriting and loss
adjustment expenses by almost six more percentage points in 1993, after a nine
percentage point reduction in 1992.
Ninety-three percent of Progressive's net premiums written come from 14 Core
divisions, which write insurance for private passenger autos and small
commercial and recreational vehicles. Core business net premiums written grew
25 percent to $1,700 million, compared to $1,355 million in 1992. The Core
business underwriting profit margin was ten percent, compared to eight percent
in 1992.
Three smaller Diversified divisions, Financial Services, Risk Management
Services and Motor Carrier, provide combinations of service and indemnity to
businesses. Diversified divisions' net premiums written and underwriting
profit margins were $118 million and 14 percent, respectively, compared to
$107 million and minus 33 percent in 1992. The Diversified divisions produced
service revenues and pretax profits of $43.7 million and $6.8 million,
respectively, compared to $53.3 million service revenue and a $4.3 million
pretax loss in 1992.
A - THE MOST IMPORTANT OBJECTIVE IS RETURN ON SHAREHOLDERS' EQUITY, WHICH WAS
36.0 PERCENT IN 1993. HOWEVER, WE ARE COMMITTED TO ACHIEVING ALL OUR FINANCIAL
OBJECTIVES (ROE, PROFITABILITY AND GROWTH) OVER SUCCESSIVE FIVE-YEAR PERIODS.
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THE STATE OF OUR BUSINESSES
CORE BUSINESS
We are in the midst of a multi-year strategy to change and greatly enhance the
Core business. We began as almost entirely a provider of niche products
through independent insurance agents. Our goal is to become a low-cost
provider of a full line of auto insurance and related services, distributed
through many different channels. This full product line will be marketed under
a distinctive brand based on our commitment to delight customers. The
transition strategy is to build on the excellent people, customer-focused
divisionalized product manager organization, superb claim service, broad
independent agent distribution and creative rate segmentation that are the
basis for our extraordinary results to date. In 1993, we made substantial
progress by reducing expenses, improving control of loss costs, expanding
product offerings, testing new distribution methods and developing the
Progressive brand experience.
EXPENSES The Core business underwriting expense ratio was reduced to 25.9
percent from 28.4 percent in 1992, compared to the personal auto insurance
industry expense ratio of 22.7 percent. Our achievement in lowering expenses
was in line with our goal of having a 20 percent expense ratio by the year
2000. The 1993 reductions came from process improvements developed by
empowered work teams and from technology like our ProRater (registered trade-
mark) Plus program where agents quote and submit applications electronically.
LOSS COSTS Payments for policyholders' losses and the expenses associated with
handling them were 63.7 percent of 1993 earned premium. Immediate Response
(Registered trademark) claims service begins with our customers' understanding
that we are available around-the-clock, 24 hours a day, 365 days a year, and
WANT THEM TO CALL 1-800-274-4499 immediately--from the scene of their accident
or as soon as possible thereafter. During 1993, we improved on key claim
service reporting measurements, including median hours between claims
occurring and being reported, and the number of claims reported within four
hours of occurrence.
Once a claim is reported, we try to communicate with all appropriate parties
within hours to obtain necessary information, determine damages, assess fault
and make a fair settlement offer. This often involves claim reps meeting
personally with our insured or claimant within hours of the accident.
The percentage of third-party property damage and first-party collision
claims closed within seven days of the accident increased from 51 percent in
1992 to 56 percent in 1993.
Delivering this claim service cost 9.1 percent of 1993 earned premium, down
from 10.7 percent in 1992 and 14.2 percent in 1991. We plan for ten percent
loss adjustment expense long-term because we believe it achieves the optimum
balance between the cost of adjusting and the costs of settlements, because it
takes into account that loss ratios will increase and because we will write
more policies with high liability limits.
PRODUCT OFFERINGS Our traditional nonstandard auto product provides coverage
for people cancelled and rejected by other insurers. However, more insurers
are surcharging and retaining the risks they formerly rejected, thereby
shrinking the market available to Progressive. Also, there is more low-cost
competition for nonstandard drivers. In response, we now, or soon will, offer
consumers three different price levels, each with a different commission that
produces the same amount net to Progressive. This way agents can choose the
commission rate that matches their costs of servicing particular customers,
promoting competition and consumer choice.
Progressive divides the $94 billion United States personal auto insurance
market, which includes recreational vehicles and pick-up trucks, into
"nonstandard," "standard" and "preferred." Nonstandard private passenger auto
insurance premiums, including all residual market mechanisms, are $18 billion,
19 percent of the total. The other 81 percent is standard and preferred. In
1993, we continued testing standard and preferred products by writing $64
million, 4.5 percent of our total private passenger auto premiums.
Q - HAS PROGRESSIVE'S PRODUCTIVITY INCREASED OVER THE LAST FIVE YEARS?
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We see the chance to become an increasingly important factor in the standard
and preferred markets and will expand as we gain understanding of and
confidence in our pricing, expense structure and service. Taken with our
programs for recreational vehicles and small fleet commercial vehicles, plus
auto insurance in Ontario, Canada, our potential market is approximately $115
billion, making Progressive's share 1.5 percent, and leaving us much room to
grow.
We continually revise rates in every program to reflect loss costs and
expenses. During 1993, we became more competitive by reducing rates an average
of .8 percent in existing private passenger auto programs. We did this by
decreasing expenses and controlling loss costs. This compares with a 1.9
percent increase in 1992 and larger increases in prior years. Offering agents
a choice of lower commissions and serving more customers are steps toward
offering auto insurance to every auto owner and operator at prices that will
be competitive for many.
DISTRIBUTION We want consumers to be able to buy Progressive insurance how,
when and where THEY choose. We continued testing multiple distribution, which
we call "Community Marketing," in the Miami and Tampa markets. These
experiments involve consumer advertising, telephone quoting, and allowing
customers to buy from an agent, at a company office, over the phone or by
mail. Test results are encouraging, have produced some premium in new channels
and, most importantly, have dramatically increased premium volume from
independent agents, who have been and continue to be Progressive's most
important channel of distribution.
PROCESS We define a "process" as a collection of inputs, resources and
activities focused on creating value for customers and shareholders.
Resources include people, capital, technology, information and external
suppliers. The key aspect of process management is the design of how inputs
and resources work together to delight customers, by reducing the error rate,
cost and cycle time of the process.
We have a system for Process Leadership where Division Presidents serve in the
dual role of line manager for their division and Process Leader for a key
element of our business, such as Policy Quoting, Billing and Claims. Working
with cross-divisional and cross-functional teams of line people to address
specific issues, Process Leaders make key decisions for the process and
oversee the design and implementation of "best practices" for the entire Core
business for their process. This additional responsibility reinforces Division
Presidents becoming a team because they work together not only to decide and
execute business strategy but also to integrate processes.
EXPERIMENTATION The transition from a niche provider of nonstandard auto to a
broad-based provider of personal auto with compelling competitive advantages
will take several years. Our approach is to test and refine our techniques in
selected markets before expanding any aspect of the change. We have introduced
disciplined experimental techniques and closely monitor the performance of all
market tests against pre-agreed milestones.
CONTROLS Recognizing the challenge of growing fast and simultaneously improving
products and processes, we monitor performance against detailed forecasts
which are updated monthly, and against monthly customer and employee surveys.
We will curtail growth if service levels deteriorate, or if underwriting
profit drops below four percent.
BRAND We have begun to define a "Progressive Brand" for auto insurance,
focusing on creating distinctive and delightful Buying, Ownership and Claims
experiences for our customers. The purpose of brand development is to reduce
the cost of acquiring a new customer and to increase customer retention.
During 1993, we defined and improved internal methods that create positive
customer experiences, and created an external com-munication package for the
Progressive brand, by testing television, radio, print and targeted direct
mail programs.
A - IT SURE HAS. OVER THAT PERIOD, OUR DIRECT PREMIUMS WRITTEN
GREW 47 PERCENT WHILE THE NUMBER OF EMPLOYEES GREW ONLY FOUR PERCENT.
AS A RESULT, OUR DIRECT PREMIUMS PER PERSON INCREASED FROM
$228,000 TO $322,000.
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DIVERSIFIED DIVISIONS
Diversified divisions account for seven percent of Progressive's total volume.
Past efforts to manage core and diversified divisions in the same way did not
recognize important differences between them and detracted from the results of
both. In 1993, we separated the Diversified divisions' information, claim
handling and incentive compensation systems from those used by the Core
divisions, and Diversified divisions began to accept risk in one of our
wholly-owned subsidiary insurers, instead of Progressive Casualty, to keep
the emerging Progressive brand focused on auto insurance and to insulate the
Core business from distractions caused by Diversified divisions' operations.
In 1994, we expect to further reduce both the risk in these businesses and
their distraction from the Core business.
FINANCIAL SERVICES Financial Services' principal product is collateral
protection for automobile lenders. The division, enjoying its fourth
consecutive profitable year, produced a 13 percent return on $90 million
revenue, compared to a 14 percent return on $91 million revenue in 1992.
During the year, we were privileged to begin serving Toyota Motor Services,
First Interstate Bank and the Associates.
RISK MANAGEMENT SERVICES Risk Management Services' principal customers are
community banks. Its principal products are liability insurance for directors
and officers and employee dishonesty insurance. Progressive shares the risk
and premium on these coverages with a small mutual insurer controlled by its
bank customers. The program is sponsored by the American Bankers Association.
In 1993, Risk Management Services produced a 69 percent return on $16 million
revenue, compared to 35 percent on $14 million revenue in 1992.
MOTOR CARRIER The Motor Carrier Division manages involuntary commercial auto
plans (CAIP) and pricing and risk management for select former customers of
our defunct Transportation business as well as a growing number of
intermediate size trucking companies, reinsuring them to limit Progressive's
loss to $100,000 per occurrence. The Division produced a 13 percent return on
$44 million revenue, compared to an 11 percent loss on $44 million revenue in
1992.
INVESTMENTS AND CAPITAL MANAGEMENT
The balance of revenue and profit comes from interest, dividends and capital
gains produced by Progressive's invested assets ($2,786.4 million at December
31, 1993, compared to $2,386.1 million at December 31, 1992). These funds are
under the management of Progressive Partners, Inc., our investment and capital
management subsidiary. Total investment income was $242.4 million before taxes
and $177.2 million after taxes, compared to $153.5 million before taxes and
$120.0 million after taxes in 1992. On December 31, 1993, our portfolio had
$70.2 million in total unrealized gains, compared to $138.7 million at
December 31, 1992. In 1993, we realized $107.9 million in capital gains, of
which $74.3 million came from selling all the stock we owned in MBNA
Corporation.
Progressive Partners, which became fully integrated as part of the Company
during 1993, is guided by conservative investment and capital management
policies which support Progressive's overriding focus on underwriting and are
intended to assure that we always have enough capital to support all the
insurance premium we can write profitably. In addition to the increase in
capital from 1993's record earnings, we raised $177 million by selling common
stock, to support the anticipated rapid expansion of our insurance business
and to reduce the financial leverage which resulted from previous years' stock
repurchases. To assure adequate capital at relatively low cost, we also raised
$350 million during 1993 (the last $200 million closed January 12, 1994) by
issuing long-term debt securities at some of the lowest interest rates
available during the last twenty years.
Q - HOW DOES PROGRESSIVE PLAN FOR THE FUTURE?
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Photograph: "Lens (Headlight, Hubcap, Grill)," Zeke Berman, 1994
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Photograph: "Headlight, Mirrors, Grill," Zeke Berman, 1993
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Photograph: "Steering-wheel and Shoe," Zeke Berman, 1993
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A - WE ANTICIPATE THAT CHANGE IS CONSTANT, ORGANIZE TO EMBRACE IT AND USE OUR
ABILITY TO RESPOND QUICKLY AS A TACTICAL ADVANTAGE.
WHAT PROGRESSIVE HAS CHANGED AND WHY
Progressive's consistent success stems from our great people, clear Core
Values, ambitious objectives, high standards, constant creativity, data-driven
decision making, customer-focussed organization, excellent partners and
unusual flexibility. Our Core Value of "Excellence" guides us to "strive
constantly to improve." From our beginning, Progressive has constantly raised
standards, added more excellent people, developed better systems and controls,
and explored new markets. Our ambition to be a major factor in the extremely
competitive private passenger auto insurance business requires creativity in
developing ways to attract new customers AND to provide superior service.
Six years ago, Progressive was enjoying what was our greatest year until then.
As 1987 ended, we were confident that we could sustain profitable growth by
continuing to do what we were doing. Eleven months later, we learned just how
fast our circumstances can change. In November 1988, we were shocked into
action when California voters passed Proposition 103, threatening auto
insurance as we knew it. It opened our eyes to auto insurance consumers' anger
and mistrust, and our vulnerability to capricious legislation and regulation.
Consumer dissatisfaction with auto insurance appeared to put Progressive's
existence in danger; we knew we had to do something. We pulled back in
California, but the situation required much more positive action.
About the same time, we learned that Allstate had passed us in total U.S.
volume on OUR specialty of nonstandard auto insurance, making it our most
threatening competitor. After 25 years of observing Progressive's success,
Allstate and other competitors, like the Penn Central companies, recognized
that our high expense ratios and wide profit margins gave them a perfect
opportunity to take market share from us by mimicking our programs, operating
at lower cost and accepting slimmer profit margins. We saw that Allstate, with
its distribution and data advantages, could overwhelm us unless we acted
quickly and decisively.
Auto owners and operators reward Progressive in direct proportion to how our
service, quality and cost compare to their options. In five years of intensive
study of U.S. auto owners and operators, we are learning their needs and
attitudes. We have concluded that Progressive has an opportunity to continue
to grow profitably IF we work within our highly regulated, highly competitive,
very staid industry, figuring out how to lower consumers' cost and improve
their experience sufficiently to turn their anger with auto insurance to
delight.
"Re-engineering" is what we have been doing to respond to these threats and
opportunities, as well as to the changing environment. The result is
Progressive's new strategy for the 1990's. When we set on the path of change
five years ago, not only were we uncertain where it would lead, but also did
not realize how difficult it would be, how long it would take and how much of
what we tried would not work. Our profitable growth has obscured many of the
following profound, steady, incremental, continuing changes:
bullet EXPENSE REDUCTION -- Our underwriting expenses were among the industry's
highest, but we passed them along by constantly increasing prices. Continuing
cost reduction is a critically important initiative. We went through painful
layoffs in 1991 and 1992, dramatically reducing costs, and we continue to
drive them down by implementing operating efficiencies.
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bullet LOWER PROFIT MARGINS -- Our underwriting profit margins have been among
the industry's highest. We have learned that margins greater than four
percent are unsustainable and undesirable for the long-term, because
good results lure effective competitors happy to operate at lower profit
margins, as well as encouraging onerous regulation and legislation. We
now strive to achieve our four percent target in each program, but not
more, so as to keep prices attractive to customers and to make it more
difficult for competitors to charge less and still make a profit. We
expect to convert operating improvements into lower prices, written
premium growth and subsequent earnings growth.
bullet DIVERSIFICATION CURTAILED -- Our diversification efforts--both
Transportation and Financial Services--were motivated by our not seeing
the growth opportunities in personal auto insurance that we see today.
In diversifying, we promoted many programs too fast, before fully
understanding all the risks and how to price them. We are now more
restrained and disciplined in how we develop new businesses.
bullet REDUCED VARIATION -- We encouraged individual, relatively undisciplined
experimentation, resulting in unnecessarily expensive variation in our
products and processes and some very unprofitable programs. Now we
depend on cross-divisional and cross-functional teams, operating under
careful control, to manage experiments while we seek to align our
products and implement our best practices, driven by customer needs and
wants.
bullet REDEFINE OUR BUSINESS -- Our concept was that we were in the
auto insurance business. Now we know we are in the business of reducing
the human trauma and economic costs of auto accidents. Our attitude
about auto accidents was that more accidents costing more created a
larger auto insurance market and more profit per transaction for us. Now
we act on our conviction that we and our customers will be healthier and
happier if there are fewer accidents costing less.
bullet IMMEDIATE RESPONSE (registered trademark) CLAIMS SERVICE -- Our previous
claim service objective (and accomplishment) was to provide the best
available from any auto insurer. Now we are creating a whole new
standard for auto accident claim service by responding
Q - WHAT SERVICE LEVELS CAN CUSTOMERS EXPECT FROM PROGRESSIVE?
23
22 - 23
THE TYPE OF SERVICE THAT CONSUMERS CAN'T EVEN IMAGINE IS POSSIBLE TODAY, BUT
WILL BE COMMONPLACE IN THE FUTURE. WE PROVIDE IMMEDIATE RESPONSE TO THEIR
REQUESTS FOR CLAIMS AND CUSTOMER SERVICE, 24 HOURS A DAY, SEVEN DAYS A
WEEK, 365 DAYS A YEAR.
immediately on all claims in ways that delight our customers and claimants.
bullet BROADENED MARKET -- Our target customer was cancelled and rejected auto
insureds. Now it is all auto owners and operators that can be profitably
underwritten.
bullet MULTIPLE DISTRIBUTION -- We have historically depended almost entirely
on the independent agents to distribute our products, despite knowing we
could not stem the agency system's plummeting market share or the threat
of that decline to Progressive. Now we are changing consumers'
experience of auto insurance AND involving agents in a way that can
REVERSE more than 30 years of market share loss by agents. At the same
time, we have shifted our focus to the consumer and will distribute our
products how, when and where the consumer wants to buy.
bullet CONSUMER INFORMATION -- Consumers' comparison shopping for auto insurance
required a tiresome, confusing, unreliable search of agents and/or
companies to obtain quotes they often found to be inaccurate and
difficult to compare. In several states, we now offer consumers
comparable, competitive quotes for their specific situation from the
companies with the largest market share in their state.
bullet INVESTMENT AND CAPITAL MANAGEMENT -- Our philosophy, process and people
for managing investments and capital involved policy setting and
decision making by a committee comprised of independent money managers,
investment bankers, consultants, operating managers and directors. Now
investment professionals employed by Progressive are empowered to
execute our clear, conservative investment philosophy and to lead it in
different directions as circumstances change.
bullet CORE AND DIVERSIFIED BUSINESSES -- We worked for years to have all our
businesses function within one organization, with the result that each
sacrificed something. We are now separating the "Core" and "Diversified"
businesses operationally and corporately to achieve the focus that makes
both more efficient and effective.
bullet TEAMWORK -- Our organization was stable, structured and hierarchical.
Now it involves interlocking and constantly changing teams established
to understand and meet specific customer needs. Teams disband when their
mission is complete. Our people interactions were top down, directive
and internally competitive (win-lose). Now they are driven by people
consulting and cooperating with each other to find better ways to serve
our customers in a Total Quality Management environment (win-win).
bullet NEW COMPENSATION SYSTEM -- Our compensation was based on individual
skills and scope of authority. It was more generous for the highest paid
people, was predominantly salary and was applied inconsistently enough
to irritate people. Now it is market-based with the same standards for
all people and more aligned with shareholders' interest because total
compensation can vary greatly from year to year depending on company,
division, team and individual results. Our best performers earn at the
top of the market in years we achieve our objectives and more when we
surpass them. The new companywide bonus plan, which we call
"gainsharing", reinforced these changes by paying Progressive's people
$23.4 million for 1993's extraordinary performance.
bullet PROCESS LEADERSHIP -- Managing our important processes was impossible
when doing so was a staff responsibility, because our excellent,
strong-willed Division Presidents liked to do things their own way. Now
we achieve regular cost savings and customer service improvements
because most Division Presidents are individually responsible for a
specific key process, and all have agreed to follow the others'
leadership.
bullet CONSUMER IDENTITY -- Progressive is virtually unknown except to our
agents and customers. We are now defining our "brand" and its symbolism,
and beginning to communicate a unified and consistent image in order to
develop our consumer franchise.
24
24 - 25
CHANGE AND COMPETITION
Making all these changes demanded much of our people. There were
disappointments, failures and large costs, but what we have done may allow
Progressive to offer all auto owners and operators lifetime insurance, easy
comparison shopping, and superb service, as well as providing the lowest cost
to many. Progressive will reduce its customers' and claimants' trauma and
costs caused by auto accidents with immediate, around-the-clock service,
in-person when appropriate on a claim.
These changes will work into our businesses slowly and unevenly. Our divisions
and departments are in different stages of evolution toward Progressive's
vision. The strategy is driven by our strong belief that lower prices, more
information, more options and immediate service will delight customers and
make it possible for us to achieve our ambitious objectives.
In Florida, we are testing how many of these changes operate together.
Consumers can now call 1-800-AUTO-PRO( service mark) 24 hours a day, seven
days a week, and in ten minutes get an accurate list of the prices charged by
State Farm, Allstate, Prudential and Progressive for the caller's particular
insurance package. Progressive will accept and guarantee to renew every
consumer who chooses to insure with us, and will help them purchase their auto
insurance either through an independent insurance agent, at a Progressive
operated location, by telephone or through the mail. We will tell callers who
ask how to get in touch with the competitors.
Once insured with Progressive, our customers can call us at any time about
claims, policy changes, payment status and other services. Whenever our
customer, the claimant or Progressive feels it is appropriate, a Progressive
person will almost always be face-to-face with our customer or the claimant
within hours of our receiving the first call.
To the extent that competitors effectively copy (and improve on) our good
ideas, Progressive will have less opportunity for rapid growth and unusually
good profit margins. But that is the beauty of competitive free-enterprise for
consumers and for society, and why the system should be honored, nurtured and
sustained. If competitors follow Progressive's lead, auto insurance will
become less of a political football. Auto insurers will be partners in
changing insurance regulation and improving traffic safety, not victims of
sometimes opportunistic finger-pointers. The system will work better for
consumers, and everybody will win because there will be fewer, less costly
accidents that cause less human trauma.
Q - WHAT DOES PROGRESSIVE SEE AS AN ESPECIALLY GREAT RISK?
25
Photograph: "Belts Triptych," Zeke Berman, 1994
26
Photograph: "Seatbelt Diptych," Zeke Berman, 1994
27
26 - 27
A - INSURANCE LAWS AND REGULATIONS CHANGE CONTINUALLY. WE REACT PROMPTLY TO
THESE CHANGES WHEN THEY PROHIBIT US FROM MAKING OUR TARGET PROFIT MARGINS.
RISKS
We perceive Progressive's opportunity as one which must be realized now. The
risk of competitors copying and improving on what we are doing, or of new
restrictive regulation (or both) inhibiting our ability to do it, leads us to
want to develop and spread our new price levels, services and ways of doing
business throughout the United States as quickly as possible. Here are factors
shareholders need to understand concerning 1994 earnings and the risks in our
strategy:
bullet LEGISLATIVE AND REGULATORY RISK -- Insurance laws and regulations change
continually. We react promptly when they prohibit us from making our
target profit margins. Such reaction could result in reduced volume.
bullet UNPREDICTABLE UNDERWRITING MARGIN AND GROWTH RATE - Margins in auto
insurance are inherently unstable. In the short run, pricing to produce
our long-time four percent underwriting profit goal means operating
earnings may not increase in proportion to volume growth. Our growth
rate will be influenced by agent and competitor reaction to our
strategies, and by the trend in loss costs. WE CANNOT PREDICT WITH ANY
PRECISION THE TIMING AND PACE OF THE DECREASE IN UNDERWRITING MARGINS
NOR THE RATE OF GROWTH.
bullet OPERATING EARNINGS VOLATILITY -- Growth requires investment in training,
new systems and improved processes, and rapid growth can generate
expensive mistakes. This risk and our continuing to do nothing to
influence current earnings or the price of our stock could make
short-term earnings trends difficult to predict.
bullet UNPREDICTABLE INVESTMENT INCOME -- The average maturity of our $2.6
billion fixed-income portfolio is approximately two years, meaning
investment income is unusually sensitive to short-term interest rates.
This could be a positive if rates go up as many predict.
bullet PRICING RISK -- We may not yet have learned quite enough to price
standard and preferred auto insurance to produce our planned results.
This risk is small because our commitment to the philosophy that
"Progressive's alternative to making its targeted underwriting profit is
not to do business" requires us to change rates immediately when
experience dictates.
bullet GROWTH ITSELF -- To accomplish our objectives, we must build many new
systems, train thousands of claim and telephone service people, continue
to improve our claim handling and ability to sell by telephone, align
our products, validate new pricing criteria AND simultaneously continue
to reduce costs. We have experience managing our planned level of growth
(including periods when we grew at 40 percent compounded) but not at our
current size.
28
28 - 29
THE FUTURE
Progressive can and will lead a wave of change in the United States system for
dealing with auto accident injuries and property damage. We believe we will
reduce accident victims' trauma and costs, improve how consumers feel about
auto insurance and be rewarded handsomely for our leadership.
1993's results are significant, not only because a profit surge is always
welcome, but because, heartened by our success, we will pursue our new
strategy. We will expand our core private passenger auto insurance business at
a pace that will test our ability to provide the service we guarantee, could
reduce 1994 and 1995 earnings growth and may unnerve investors who focus
disproportionately on short-term earnings. This approach is consistent with
our strategy of creating long-term capital appreciation.
Much will be required to realize our vision. Thus we begin 1994 as we began all
other years--excited, respectful of the challenge implicit in our objectives
and strategy, humbled by our failures, proud of having responded to them and
confident that our excellent people will continue to achieve superior results.
At Progressive, it is always as if we are just beginning our business and
looking at a future that is brighter than ever.
We deeply appreciate the customers we are privileged to serve. Thank you for
your business, and thanks especially to the more than 30,000 independent
insurance agents who chose to do business with Progressive in 1993. We are
particularly grateful for our shareholders' continued confidence. Happily,
1993 was a year in which the men and women of Progressive rebounded from the
stresses and anxieties implicit in any change. To you, thanks for all your
contributions in 1993 and the promise you bring to our future.
Joy, Love and Peace
Peter B. Lewis, Chairman, President
and Chief Executive Officer
29
Photograph: "Road 1, Road 2," Zeke Berman, 1993
30
Photograph: "Tour (Lightbulb and Steering-wheel Diptych)," Zeke Berman, 1993
31
Photograph: "Tour (Lightbulb and Steering-wheel Diptych)," Zeke Berman, 1993
32
1993 Financial Review 32 - 33
Consolidated Financial Statements 34 Management's Discussion and Analysis 47
Ten Year Summaries 50
Loss Reserves 54 Direct Premiums Written by State 54 Quarterly Financial and
Common Share Data 55
33
REPORT OF COOPERS & LYBRAND, INDEPENDENT ACCOUNTANTS
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS, THE PROGRESSIVE CORPORATION:
We have audited the accompanying consolidated balance sheets of The Progressive
Corporation and subsidiaries as of December 31, 1993 and 1992, and the related
consolidated statements of income, changes in shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1993. These
financial statements are the responsibility of The Progressive Corporation and
subsidiaries' management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit 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. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of The Progressive
Corporation and subsidiaries as of December 31, 1993 and 1992, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1993, in conformity with
generally accepted accounting principles.
As discussed in Note 3 to the consolidated financial statements, in 1993, The
Progressive Corporation and subsidiaries adopted the provisions of Statement
of Financial Accounting Standards No. 113, "Accounting and Reporting for
Reinsurance of Short-Duration and Long-Duration Contracts."
Coopers & Lybrand
Cleveland, Ohio
January 26, 1994
34
CONSOLIDATED STATEMENTS OF INCOME
(millions-except per share amounts)
For the years ended December 31, 1993 1992 1991
NET PREMIUMS WRITTEN $ 1,819.2 $ 1,451.2 $ 1,324.6
============ =========== ===========
REVENUES
Premiums earned . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 1,668.7 $ 1,426.1 $ 1,286.9
Investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . 134.5 139.0 144.8
Net realized gains on security sales . . . . . . . . . . . . . . . . . 107.9 14.5 7.4
Service revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . 43.7 53.3 54.0
Proposition 103 reserve reduction . . . . . . . . . . . . . . . . . . . -- 106.0 --
------------ ----------- -----------
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,954.8 1,738.9 1,493.1
------------ ----------- -----------
EXPENSES
Losses and loss adjustment expenses . . . . . . . . . . . . . . . . . . 1,028.0 930.9 858.0
Policy acquisition costs . . . . . . . . . . . . . . . . . . . . . . . 311.6 304.1 313.7
Other underwriting expenses . . . . . . . . . . . . . . . . . . . . . . 151.3 141.5 162.1
Investment expenses . . . . . . . . . . . . . . . . . . . . . . . . . . 10.2 17.0 22.5
Service expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . 36.9 57.6 56.1
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . 39.7 44.5 47.8
Non-recurring items1 . . . . . . . . . . . . . . . . . . . . . . . . . 4.0 64.6 --
------------ ----------- -----------
Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,581.7 1,560.2 1,460.2
------------ ----------- -----------
NET INCOME
Income before Federal income taxes . . . . . . . . . . . . . . . . . . 373.1 178.7 32.9
Provision for Federal income taxes . . . . . . . . . . . . . . . . . . 105.8 39.1 --
------------ ----------- -----------
Income before cumulative effect of accounting change . . . . . . . . . 267.3 139.6 32.9
Cumulative effect of adopting SFAS 109 . . . . . . . . . . . . . . . . -- 14.2 --
------------ ----------- -----------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 267.3 $ 153.8 $ 32.9
============ =========== ===========
PER SHARE
Income before cumulative effect:
Primary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3.59 $ 2.09 $ .41
Fully diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.58 1.85 .41
Cumulative effect of adopting SFAS 109:
Primary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- .23 --
Fully diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- .20 --
Net income:
Primary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3.59 $ 2.32 $ .41
Fully diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3.58 2.05 .41
<FN>
1See Note 5-Debt and Note 10-Related Party Transactions for discussion.
All per share amounts were adjusted for the December 8, 1992, 3-for-1 stock split.
See notes to consolidated financial statements.
The Progressive Corporation and Subsidiaries
35
34 - 35
CONSOLIDATED BALANCE SHEETS
(millions)
December 31, 1993 1992
ASSETS
Investments:
Held-to-maturity:
Fixed maturities, at amortized cost (market: $327.4 and $271.2) . . . . . . . . . $ 309.1 $ 250.4
Available-for-sale:
Fixed maturities, at market (amortized cost: $1,761.9 and $1,408.0) . . . . . . . 1,792.6 1,437.1
Equity securities, at market (cost: $433.2 and $310.3) . . . . . . . . . . . . . . 453.9 398.6
Short-term investments, at amortized cost (market: $231.3 and $300.5) . . . . . . . 230.8 300.0
----------- -----------
Total investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,786.4 2,386.1
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.7 22.9
Accrued investment income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 33.7 27.1
Premiums receivable, net of allowance for doubtful accounts of $8.7 and $8.9 . . . . 380.6 312.0
Reinsurance recoverables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 380.9 357.8
Prepaid reinsurance premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . 84.6 78.0
Deferred acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 124.6 101.3
Federal income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 78.5 58.5
Property and equipment, net of accumulated depreciation of $107.1 and $95.1 . . . . . 106.7 63.5
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26.6 33.7
----------- -----------
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,011.3 $ 3,440.9
=========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
Unearned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 772.0 $ 614.8
Loss and loss adjustment expense reserves . . . . . . . . . . . . . . . . . . . . . . 1,348.6 1,274.2
Policy cancellation reserve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 60.1 52.1
Accounts payable and accrued expenses . . . . . . . . . . . . . . . . . . . . . . . . 355.6 302.3
Funded debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 477.1 568.5
----------- -----------
Total liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,013.4 2,811.9
----------- -----------
Shareholders' equity:
Serial Preferred Shares (authorized 20.0)
9 3/8% Serial Preferred Shares, Series A, no par value,
cumulative, liquidation preference $25.00 per share (issued
and outstanding 3.6 and 4.0) . . . . . . . . . . . . . . . . . . . . . . . . . . 87.9 96.4
Common Shares, $1.00 par value (authorized 200.0, issued 82.2 and 77.1,
including treasury shares of 10.1 and 10.0) . . . . . . . . . . . . . . . . . . . 72.1 67.1
Paid-in capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 357.6 180.7
Net unrealized appreciation on investment securities . . . . . . . . . . . . . . . . 33.5 77.5
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 446.8 207.3
----------- -----------
Total shareholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . 997.9 629.0
----------- -----------
Total liabilities and shareholders' equity . . . . . . . . . . . . . . . . . . $ 4,011.3 $ 3,440.9
=========== ===========
<FN>
See notes to consolidated financial statements.
The Progressive Corporation and Subsidiaries
36
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
(millions--except per share amounts)
For the years ended December 31, 1993 1992 1991
PREFERRED SHARES, NO PAR VALUE
Balance, Beginning of year . . . . . . . . . . . . . . . . . . . . . . $ 96.4 $ 96.4 --
Sale of Preferred Shares, Series A . . . . . . . . . . . . . . . . . . -- -- $ 96.4
Treasury shares purchased-cost basis . . . . . . . . . . . . . . . . . (8.5) -- --
------------ ----------- -----------
Balance, End of year . . . . . . . . . . . . . . . . . . . . . . . . . $ 87.9 $ 96.4 $ 96.4
------------ ----------- -----------
COMMON SHARES, $1 PAR VALUE
Balance, Beginning of year . . . . . . . . . . . . . . . . . . . . . . $ 67.1 $ 21.1 $ 23.1
Stock options exercised . . . . . . . . . . . . . . . . . . . . . . . .1 .5 --
Stock rights issued (cancelled) . . . . . . . . . . . . . . . . . . . -- (.1) --
Sale of Common Shares . . . . . . . . . . . . . . . . . . . . . . . . 5.0 -- --
Treasury shares purchased . . . . . . . . . . . . . . . . . . . . . . (.1) (1.9) (2.0)
Capitalization of stock split . . . . . . . . . . . . . . . . . . . . -- 38.5 --
Conversion of convertible debenture . . . . . . . . . . . . . . . . . -- 9.0 --
------------ ----------- -----------
Balance, End of year . . . . . . . . . . . . . . . . . . . . . . . . . $ 72.1 $ 67.1 $ 21.1
------------ ----------- -----------
PAID-IN CAPITAL
Balance, Beginning of year . . . . . . . . . . . . . . . . . . . . . . $ 180.7 $ 118.7 $ 126.5
Stock options exercised . . . . . . . . . . . . . . . . . . . . . . . 1.7 3.7 --
Stock rights issued . . . . . . . . . . . . . . . . . . . . . . . . . 3.5 2.8 3.2
Sale of Common Shares . . . . . . . . . . . . . . . . . . . . . . . . 172.0 -- --
Treasury shares purchased . . . . . . . . . . . . . . . . . . . . . . (.3) (10.5) (11.0)
Conversion of convertible debenture . . . . . . . . . . . . . . . . . -- 66.0 --
------------ ----------- -----------
Balance, End of year . . . . . . . . . . . . . . . . . . . . . . . . . $ 357.6 $ 180.7 $ 118.7
------------ ----------- -----------
NET UNREALIZED APPRECIATION (DEPRECIATION) ON INVESTMENT SECURITIES
Balance, Beginning of year . . . . . . . . . . . . . . . . . . . . . . $ 77.5 $ 20.7 $ (28.3)
Change in net unrealized appreciation (depreciation) . . . . . . . . . (44.0) 56.8 49.0
------------ ----------- -----------
Balance, End of year . . . . . . . . . . . . . . . . . . . . . . . . . $ 33.5 $ 77.5 $ 20.7
------------ ----------- -----------
RETAINED EARNINGS
Balance, Beginning of year . . . . . . . . . . . . . . . . . . . . . . $ 207.3 $ 208.8 $ 287.2
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 267.3 153.8 32.9
Cash dividends on Preferred Shares (9 3/8% annually) . . . . . . . . . (9.2) (9.4) (5.7)
Cash dividends on Common Shares ($.200, $.191
and $.172 per share, split effected) . . . . . . . . . . . . . . . . (13.9) (11.4) (11.3)
Treasury shares purchased: Preferred Shares . . . . . . . . . . . . . (1.3) -- --
Common Shares . . . . . . . . . . . . . . . (2.0) (93.5) (94.3)
Capitalization of stock split . . . . . . . . . . . . . . . . . . . . -- (38.5) --
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (1.4) (2.5) --
------------ ----------- -----------
Balance, End of year . . . . . . . . . . . . . . . . . . . . . . . . . $ 446.8 $ 207.3 $ 208.8
------------ ----------- -----------
TOTAL SHAREHOLDERS' EQUITY . . . . . . . . . . . . . . . . . . . . . . $ 997.9 $ 629.0 $ 465.7
============ =========== ===========
<FN>
The 9 3/8% Serial Preferred Shares, Series A, may be redeemed at the Company's option any time on or after May 31, 1996. There are
5.0 million Voting Preference Shares authorized; no such shares have been issued.
See notes to consolidated financial statements.
The Progressive Corporation and Subsidiaries
37
36 - 37
CONSOLIDATED STATEMENTS OF CASH FLOWS
(millions)
For the years ended December 31, 1993 1992 1991
CASH FLOWS FROM OPERATING ACTIVITIES
Income before cumulative effect of accounting change . . . . . . . . . $ 267.3 $ 139.6 $ 32.9
Adjustments to reconcile income to net
cash provided by operating activities:
Depreciation and amortization . . . . . . . . . . . . . . . . . . . . 16.1 24.3 28.4
Net realized gains on security sales . . . . . . . . . . . . . . . . . (107.9) (14.5) (7.4)
Changes in:
Unearned premiums . . . . . . . . . . . . . . . . . . . . . . . . . 157.2 19.8 51.0
Loss and loss adjustment expense reserves . . . . . . . . . . . . . 74.4 197.1 149.7
Accounts payable and accrued expenses . . . . . . . . . . . . . . . 6.2 (154.9) 139.4
Policy cancellation reserve . . . . . . . . . . . . . . . . . . . . 8.0 (13.5) (4.7)
Prepaid reinsurance . . . . . . . . . . . . . . . . . . . . . . . . (6.6) 5.3 (12.7)
Reinsurance recoverables . . . . . . . . . . . . . . . . . . . . . . (23.1) (103.0) (118.3)
Premiums receivable . . . . . . . . . . . . . . . . . . . . . . . . (68.6) 11.3 (43.2)
Deferred acquisition costs . . . . . . . . . . . . . . . . . . . . . (23.3) 8.9 (5.7)
Federal income taxes . . . . . . . . . . . . . . . . . . . . . . . . 2.0 22.7 (32.9)
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21.8 7.5 14.1
------------ ----------- -----------
Net cash provided by operating activities . . . . . . . . . . . . . 323.5 150.6 190.6
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases:
Held-to-maturity: fixed maturities . . . . . . . . . . . . . . . . (118.1) (135.0) (1,083.0)
Available-for-sale: fixed maturities . . . . . . . . . . . . . . . . (1,215.6) (1,089.6) --
equity securities . . . . . . . . . . . . . . . . (358.4) (123.3) (198.6)
Sales:
Available-for-sale: fixed maturities . . . . . . . . . . . . . . . . 323.7 419.4 --
equity securities . . . . . . . . . . . . . . . . 326.1 134.1 99.6
Maturities, paydowns, calls and other:
Held-to-maturity: fixed maturities . . . . . . . . . . . . . . . . 59.5 262.2 813.6
Available-for-sale: fixed maturities . . . . . . . . . . . . . . . . 528.5 354.1 --
Net sales of short-term investments . . . . . . . . . . . . . . . . . . 69.2 188.1 229.5
(Receivable) payable on securities . . . . . . . . . . . . . . . . . . . 55.9 (21.4) 22.6
Purchase of property and equipment . . . . . . . . . . . . . . . . . . (60.0) (17.5) (45.1)
Sale of property and equipment . . . . . . . . . . . . . . . . . . . . -- 5.4 --
------------ ----------- -----------
Net cash used in investing activities . . . . . . . . . . . . . . (389.2) (23.5) (161.4)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from exercise of stock options . . . . . . . . . . . . . . . . 1.8 4.2 --
Proceeds from issuance of stock . . . . . . . . . . . . . . . . . . . 177.0 -- 96.4
Proceeds from funded debt . . . . . . . . . . . . . . . . . . . . . . . 148.2 170.0 170.0
Payments of funded debt . . . . . . . . . . . . . . . . . . . . . . . . (240.2) (170.9) (170.8)
Dividends paid to shareholders . . . . . . . . . . . . . . . . . . . . (23.1) (20.8) (17.0)
Acquisition of treasury shares . . . . . . . . . . . . . . . . . . . . (12.2) (105.9) (107.3)
------------ ----------- -----------
Net cash provided by (used in) financing activities . . . . . . . . 51.5 (123.4) (28.7)
------------ ----------- -----------
Increase (decrease) in cash . . . . . . . . . . . . . . . . . . . . . . (14.2) 3.7 .5
Cash, Beginning of year . . . . . . . . . . . . . . . . . . . . . . . . 22.9 19.2 18.7
------------ ----------- -----------
Cash, End of year . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8.7 $ 22.9 $ 19.2
============ =========== ===========
<FN>
See notes to consolidated financial statements.
The Progressive Corporation and Subsidiaries
38
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1993, 1992 and 1991
1. REPORTING AND ACCOUNTING POLICIES
BASIS OF CONSOLIDATION AND REPORTING The accompanying consolidated financial
statements include the accounts of The Progressive Corporation and
subsidiaries (the Company), all of which are wholly owned. All significant
intercompany accounts and transactions are eliminated in consolidation. The
Company's investments in subsidiaries exceeded their underlying book value at
dates of acquisition by $4.0 million. In the opinion of management, there is
no present indication of diminished value; however, in accordance with
generally accepted accounting principles, $2.4 million of that amount is being
amortized over 25 years.
INVESTMENTS Held-to-maturity: fixed maturity securities are securities which
the Company has the positive intent and ability to hold to maturity. These
securities are reported at amortized cost with the difference between the
original cost and redemption value of these securities earned over the lives
of the respective issues and included in investment income.
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 other
similar economic factors. These securities are carried at market value with
the corresponding unrealized appreciation or depreciation, net of deferred
income taxes, reflected in shareholders' equity.
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
directly as unrealized appreciation or depreciation in shareholders' equity.
Trading securities are securities bought and held principally for the purpose
of selling them in the near term and are reported at market value. Changes in
market value are reflected in earnings. The Company has no trading securities
as of December 31, 1993.
Short-term investments include certificates of deposit, commercial paper and
other securities maturing within one year and are reported at amortized cost,
which approximates market.
Financial instruments with off-balance-sheet risk are used in normal investment
activities and include commitments to extend credit and various forward,
future and interest rate swap positions. Risk is individually evaluated for
each position. The difference between the cost and market value of these
instruments is included in "net realized gains (losses) on security sales"
when realized.
Realized gains and losses on sales of securities are computed based on the
first-in first-out method.
PROPERTY AND EQUIPMENT Property and equipment is recorded at cost.
Depreciation is provided over the estimated useful lives for assets using
accelerated methods.
As of December 31, 1993, the Company had contractual commitments related to the
construction of its new corporate office complex totalling $69.4 million, of
which $50.5 million had been paid through 1993. Capitalized interest costs
were $2.7 million in 1993 and $.3 million in 1992.
INSURANCE PREMIUMS AND RECEIVABLES Insurance premiums written are earned
primarily on a pro rata basis over the period of risk. For products where more
than 50 percent cancellations are anticipated, premiums written and earned are
reduced, though cancellations have not yet occurred.
The Company provides insurance and related services to individuals, lenders and
motor carriers throughout the United States and in Canada, 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.
Prior to the second quarter 1992, the Company established a reserve for
potential premium refunds under provisions of California Proposition 103; this
reserve reduced premiums written and earned $10.2 million in 1992 and $49.7
million in 1991.
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. Loss adjustment expense reserves represent the estimated
expenses required to settle these claims and losses. These estimates are
reported net of amounts recoverable from salvage and subrogation. The methods
of making estimates and establishing these reserves are reviewed regularly,
and resulting adjustments are reflected in income currently. A supplemental
loss reserve provides 98 percent statistical confidence that reserves are
adequate. The supplemental reserve was $73.1 million (net of $17.6 million of
reinsurance recoverables) at both December 31, 1993 and 1992. See Management's
Discussion and Analysis for further discussion.
REINSURANCE The Company's reinsurance transactions are primarily attributable
to premiums written under state-mandated involuntary plans for commercial
vehicles (Commercial Auto Insurance Plans-CAIP), for which the Company retains
no indemnity risk. The remaining reinsurance arises from the Company seeking
to reduce its loss exposure in its non-auto businesses. Prepaid reinsurance
premiums are recognized on a pro rata basis over the period of risk.
EARNINGS PER SHARE Net income is reduced by Preferred Share dividends earned
during the period for both the primary and fully diluted earnings per share
calculations. Primary earnings per share are computed using the weighted
number of Common Shares and equivalents, including stock options, assumed
outstanding during the period. For 1992 and prior, fully diluted earnings per
share assumed the conversion of the convertible debt instrument and the
effects of related interest expense and income taxes.
The Progressive Corporation and Subsidiaries
39
38 - 39
DEFERRED ACQUISITION COSTS Deferred acquisition costs include commissions,
premium taxes and other costs incurred in connection with writing business.
These costs are deferred and amortized over the period in which the related
premiums are earned. The Company considers anticipated investment income in
determining the recoverability of these costs.
In 1993, the Company early adopted Statement of Position 93-7, "Reporting on
Advertising Costs," which provides guidance on financial reporting of
advertising costs. Included in "other assets" for 1993 are $1.6 million of
direct-response advertising costs, which are capitalized and amortized over
the estimated period of the benefits. Direct-response advertising costs
consist primarily of direct mail expenses and are amortized over a two- to
four-year period.
SERVICE REVENUES AND EXPENSES Service revenues 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 Federal income taxes of $91.0 million, $4.0 million and $30.4
million in 1993, 1992 and 1991, respectively. Total interest paid was $38.3
million for 1993, $44.2 million for 1992 and $47.2 million for 1991. In 1992,
the $75.0 million Floating Rate Convertible Subordinated Debenture due 2008
was converted into 9.0 million Common Shares.
The Company effected a 3-for-1 stock split in the form of a dividend to
shareholders on December 8, 1992. The Company reflected the issuance of the
additional Common Shares by transferring $38.5 million from retained earnings
to the common stock account. All per share, average equivalent share amounts
and stock prices were adjusted to give effect to the split. Treasury shares
were not split.
RECLASSIFICATIONS Certain amounts in the financial statements for prior periods
were reclassified to conform with the 1993 presentation.
2. INVESTMENTS
As of December 31, 1993, the Company elected to early adopt Statement of
Financial Accounting Standards (SFAS) 115 "Accounting for Certain Investments
in Debt and Equity Securities." For 1993, the adoption of SFAS 115 did not
have any effect on the Company's results of operations or financial position.
The components of pretax investment income at December 31 were:
(millions) 1993 1992 1991
Held-to-maturity: fixed maturities . . . . . . . . . . $ 17.4 $ 23.2 $ 92.2
Available-for-sale: fixed maturities . . . . . . . . . . 88.7 82.4 --
equity securities . . . . . . . . . . 19.8 23.4 21.4
Short-term investments . . . . . . . . . . . . . . . . . 8.6 10.0 31.2
-------------- -------------- --------------
Investment income . . . . . . . . . . . . . . . . . . . 134.5 139.0 144.8
Gross realized gains:
Held-to-maturity: fixed maturities . . . . . . . . . . . 1.0 .5 16.2
Available-for-sale: fixed maturities . . . . . . . . . . 20.9 14.9 --
equity securities . . . . . . . . . 102.3 4.5 8.8
Short-term investments . . . . . . . . . . . . . . . . . -- -- .1
Gross realized losses:
Held-to-maturity: fixed maturities . . . . . . . . . . . -- -- (1.0)
Available-for-sale: fixed maturities . . . . . . . . . . (4.6) (4.2) --
equity securities . . . . . . . . . (11.7) (1.2) (16.7)
-------------- -------------- --------------
Net realized gains on security sales . . . . . . . . . 107.9 14.5 7.4
-------------- -------------- --------------
$ 242.4 $ 153.5 $ 152.2
============== ============== ==============
Changes in unrealized gains (losses) on fixed maturities and equity securities
were:
(millions) 1993 1992 1991
Unrealized gains (losses):
Held-to-maturity: fixed maturities . . . . . . . . . . . $ (2.5) $ (28.3) $ 35.6
============== ============== ==============
Available-for-sale: fixed maturities . . . . . . . . . . $ 1.6 $ 29.1 $ --
equity securities . . . . . . . . . (67.6) 56.9 74.2
Deferred income taxes . . . . . . . . . . . . . . . . . 22.0 (29.2) (25.2)
-------------- -------------- --------------
$ (44.0) $ 56.8 $ 49.0
============== ============== ==============
40
The composition of the investment portfolio at December 31 was:
GROSS GROSS
UNREALIZED UNREALIZED MARKET
(millions) COST GAINS LOSSES VALUE
1993
Held-to-maturity:
State and local government obligations . . . . . . . . $ 309.1 $ 19.8 $ (1.5) $ 327.4
Available-for-sale:
U.S. government obligations . . . . . . . . . . . . . 20.5 .3 -- 20.8
State and local government obligations . . . . . . . . 819.8 18.2 (2.3) 835.7
Foreign government obligations . . . . . . . . . . . . 31.8 3.8 (1.8) 33.8
Corporate debt securities . . . . . . . . . . . . . . 107.5 5.4 (.2) 112.7
Asset-backed securities . . . . . . . . . . . . . . . 732.8 8.3 (4.9) 736.2
Other debt securities . . . . . . . . . . . . . . . . 49.5 4.7 (.8) 53.4
------------- ------------- ------------ -----------
1,761.9 40.7 (10.0) 1,792.6
Equity securities . . . . . . . . . . . . . . . . . . 433.2 21.1 (.4) 453.9
Short-term investments . . . . . . . . . . . . . . . . . 230.8 .5 -- 231.3
------------- ------------- ------------ -----------
$ 2,735.0 $ 82.1 $ (11.9) $ 2,805.2
============= ============= ============ ===========
1992
Held-to-maturity: . . . . . . . . . . . . . . . . . . .
State and local government obligations . . . . . . . . $ 250.4 $ 21.2 $ (.4) $ 271.2
Available-for-sale:
U.S. government obligations . . . . . . . . . . . . . 56.0 .8 (.1) 56.7
State and local government obligations . . . . . . . . 350.8 15.8 (.1) 366.5
Foreign government obligations . . . . . . . . . . . . 31.7 .8 (.1) 32.4
Corporate debt securities . . . . . . . . . . . . . . 88.4 2.3 (.2) 90.5
Asset-backed securities . . . . . . . . . . . . . . . 840.9 11.0 (.7) 851.2
Other debt securities . . . . . . . . . . . . . . . . 40.2 .2 (.6) 39.8
------------- ------------- ------------ -----------
1,408.0 30.9 (1.8) 1,437.1
Equity securities . . . . . . . . . . . . . . . . . . 310.3 93.0 (4.7) 398.6
Short-term investments . . . . . . . . . . . . . . . . . 300.0 .5 -- 300.5
------------- ------------- ------------ -----------
$ 2,268.7 $ 145.6 $ (6.9) $ 2,407.4
============= ============= ============ ===========
The composition of fixed maturities by maturity at December 31, 1993 was:
(millions) HELD-TO-MATURITY AVAILABLE-FOR-SALE
MARKET MARKET
COST VALUE COST VALUE
Less than one year . . . . . . . . . . . . . . . . . . . $ 42.7 $ 43.0 $ 464.6 $ 477.2
One to five years . . . . . . . . . . . . . . . . . . . 213.4 223.1 1,057.5 1,070.0
Five to ten years . . . . . . . . . . . . . . . . . . . 24.3 26.1 185.3 188.6
More than ten years . . . . . . . . . . . . . . . . . . 28.7 35.2 54.5 56.8
------------- ------------- ------------ ------------
Total fixed maturities . . . . . . . . . . . . . . . . . $ 309.1 $ 327.4 $ 1,761.9 $ 1,792.6
============= ============= ============ ============
<FN>
Securities which do not have a single maturity date are reported at average maturity.
At December 31, 1993, bonds in the principal amount of $51.9 million were on
deposit with various regulatory agencies to meet statutory requirements.
As of December 31, 1993 and 1992, the Company had committed $46.0 million in
uncollateralized lines and letters of credits, of which $0 and $1.7 million,
respectively, were outstanding and subject to credit risk as of December 31,
1993 and 1992. In addition, as of December 31, 1993 and 1992, the Company had
forward and future positions with contract values of $901.2 million and $375.9
million, respectively, offset by short forward, future or interest rate swap
positions (market values of $3.5 million and $1.7 million, respectively), and
unmatched short foreign currency positions as of December 31, 1993 with
contract values of $80.9 million (market values of $1.9 million); net cash
requirements are limited to changes in market values which may vary based upon
changes in interest rates and other factors.
41
40 - 41
3. REINSURANCE
In 1993, the Company adopted SFAS 113, "Accounting and Reporting for
Reinsurance of Short-Duration and Long-Duration Contracts."SFAS 113 requires
amounts related to ceded reinsurance to be shown gross on the financial
statements. Prior practice allowed ceding enterprises to report insurance
activities net of the effects of reinsurance. The implementation of SFAS 113
has resulted in the Company reporting ceded unearned premium reserves as
"prepaid reinsurance premiums" on the balance sheet and reporting ceded unpaid
losses and amounts recoverable on paid losses as "reinsurance recoverables."
The balance sheet has been restated for the prior period. SFAS 113 also
provides risk transfer criteria and prescribes the accounting and reporting
standards for reinsurance contracts. The Company reviewed all contracts and
determined that there was no impact to its results of operations.
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. See Management's Discussion and Analysis for further
discussion. 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, 1993, 69
percent of the "prepaid reinsurance premiums" and 75 percent of the
"reinsurance recoverables" relate to CAIP, for which the Company retains no
indemnity risk.
The effect of reinsurance on premiums written and earned as of December 31 is
as follows:
(millions) 1993 1992 1991
WRITTEN EARNED WRITTEN EARNED WRITTEN EARNED
Direct premiums . . . . . . . . . . . . . $1,966.4 $1,808.8 $1,636.8 $1,619.4 $1,536.8 $1,486.3
Assumed . . . . . . . . . . . . . . . . . 9.2 9.7 4.3 1.9 .1 .2
Ceded . . . . . . . . . . . . . . . . . . (156.4) (149.8) (189.9) (195.2) (212.3) (199.6)
----------- ----------- ----------- ----------- ----------- -----------
Net premiums . . . . . . . . . . . . . . $1,819.2 $1,668.7 $1,451.2 $1,426.1 $1,324.6 $1,286.9
=========== =========== =========== =========== =========== ===========
<FN>
Losses and loss adjustment expenses are net of reinsurance ceded of $138.8 million in 1993, $196.7 million in 1992 and $155.3
million in 1991.
4. FEDERAL INCOME TAXES
The provision for Federal income taxes in the accompanying consolidated
statements of income differs from the statutory rates as follows:
(millions) 1993 1992 1991
Income before Federal income taxes . . . $ 373.1 $ 178.7 $ 32.9
=========== =========== ===========
Tax at statutory rate . . . . . . . . . . $ 130.6 35% $ 60.8 34% $ 11.2 34%
Tax effect of--
Exempt interest income . . . . . . . . . (15.4) (4) (12.9) (7) (16.5) (50)
Dividends received deduction . . . . . . (4.3) (1) (6.4) (4) (8.9) (27)
Deferred tax asset write-down . . . . . -- -- -- -- 14.2 43
Other items, net . . . . . . . . . . . . (5.1) (2) (2.4) (1) -- --
----------- ----------- ----------- ----------- ----------- -----------
$ 105.8 28% $ 39.1 22% $ -- --%
=========== =========== =========== =========== =========== ===========
The current portion of the Federal income tax provision was $90.3 million in
1993, $8.2 million in 1992 and $20.5 million in 1991. For tax purposes, the
alternative minimum tax (AMT) credit carryover was $0 and $13.3 million at
December 31, 1993 and 1992, respectively. Due to strong underwriting earnings
in the current year, the entire AMT credit carryover was used in 1993.
42
Deferred Federal income taxes reflect the impact for financial statement
reporting purposes of "temporary differences" between the financial statement
carrying amounts and tax bases of assets and liabilities. At December 31, 1993
and 1992, the components of the net deferred tax asset were as follows:
(millions)
1993 1992
Deferred tax assets:
Unearned premium reserve . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 48.1 $ 36.1
Non-deductible accruals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25.4 23.1
AMT credit carryover . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 13.3
Capitalized expenditures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2.1 4.3
Loss discounting . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 5.2 5.3
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 4.5
Deferred tax liabilities:
Deferred acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (43.6) (34.4)
Unrealized gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (18.0) (40.0)
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (5.5) --
------------ ------------
Net deferred tax asset . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 13.7 $ 12.2
============ ============
Deferred Federal income taxes include noninterest bearing special estimated tax
deposits made pursuant to Section 847 of the Internal Revenue Code of $40.5
million, $36.5 million and $33.7 million at December 31, 1993, 1992 and 1991,
respectively.
The Omnibus Budget Reconciliation Act of 1993 increased the maximum tax rate
for corporations from 34 percent to 35 percent, effective for tax years
beginning after December 31, 1992. As a result of this change in rate, the
Company was able to write up the value of its deferred tax asset. The effect
of this write-up was to increase net deferred tax assets which increased net
income by $2.1 million, or $.03 per share, in 1993.
The $14.2 million write-down of the deferred tax asset in 1991 was required
under SFAS 96, "Accounting for Income Taxes," because, based on facts at
December 31, 1991, the Company could not demonstrate absolute assurance that
the benefit of AMT credit carryover for financial statement purposes would be
realized in the future. Effective January 1, 1992, the Company adopted SFAS
109, "Accounting for Income Taxes," which changed the method of accounting for
income taxes. Under SFAS 109, the Company was able to demonstrate that the
benefit of deferred tax assets was fully realizable. The cumulative effect of
adopting SFAS 109 was to restore deferred tax assets and increased net income
$14.2 million, or $.20 per share, in 1992.
As of December 31, 1993, the Company included in "Federal income taxes" $6.4
million of foreign tax credit carryover. Of this amount, $1.9 million, $2.8
million and $1.7 million will expire at the end of 1996, 1997 and 1998,
respectively, unless previously used.
5. DEBT
During 1993, the maximum amount of bank borrowings outstanding was $170.0
million, and the daily average amount outstanding was $3.4 million, at an
average annual interest rate of 5.3 percent.
Funded debt at December 31 consisted of:
(millions) 1993 1992
Revolving credit agreements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ -- $ 50.0
Credit facilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 120.0
7% Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 148.2 --
8 3/4% Debentures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- 69.7
8 3/4% Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 28.8 28.6
10% Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 149.3 149.3
10 1/8% Subordinated Notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 149.2 149.1
Other funded debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1.6 1.8
------------ ------------
$ 477.1 $ 568.5
============ ============
Funded debt includes amounts the Company has borrowed and contributed to the
capital of its insurance subsidiaries or borrowed for other long-term
purposes.
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 had the right to borrow up to $50.0 million. In
February 1994, the Company reduced this revolving credit arrangement to $20.0
million. See Note 12-Subsequent Events. By selecting from available credit
options, the Company may elect to pay interest at rates related
43
42 - 43
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. At December 31, 1993,
the Company had no borrowings under this arrangement; at December 31, 1992,
$50.0 million was outstanding.
In May 1990, the Company also entered into a four-year credit facility with
Morgan Guaranty Trust Company of New York under which the Company had the
right to borrow up to $75.0 million. By selecting from available credit
options, the Company could have elected to pay interest at rates related to
the London interbank offered rate, the bank's CD rate, a base lending rate or
a quoted rate. A commitment fee was payable on any unused portion of the
committed facility at the rate of .15 percent per annum. At December 31, 1993
and 1992, the Company had no borrowings under this agreement. In February
1994, the Company terminated this credit facility. See Note 12--Subsequent
Events.
In October 1989, the Company entered into a five-year credit facility agreement
with a group of banks under which the Company secured the right to borrow up
to $235.0 million and request an additional $235.0 million. By selecting from
available credit options, the Company could have elected to pay interest at
rates related to the London interbank offered rate or the greater of the agent
bank's base lending rate or a rate based on the Federal funds' rate. A
commitment fee was payable on any unused portion of the committed facility at
the rate of .125 percent per annum. The agreement provided for a utilization
fee not to exceed .10 percent on the average amount of outstanding borrowings.
At December 31, 1993, no borrowings were outstanding under this arrangement;
at December 31, 1992, $120.0 million was outstanding. In February 1994, the
Company terminated this agreement. See Note 12--Subsequent Events.
In October 1993, the Company sold $150.0 million of noncallable 7% Notes due
2013 with interest payable semiannually. The fair value of these Notes was
$145.3 million at December 31, 1993.
In February 1987, the Company sold $100.0 million, $70.0 million after the May
1989 debt exchange, of 8 3/4% Debentures due 2017 with interest payable
semiannually. In December 1993, the Company redeemed the entire $70.0 million
principal amount of these Debentures. The Company redeemed the Debentures at
105.425 percent of the principal amount, plus accrued interest, with the
proceeds of the sale of certain securities in its investment portfolios. A
$4.0 million charge on debt extinguishment was recorded as a "non-recurring
item." The fair value of this debt was $69.2 million at December 31, 1992.
In May 1989, the Company issued $30.0 million of 8 3/4% Notes due 1999 in
exchange for $30.0 million of the 8 3/4% Debentures due 2017. These Notes are
noncallable and interest is payable semiannually. The fair value of these
Notes was $33.7 million and $31.8 million at December 31, 1993 and 1992,
respectively.
In December 1988, the Company sold $150.0 million of 10% Notes due 2000 and
$150.0 million of 10 1/8% Subordinated Notes due 2000. All such Notes are
noncallable. Interest is payable semiannually on both issues. The fair values
of the 10% Notes and 10 1/8% Subordinated Notes were $180.6 million and $181.2
million, respectively, at December 31, 1993 and $170.4 million and $169.1
million, respectively, at December 31, 1992.
As of December 31, 1993, the Company is in compliance with its financial debt
covenants. The most restrictive financial covenant, which appeared under the
recently terminated credit facilities, provided that senior indebtedness could
not exceed 200 percent of long-term capital.
In January 1994, the Company sold $200.0 million of its 6.60% Notes due 2004.
See Note 12--Subsequent Events.
Aggregate principal payments on funded debt outstanding at December 31, 1993
are $.4 million for 1994, 1995 and 1996, $.3 million for 1997, $.1 million for
1998 and $480.0 million thereafter.
6. LITIGATION
The Company, or its subsidiaries, are named as defendant in various lawsuits
generally relating to their business. Numerous legal actions arise from claims
made under insurance policies issued by the subsidiaries or in connection with
previous reinsurance agreements. These actions were considered by the Company
in establishing its loss reserves. The Company believes that the ultimate
disposition of these and other pending lawsuits will not materially impact the
Company's operations or financial position.
7. STATUTORY FINANCIAL INFORMATION
At December 31, 1993, $91.5 million of consolidated statutory policyholders'
surplus represents net admitted assets of the Company's insurance subsidiaries
that are not transferable in the form of dividends, loans or advances to the
Company. Generally, the net admitted assets of insurance subsidiaries
available for transfer to the Company are restricted by state law and are
limited to those net admitted assets, as determined in accordance with
statutory accounting principles, which exceed minimum statutory capital
requirements.
During 1993, the insurance subsidiaries paid aggregate cash dividends of $131.3
million, and one subsidiary returned $32.9 million of previously contributed
capital to the Company. Based on the dividend laws currently in effect, the
insurance subsidiaries may pay aggregate dividends of $117.1 million in 1994
without prior approval from regulatory authorities. These limitations may
change during 1994, which could affect the dividends permitted to be paid
without prior approval. Statutory policyholders' surplus was $703.6 million
and $658.3 million at December 31, 1993 and 1992, respectively. Statutory net
income was $188.6 million, $61.7 million and $76.8 million for the years ended
December 31, 1993, 1992 and 1991, respectively.
8. LEASE COMMITMENTS
The Company has operating lease commitments with terms greater than one year
for equipment and office space, some with options to renew at the end of the
lease periods. The minimum rental commitments under all such noncancelable
leases at December 31, 1993 are as follows (in millions): 1994--$20.2;
1995--$14.5; 1996--$8.8; 1997--$2.6; 1998--$.7; and thereafter--$.1. Total
rental expense incurred by the Company for 1993, 1992 and 1991 was $31.3
million, $35.4 million and $33.4 million, respectively.
44
9. EMPLOYEE BENEFIT PLANS
RETIREMENT PLANS In 1990, the Company adopted a defined contribution pension
plan covering employees hired after December 31, 1988, who meet requirements
as to age and length of service. The Company's funding policy was to
contribute 1.3 percent of each eligible employee's compensation up to the
Social Security wage base. Company contributions were $.7 million in 1993, $.5
million in 1992 and $.3 million in 1991. Effective January 1, 1994, the plan
was amended to include all employees who meet requirements as to age and
length of service. Under the amended plan, contributions vary from one percent
to five percent of compensation up to the Social Security wage base, based on
years of eligible service.
The Company has a defined benefit pension plan which covered employees hired
before January 1, 1989 who met requirements as to age and length of service.
This plan was curtailed on December 31, 1993, and the Company recognized a
$1.5 million gain. The benefits accruals, based on years of service and the
employee's career average compensation up to the Social Security tax base,
were frozen as of December 31, 1993. The Company's funding policy is to
contribute annually the maximum amount that can be deducted for Federal income
tax purposes.
The following table sets forth the defined benefit plan information as of
December 31:
(millions) 1993 1992 1991
Actuarial present value of benefit obligations:
Vested benefit obligation . . . . . . . . . . . . . . . . . . . . . . $ 15.8 $ 9.2 $ 5.5
========= ========= ==========
Accumulated benefit obligation . . . . . . . . . . . . . . . . . . . . $ 16.8 $ 12.3 $ 8.8
========= ========= ==========
Projected benefit obligation for service
rendered to date . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 16.8 $ 16.6 $ 12.3
Plan assets at fair value, primarily government
and corporate taxable bonds . . . . . . . . . . . . . . . . . . . . . 17.9 13.6 16.4
Plan assets net of projected benefit obligation . . . . . . . . . . . . 1.1 (3.0) 4.1
Unrecognized actuarial gains . . . . . . . . . . . . . . . . . . . . . (1.9) (3.6) (8.8)
Unrecognized prior service cost . . . . . . . . . . . . . . . . . . . . -- .7 .8
Unrecognized transition asset at January 1, 1987,
recognized over 21 years . . . . . . . . . . . . . . . . . . . . . . . (.3) (.3) (.4)
--------- --------- ----------
Pension liability recognized in the
consolidated balance sheets . . . . . . . . . . . . . . . . . . . . . $ (1.1) $ (6.2) $ (4.3)
========= ========= ==========
Net pension cost included the following components:
Service cost-benefits earned during the period . . . . . . . . . . . . $ 1.9 $ 2.5 $ 2.1
Interest cost on projected benefit obligation . . . . . . . . . . . . 1.2 1.1 .9
Actual return on plan assets . . . . . . . . . . . . . . . . . . . . . (1.2) (1.3) (2.2)
Net amortization and deferral . . . . . . . . . . . . . . . . . . . . (.5) (.4) .2
--------- --------- ----------
Net periodic pension cost . . . . . . . . . . . . . . . . . . . . . . $ 1.4 $ 1.9 $ 1.0
========= ========= ==========
The weighted average discount rate used in determining the actuarial present
value of the projected benefit obligation was 7.0 percent for 1993, 8.0
percent for 1992 and 9.0 percent for 1991. The expected long-term rate of
return on assets was 8.0 percent for 1993 and 1992 and 9.0 percent for 1991.
The rate of increase in future compensation levels was 8.0 percent in 1992 and
1991.
POSTEMPLOYMENT BENEFITS The Company provides various postemployment benefits to
former or inactive employees, their beneficiaries and covered dependents.
Postemployment benefits include salary continuation and disability-related
benefits including workers' compensation and continuation of health care
benefits. In 1993, the Company early adopted SFAS 112, "Accounting for
Postemployment Benefits," and recognized its obligation of $.9 million at
December 31, 1993. The Company's policy is to fund annually the maximum amount
of its obligation that can be deducted for Federal income tax purposes.
POSTRETIREMENT BENEFITS The Company provides postretirement health and life
benefits to all employees who met requirements as to age and length of service
at December 31, 1988. The Company recognized its obligation of $.4 million at
December 31, 1993 and 1992 and $1.4 million at December 31, 1991. The
Company's policy is to fund annually the maximum amount of its obligation 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.
LONG-TERM SAVINGS PLAN The Company has a Long-Term Savings Plan (LTSP) under
which the Company matches, into Company stock purchase accounts, a maximum of
3.0 percent of an employee's eligible salary or wages contributed to the LTSP.
Company contributions were $3.8 million in 1993, $3.6 million in 1992 and $3.7
million in 1991.
45
44 - 45
INCENTIVE COMPENSATION PLANS Under the Company's 1985 Restricted Stock Plan,
key employees were awarded Common Shares which vested over future employment
periods. An amount equal to the market value of the shares at the date of
grant was charged to income over the vesting period. During 1993, the
remaining 297,419 shares under this plan vested. No awards may be granted
under this plan after December 31, 1993.
The Company's 1989 Incentive Plan provides for the granting of stock options
and other stock-based awards to key employees of the Company. The 6,500,000
Common Shares authorized under the Incentive Plan have been registered.
Outside of the Incentive Plan, the Company registered 1,425,000 Common Shares
relating to stock options granted to key employees of the Company. 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
were granted at the fair market value at the date of grant.
A summary of all stock option activity (adjusted for the December 1992 3-for-1
stock split) during the three years ended December 31, follows:
1993 1992 1991
NUMBER OF OPTION PRICES NUMBER OF OPTION PRICES NUMBER OF OPTION PRICES
OPTIONS OUTSTANDING SHARES PER SHARE SHARES PER SHARE SHARES PER SHARE
Beginning of year . . . . . . 4,123,003 $ 7.666 to 19.833 3,301,176 $ 7.666 to 19.833 2,744,976 $ 7.666 to 18.291
Add (deduct):
Granted . . . . . . . . . . 693,325 29.625 1,581,750 15.458 to 18.833 767,100 14.458 to 20.208
Exercised . . . . . . . . . (96,443) 9.250 to 19.666 (531,497) 7.666 to 18.291 -- --
Cancelled . . . . . . . . . (230,998) 9.125 to 29.625 (228,426) 9.125 to 19.375 (210,900) 9.250 to 20.208
----------- ------------------- ----------- ------------------- ----------- -------------------
End of year . . . . . . . . . 4,488,887 $ 7.666 to 29.625 4,123,003 $ 7.666 to 19.833 3,301,176 $ 7.666 to 19.833
=========== =================== =========== =================== =========== ===================
Exercisable, end of year. . . 934,592 $ 7.666 to 19.833 759,238 $ 7.666 to 19.666 788,997 $ 7.666 to 18.291
=========== =================== =========== =================== =========== ===================
Available, end of year. . . . 2,808,173 1,270,500 2,623,824
=========== =========== ===========
The amounts charged to income for incentive compensation plans, including a
cash bonus program for key members of management and a gainsharing payment to
all other employees, were $24.7 million in 1993, $12.0 million in 1992 and
$4.7 million in 1991.
10. RELATED PARTY TRANSACTIONS
In April 1988, the Company sold to Alfred Lerner, then Chairman of the
Company's Board of Directors, a $75.0 million Floating Rate Convertible
Subordinated Debenture due 2008 (convertible debenture). On December 16, 1992,
the convertible debenture was converted into 9,000,000 Common Shares. On the
same date, Mr. Lerner sold, in an underwritten public offering, 5,175,000 of
the Common Shares received upon such conversion. In 1993, Mr. Lerner sold the
remaining 3,825,000 shares. The public offering was completed pursuant to the
terms of the registration rights provisions of the convertible debenture,
under which the Company paid $5.1 million in underwriting and other expenses
of the offering, which were charged directly to shareholders' equity. In
addition, Mr. Lerner ended his employment agreement with the Company, and the
Company paid him $10.0 million. Prior to the conversion, the Company incurred
interest expense on the convertible debenture of $4.5 million in 1992 and $6.5
million in 1991.
As of June 30, 1992, the Company exercised its right to terminate the
Investment Management Agreement with Progressive Partners Limited Partnership
(Progressive Partners) as part of its strategy to compete more effectively by
lowering costs. Mr. Lerner had a 50 percent interest in Progressive Partners.
Upon such termination, the Company paid Progressive Partners a one-time
termination fee, and an additional incentive fee for the period ended June 30,
1992, in the aggregate amount of $54.6 million, determined according to a
formula contained in the Investment Management Agreement. Progressive
Partners' investment staff became employed by a wholly-owned subsidiary of the
Company and continues to provide the Company with investment and capital
management services. Prior to the termination of the Agreement, the Company
incurred investment management service fees to Progressive Partners of $10.5
million for 1992 and $19.1 million for 1991.
In January 1991, the Company purchased 4,851,000 shares (adjusted for the
2-for-1 stock split paid February 12, 1993), or 4.9 percent, of MBNA
Corporation in connection with its initial public offering. At the time of the
transaction, Mr. Lerner was Chairman of the Board and Chief Executive Officer
of MBNA Corporation and owned 10 percent of its common stock. During 1993, the
Company sold its entire holding of MBNA Corporation, recognizing realized
gains of $74.3 million.
46
46 - 47
11. SEGMENT INFORMATION
The operating segments of the Company and subsidiaries are classified into
Insurance and Service. Expense allocations are based on assumptions and
estimates; stated segment operating results would change if different methods
were applied. The Company does not allocate assets to segments.
For the years ended December 31,
(millions) 1993 1992 1991
PRETAX PRETAX PRETAX
REVENUES PROFIT (LOSS) REVENUES PROFIT (LOSS) REVENUES PROFIT (LOSS)
Insurance operations . . . $ 1,668.7 $ 177 .8 $ 1,426.1 $ 49.6 $ 1,286.9 $ (46.9)
Service operations . . . 43.7 6 .8 53.3 (4.3) 54.0 (2.1)
------------- ------------- ------------ ------------ ------------ ------------
Total operations . . . . 1,712.4 184 .6 1,479.4 45.3 1,340.9 (49.0)
Proposition 103
reserve reduction . . . -- -- 106.0 106.0 -- --
Investment income . . . . 242.4 242 .4 153.5 153.5 152.2 152.2
Interest expense and
other costs . . . . . -- (53.9) -- (126.1) -- (70.3)
------------- ------------- ------------ ------------ ------------ ------------
Total . . . . . . . . . $ 1,954.8 $ 373 .1 $ 1,738.9 $ 178.7 $ 1,493.1 $ 32.9
============= ============= ============ ============ ============ ============
12. SUBSEQUENT EVENTS
On January 12, 1994, the Company sold $200.0 million of its 6.60% Notes due
2004 in an underwritten public offering. The Notes were priced to yield 6.62
percent. The Notes are noncallable, and interest is payable semiannually.
Effective February 1, 1994, the Company cancelled its $75.0 million credit
facility with Morgan Guaranty Trust Company of New York and reduced its
revolving credit arrangement with National City Bank to $20.0 million from
$50.0 million. Effective February 10, 1994, the Company cancelled the
remaining $185.0 million under the credit facility agreement with a group of
banks. Since the first half of 1993, the Company raised over $500 million
through the sale of its debt and equity securities in the public market and,
therefore, is not currently in need of these credit facilities.
47
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The consolidated financial statements and the related notes on pages 34 through
46, together with the supplemental information on pages 50 through 55, should
be read in conjunction with the following discussion of our 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 and other outstanding securities, to redeem debt, and for other
business purposes. In 1993, the Company sold 4,950,000 Common Shares for net
proceeds of $177.0 million, $150.0 million of its 7% Notes due 2013 and filed
a shelf registration for $200.0 million of its debt securities (in January
1994, the Company sold $200.0 million of its 6.60% Notes due 2004 under the
shelf registration statement). During 1993, the Company repurchased .4
million of its Serial Preferred Shares, Series A, for a cost of $9.8 million,
repaid $170.0 million borrowed under its credit facilities and redeemed the
entire $70.0 million of its 8 1/4 % Debentures.
During the three-year period ended December 31, 1993, the Company also sold
4,000,000 Serial Preferred Shares, Series A, for net proceeds of $96.4
million, repurchased 4.4 million Common and Serial Preferred Shares at a
total cost of $225.4 million, and decreased its aggregate borrowings $167.3
million. During the same period, The Progressive Corporation received $393.3
million from its insurance subsidiaries, net of capital contributions made to
these subsidiaries. The regulatory restrictions on subsidiary dividends are
described in Note 7 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. The Company also has available a $20.0 million
revolving credit agreement. The Company believes it has sufficient borrowing
capacity and other capital resources to support current and anticipated
growth.
The Company's insurance operations create liquidity by collecting and investing
premiums written from new and renewal business in advance of paying claims.
For the three years ended December 31, 1993, operations generated a positive
cash flow of $664.7 million, and cash flow is expected to be positive in both
the short-term and reasonably foreseeable future. The Company's substantial
investment portfolio is highly liquid, consisting almost entirely of readily
marketable securities. The Company does not expect any material changes in
its cash requirements and is not aware of any trends, events or uncertainties
that are reasonably likely to have a material effect on its liquidity.
Total capital expenditures for the three years ended December 31, 1993,
aggregated $122.6 million. In spring 1992, construction began on the
Company's new corporate office complex in Mayfield Village, Ohio, and in
December 1993, the Company began occupying a portion of this complex.
Construction is expected to be completed in 1994. The new facility will
consist of approximately 520,000 square feet of space and will replace office
space held under expiring leases in a number of locations in the Cleveland
area. The cost of the project is currently estimated at $74.8 million, and is
being funded through operating cash flows. As of December 31, 1993, $50.5
million of the project's cost had been paid.
In June 1992, the Company reached an agreement with the California Department
of Insurance to refund approximately $50 million of premiums (including
interest) on business written between November 8, 1988 and November 7, 1989
to approximately 260,000 policyholders, thereby settling all rollback and
refund exposure since Proposition 103 was adopted in November 1988. As a
result, the Proposition 103 premium refund and rollback reserve was reduced
by $106.0 million.
During the second quarter 1992, the Company changed its financial arrangement
with Progressive Partners Limited Partnership (Progressive Partners), its
investment manager, as part of its strategy to compete more effectively for
private passenger auto insurance by lowering costs. Under the new
arrangement, Progressive Partners' people, now employed by a wholly-owned
Progressive subsidiary, continue to provide the Company with investment and
capital management. The transaction involved paying Progressive Partners a
one-time fee for terminating the investment management contract, and an
additional incentive fee for the period ended June 30, 1992, in the aggregate
amount of $54.6 million. This transaction reduced the Company's costs for
investment and capital management.
In December 1992, Mr. Alfred Lerner, then Chairman of the Company, converted
his $75.0 million Floating Rate Convertible Subordinated Debenture due 2008
into 9,000,000 Common Shares and sold 5,175,000 of those Common Shares in an
underwritten public offering. The public offering was completed pursuant to
the registration rights provisions of the convertible debenture, under which
the Company paid $5.1 million in underwriting and other expenses of the
offering. These expenses were charged directly to shareholders' equity in
accordance with generally accepted accounting principles. On the
48
same date, Mr. Lerner agreed to a termination of his employment agreement
with the Company, and, in connection with these transactions, the Company
paid Mr. Lerner $10.0 million.
The Company invests in fixed maturity, short-term and equity securities. The
Company's investment strategy recognizes its need to maintain capital
adequate to support its insurance operations. Therefore, the Company
evaluates the risk/reward trade-offs of investment opportunities, measuring
their effects on stability, diversity, overall quality and liquidity of the
investment portfolio. The majority of the portfolio at December 31, 1993, was
in short-term and intermediate-term, investment-grade fixed-income
securities. Fixed maturity securities which are held-to-maturity and
short-term securities are reported at amortized cost; amortized cost of
short-term securities approximates market. Available-for-sale securities are
held for indefinite periods of time and include fixed maturities and equity
securities. The available-for-sale securities are reported at market value
with the changes in market value, net of deferred income taxes, reported
directly in shareholders' equity as unrealized appreciation or depreciation.
As of December 31, 1993, the mark-to-market net gains in the Company's
available-for-sale portfolio were $51.4 million ($33.5 million, net of
deferred income taxes), compared to $117.4 million ($77.5 million, net of
taxes). The weighted average fully taxable equivalent yield of the portfolio
was 8.7 percent, 8.6 percent and 9.4 percent as of December 31, 1993, 1992
and 1991, respectively. (See Note 2--Investments, for a more detailed
breakdown of the investment portfolio.)
As of December 31, 1993, the Company held $122.5 million of Collateralized
Mortgage Obligations (CMOs), compared to $189.8 million last year. CMOs held
by the Company are highly liquid with readily available quotes, and, at
December 31, 1993, have an average life of 1.6 years. Eighty-nine percent of
the CMOs held by the Company are rated AAA by Moody's and Standard & Poor's.
As of December 31, 1993, the Company's total CMO portfolio had an unrealized
loss of $3.7 million, compared to an unrealized gain of $.5 million last
year.
Investments in the Company's portfolio have varying degrees of risk. Equity
securities generally have greater risks than the non-equity portion of the
portfolio since these securities are subordinate to the rights of debt
holders and other creditors of the issuer. As of December 31, 1993, the
mark-to-market net gains in the Company's equity portfolio were $20.7 million
($13.5 million, net of taxes), compared to $88.3 million ($58.3 million, net
of taxes). The Company continually evaluates the creditworthiness of each
issuer for all securities held in its portfolio. 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. It is the Company's general policy to dispose
of securities when the Company determines that the issuer is unable to
reverse its deteriorating financial condition and the prospects for its
business within a reasonable period of time. In less severe circumstances,
the Company may decide to dispose of a portion of its holdings in a specific
issuer when the risk profile of the investment becomes greater than its
tolerance for such risk.
RESULTS OF OPERATIONS Direct premiums written increased 20 percent to $1,966.4
million in 1993, compared to $1,636.8 million in 1992 and $1,536.8 million in
1991. These amounts include premiums written under state-mandated involuntary
Commercial Auto Insurance Plans (CAIP), for which the Company retains no
indemnity risk, of $98.0 million in 1993, $142.2 million in 1992 and $180.0
million in 1991. The Company provides policy and claim processing services to
28 state CAIPs, compared to 26 in 1992 and 25 in 1991; the size of the CAIP
market continues to decrease. Net premiums written increased 25 percent to
$1,819.2 million, compared to $1,451.2 million in 1992 and $1,324.6 million
in 1991. Premiums earned, which are a function of the amount of premiums
written in the current and prior periods, increased 17 percent in 1993,
compared to 11 percent in 1992 and 8 percent in 1991. In 1989, the Company
established a reserve for potential premium rollbacks and refunds under
provisions of Proposition 103 and added to the reserve in subsequent years;
the reserve reduced premiums written and earned $10.2 million and $49.7
million in 1992 and 1991, respectively. In 1992, the Company settled its
financial responsibility under California Proposition 103 and reduced its
reserve as described above.
In 1993, the Company's Core business' net premiums written grew 25 percent,
driven by an increase in unit sales. The Company anticipates continued growth
in its Core business in 1994; however, it has begun to price so underwriting
margins move down to four percent. As a result, in the short run, operating
earnings may not increase in proportion to volume growth.
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. Claims 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 collected. 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 62 percent in 1993,
compared to 65 percent in 1992 and 67 percent in 1991. The personnel
reductions in late 1991 and early 1992, along with other cost-cutting
measures and the favorable run-off of the Transportation business, reduced
the Company's losses and loss adjustment expenses.
Policy acquisition and other underwriting expenses as a percentage of premiums
earned were 28 percent in 1993, compared to 31 percent in 1992 and 37 percent
in 1991. The decrease re-
49
flects the cost-cutting measures discussed above, as well as process
improvements, changed workflows and lower commission programs.
Service revenues were $43.7 million in 1993, compared to $53.3 million in 1992
and $54.0 million in 1991; the decrease in revenues is in conjunction with
the decrease in CAIP premiums written. Service businesses generated a pretax
operating profit of $6.8 million in 1993, compared to a pretax loss of $4.3
million in 1992 and a pretax loss of $2.1 million in 1991. During 1992, we
increased loss adjustment expense reserves $6.2 million.
Recurring investment income (interest and dividends) decreased 3 percent to
$134.5 million in 1993, 4 percent to $139.0 million in 1992 and 5 percent to
$144.8 million in 1991, primarily due to lower prevailing interest rates. Net
realized gains on security sales were $107.9 million in 1993, $14.5 million
in 1992 and $7.4 million in 1991. A significant portion of the 1993 realized
gains resulted from the sale of certain equity securities held in the
Company's investment portfolio.
President Clinton signed the Omnibus Budget Reconciliation Act of 1993, which,
among other items, increased the statutory tax rate to 35 percent. Effective
January 1, 1992, the Company adopted SFAS 109 and was able to demonstrate
that the benefit of deferred tax assets was fully realizable. The cumulative
effect of adopting SFAS 109 increased net income $14.2 million, or $.20 per
share. In 1991, the deferred tax asset write-down, as required under SFAS
96, was included in the Federal income tax provision.
ENVIRONMENTAL AND PRODUCT LIABILITY EXPOSURES Because the Company has been
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 and, in addition, has a
supplemental reserve that is in an amount substantially in excess of the
potential exposure for such claims. The Company does not believe that these
claims will have a material impact on the Company's liquidity, results of
operations or financial condition.
However, the ultimate costs of the environmental and product liability claims
are inherently difficult to project due to numerous uncertainties, including
causation and policy coverage issues, the possible uncollectability of
related reinsurance and third party indemnity arrangements, unsettled and
sometimes conflicting case law, difficulties in determining the scope of any
contamination or injury and the nature and cost of the appropriate remedial
action and the number and financial condition of responsible parties and
their insurers, among other factors.
Most of the Company's exposure for such claims results from Progressive's
acquisition in 1985 of American Star Insurance Company, since renamed
National Continental Insurance Company. When American Star was acquired, the
seller agreed to administer all claims asserted under policies previously
written by American Star and to pay all losses incurred under such policies,
including those covered by reinsurance then in place on some of the policies.
The seller encountered major financial difficulties as a result of losses in
Hurricane Andrew and, despite having paid all losses and adjusted all claims
on the old business since 1985, has contested its obligation to administer
these claims and to pay the losses not being paid by some of the reinsurers.
The dispute has been submitted to arbitration and is scheduled to be heard by
an arbitration panel during the second quarter. If it is determined that the
seller is responsible for all of these losses, the amounts could be material
to it. According to a recent study by independent actuaries for the seller,
aggregate reserves on this business are about $19.2 million. Of that amount,
about $6.3 million is being contested in the arbitration, $7.8 million is the
admitted obligation of the seller and the balance is the responsibility of
reinsurance sources that are paying their obligations.
The Company will continue to monitor these exposures, adjust the related
reserves appropriately as additional information becomes known and disclose
any material developments.
50
TEN YEAR SUMMARY -- FINANCIAL HIGHLIGHTS
Not covered by report of independent accountants
(millions-except per share amounts and number of people employed)
1993 1992
INSURANCE COMPANIES' SELECTED FINANCIAL INFORMATION
AND OPERATING STATISTICS-STATUTORY BASIS
Reserves:
Loss and loss adjustment expense . . . . . . . . . . . . . . . . . . . . . . . . . $1,053.7 $ 994.7
Unearned premiums . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 688.9 538.5
Policyholders' surplus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 703.6 658.3
Ratios:
Net premiums written to policyholders' surplus . . . . . . . . . . . . . . . . . 2.6 2.2
Loss and loss adjustment expense reserves to policyholders' surplus . . . . . . . 1.5 1.5
Loss and loss adjustment expense . . . . . . . . . . . . . . . . . . . . . . . . . 62.6 68.3
Underwriting expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 25.4 29.8
--------- ---------
Statutory combined ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 88.0 98.1
SELECTED CONSOLIDATED FINANCIAL INFORMATION-GAAP BASIS
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,954.8 $1,738.9
Total assets1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,011.3 3,440.9
Total shareholders' equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . 997.9 629.0
Common Shares outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72.1 67.1
Book value per Common Share . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 12.62 $ 7.94
Return on average shareholders' equity2 . . . . . . . . . . . . . . . . . . . . . . 36.0% 34.7%
Funded debt outstanding . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 477.1 $ 568.5
Ratio of funded debt to capital . . . . . . . . . . . . . . . . . . . . . . . . . . 32% 47%
GAAP underwriting margin . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.7 3.5
Number of people employed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,101 5,591
<FN>
1 Pursuant to SFAS 113, amounts for 1990 through 1992 were restated. (See Note 3--Reinsurance)
2 Net income minus preferred share dividends divided by average common shareholders' equity.
All share and per share amounts were adjusted for stock splits.
The Progressive Corporation and Subsidiaries
50
51
1991 1990 1989 1988 1987 1986 1985 1984
$ 901.7 $ 827.4 $ 787.7 $ 685.5 $ 496.1 $ 342.0 $ 226.6 $ 153.3
513.6 474.1 467.6 505.0 446.8 323.9 219.4 141.1
676.7 636.7 578.1 495.0 452.0 312.0 230.1 118.9
2.0 1.9 2.0 2.6 2.5 2.5 2.3 2.6
1.3 1.3 1.4 1.4 1.1 1.1 1.0 1.3
65.7 62.1 65.9 62.9 58.3 61.0 65.6 65.0
33.5 31.1 31.4 33.2 35.8 34.3 33.6 37.4
---------- ---------- ---------- ---------- ---------- ---------- --------- --------
99.2 93.2 97.3 96.1 94.1 95.3 99.2 102.4
$ 1,493.1 $ 1,376.2 $ 1,392.7 $ 1,355.8 $ 1,066.2 $ 749.4 $ 507.1 $ 303.3
3,317.2 2,912.4 2,643.7 2,316.3 1,782.5 1,259.2 810.8 538.1
465.7 408.5 435.2 417.2 395.0 311.4 118.4 74.8
63.3 69.3 76.2 80.7 86.1 84.0 65.1 65.1
$ 5.83 $ 5.89 $ 5.71 $ 5.17 $ 4.59 $ 3.71 $ 1.82 $ 1.15
6.7% 21.5% 17.4% 25.9% 24.7% 26.9% 36.9% 18.0%
$ 644.0 $ 644.4 $ 645.9 $ 479.2 $ 216.9 $ 100.8 $ 158.7 $ 102.4
58% 61% 60% 53% 35% 24% 57% 58%
(3.7) 1.0 (1.2) 2.9 5.6 4.3 0.0 (2.4)
6,918 6,370 6,049 5,854 5,879 4,711 3,266 2,243
51
52
TEN YEAR SUMMARY -- GAAP CONSOLIDATED OPERATING RESULTS
Not covered by report of independent accountants
(millions-except per share amounts)
1993 1992
Direct premiums written:
Personal lines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $1,548.9 $1,214.6
Commercial lines . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 417.5 422.2
---------- ----------
Total direct premiums written . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,966.4 1,636.8
Reinsurance assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9.2 4.3
Reinsurance ceded . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (156.4) (189.9)
---------- ----------
Net premiums written . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,819.2 1,451.2
Net change in unearned premiums reserve1 . . . . . . . . . . . . . . . . . . . . . (150.5) (25.1)
---------- ----------
Premiums earned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,668.7 1,426.1
---------- ----------
Expenses:
Losses and loss adjustment expenses . . . . . . . . . . . . . . . . . . . . . . . . 1,028.0 930.9
Policy acquisition costs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 311.6 304.1
Other underwriting expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . 151.3 141.5
---------- ----------
Total underwriting expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1,490.9 1,376.5
---------- ----------
Underwriting profit (loss) before taxes . . . . . . . . . . . . . . . . . . . . . . . 177.8 49.6
Provision (benefit) for Federal income taxes . . . . . . . . . . . . . . . . . . . . 62.2 16.9
---------- ----------
Underwriting profit (loss) after taxes . . . . . . . . . . . . . . . . . . . . . . . 115.6 32.7
Service operations profit (loss) after taxes . . . . . . . . . . . . . . . . . . . . 4.4 (2.8)
---------- ----------
120.0 29.9
Investment income after taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . 107.1 110.4
Net realized gains (losses) on security sales after taxes . . . . . . . . . . . . . . 70.1 9.6
Interest expense after taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . (25.8) (29.4)
Proposition 103 reserve reduction after taxes . . . . . . . . . . . . . . . . . . . . -- 70.0
Non-recurring items after taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . (2.6) (42.6)
Other income (expense) after taxes 2 . . . . . . . . . . . . . . . . . . . . . . . . (1.5) (8.3)
---------- ----------
Income before Federal tax adjustments
and cumulative effect of accounting change . . . . . . . . . . . . . . . . . . . . 267.3 139.6
Federal tax adjustments 3 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . -- --
Cumulative effect of accounting change 4 . . . . . . . . . . . . . . . . . . . . . . -- 14.2
---------- ----------
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 267.3 $ 153.8
========== ==========
Per share
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 3.58 $ 2.05
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .200 .191
Average equivalent shares
Primary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 71.8 62.3
Fully diluted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 72.0 71.9
Common Share Price Range
High . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 46 1/8 $ 29 3/8
Low . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 26 5/8 14 3/4
<FN>
1 Amount represents change in unearned premiums reserve less change in prepaid reinsurance premiums.
2 Reflects investment expenses after taxes and other tax adjustments.
3 1991 reflects a deferred tax asset write-down; 1990 reflects a fresh start tax benefit; and 1985 reflects benefits from capital
loss carry forwards.
4 1992 reflects adoption of SFAS 109, "Accounting for Income Taxes," and 1987 reflects adoption of SFAS 96, "Accounting for Income
Taxes."
All share and per share amounts were adjusted for stock splits.
The Progressive Corporation and Subsidiaries
53
52 - 53
1991 1990 1989 1988 1987 1986 1985 1984
$ 1,047.4 $ 876.0 $ 800.1 $ 817.0 $ 690.2 $ 526.2 $ 396.4 $ 264.1
489.4 482.8 487.0 521.0 488.0 303.9 145.0 47.1
----------- ----------- ----------- ----------- ----------- ---------- ---------- ----------
1,536.8 1,358.8 1,287.1 1,338.0 1,178.2 830.1 541.4 311.2
.1 .1 7.2 9.4 19.5 9.2 1.6 .1
(212.3) (162.6) (134.0) (72.4) (81.2) (58.4) (20.1) (2.8)
----------- ----------- ----------- ----------- ----------- ---------- ---------- ----------
1,324.6 1,196.3 1,160.3 1,275.0 1,116.5 780.9 522.9 308.5
(37.7) (5.1) 36.2 (59.6) (122.1) (103.7) (78.1) (35.0)
----------- ----------- ----------- ----------- ----------- ---------- ---------- ----------
1,286.9 1,191.2 1,196.5 1,215.4 994.4 677.2 444.8 273.5
----------- ----------- ----------- ----------- ----------- ---------- ---------- ----------
858.0 762.9 799.3 752.0 571.9 406.6 288.4 176.2
313.7 292.7 296.7 321.3 292.6 190.2 130.1 82.5
162.1 123.7 114.9 106.6 74.4 51.8 26.4 21.4
----------- ----------- ----------- ----------- ----------- ---------- ---------- ----------
1,333.8 1,179.3 1,210.9 1,179.9 938.9 648.6 444.9 280.1
----------- ----------- ----------- ----------- ----------- ---------- ---------- ----------
(46.9) 11.9 (14.4) 35.5 55.5 28.6 (.1) (6.6)
(15.9) 4.0 (2.9) 10.0 12.2 13.1 (.7) (3.8)
----------- ----------- ----------- ----------- ----------- ---------- ---------- ----------
(31.0) 7.9 (11.5) 25.5 43.3 15.5 .6 (2.8)
(1.4) 2.8 2.5 (1.3) (1.0) -- -- --
----------- ----------- ----------- ----------- ----------- ---------- ---------- ----------
(32.4) 10.7 (9.0) 24.2 42.3 15.5 .6 (2.8)
121.1 126.4 135.3 91.3 59.3 49.4 35.9 20.9
4.9 (8.4) (.4) 12.3 (1.9) 5.1 5.4 (2.3)
(31.6) (32.0) (32.5) (10.5) (6.5) (3.3) (4.8) (3.3)
-- -- -- -- -- -- -- --
-- -- -- -- -- -- -- --
(14.9) (13.2) (15.4) (9.2) (3.4) (2.0) (1.7) 1.4
----------- ----------- ----------- ----------- ----------- ---------- ---------- ----------
47.1 83.5 78.0 108.1 89.8 64.7 35.4 13.9
(14.2) 9.9 -- -- -- -- .2 --
-- -- -- -- 3.7 -- -- --
----------- ----------- ----------- ----------- ----------- ---------- ---------- ----------
$ 32.9 $ 93.4 $ 78.0 $ 108.1 $ 93.5 $ 64.7 $ 35.6 $ 13.9
=========== =========== =========== =========== =========== ========== ========== ==========
$ .41 $ 1.19 $ .94 $ 1.23 $ 1.08 $ .77 $ .52 $ .21
.172 .160 .147 .133 .077 .019 .017 .016
66.6 72.9 79.8 84.0 86.7 85.5 70.5 65.1
75.6 82.5 89.1 90.9 86.7 85.5 70.5 65.1
$ 20 5/8 $ 18 3/4 $ 14 1/2 $ 10 3/4 $ 11 7/8 $ 12 7/8 $ 7 $ 3 3/4
15 11 7 1/2 7 1/4 8 1/2 6 3/4 3 3/8 3
54
54 - 55
LOSS RESERVES
Not covered by report of independent accountants
GAAP COMBINED RATIO
ADJUSTED TO
YEAR-END CURRENT % YEAR-END REFLECT
RESERVE ESTIMATE RESERVE AMOUNT LOSS
AMOUNT1 OF TOTAL UNPAID AT AS RESERVE
YEAR (MILLIONS) REDUNDANCY2 DECEMBER 31, 1993 REPORTED DEVELOPMENT
1993 . . . . . . . . . . . . . $1,349 NA 100% 89.3 NA
1992 . . . . . . . . . . . . . 1,274 6% 52 96.5 96.4
1991 . . . . . . . . . . . . . 1,077 7 29 103.7 104.4
1990 . . . . . . . . . . . . . 858 8 18 99.0 99.1
1989 . . . . . . . . . . . . . 750 9 13 101.2 99.7
1988 . . . . . . . . . . . . . 654 7 6 97.1 99.0
1987 . . . . . . . . . . . . . 475 15 3 94.4 93.0
<FN>
The chart represents what the underwriting results for prior years would have been if year-end reserves were as subsequent payments
and current reserves now suggest. For example, the 96.5 GAAP combined ratio as reported for 1992 was negatively impacted 0.1 points
because reserve redundancy which existed at December 31, 1991 increased by $1.8 million during 1992.
1 Pursuant to SFAS 113, amounts for 1990 through 1992 were restated. (See Note 3-Reinsurance.)
2 The percentage will change as claims unpaid at December 31, 1993 are ultimately settled or the reserves adjusted.
NA = Not applicable
DIRECT PREMIUMS WRITTEN
Not covered by report of independent accountants
(millions)
1993 1992 1991 1990 1989
Florida $ 265.6 13.5% $ 195.3 11.9% $ 173.9 11.3% $ 169.3 12.5% $ 160.4 12.5%
Ohio 175.9 8.9 140.7 8.6 137.1 8.9 116.8 8.6 92.9 7.2
New York 170.4 8.7 156.8 9.6 132.1 8.6 105.2 7.7 79.9 6.2
Texas 146.6 7.4 117.0 7.2 96.2 6.3 64.4 4.7 46.9 3.7
Georgia 120.0 6.1 114.6 7.0 122.9 8.0 106.4 7.8 93.3 7.2
Pennsylvania 113.0 5.8 70.1 4.3 52.8 3.4 53.0 3.9 43.8 3.4
California 80.2 4.1 90.6 5.5 156.1 10.2 177.8 13.1 262.5 20.4
All Other 894.7 45.5 751.7 45.9 665.7 43.3 565.9 41.7 507.4 39.4
--------- ----- -------- ----- -------- ----- -------- ----- -------- -----
Total $ 1,966.4 100.0% $1,636.8 100.0% $1,536.8 100.0% $1,358.8 100.0% $1,287.1 100.0%
========= ===== ======== ===== ======== ===== ======== ===== ======== =====
The Progressive Corporation and Subsidiaries
55
QUARTERLY FINANCIAL AND COMMON SHARE DATA
Not covered by report of independent accountants
(millions--except per share amounts)
NET INCOME OPERATING INCOME2
OPERATING PER PER HIGH-LOW DIVIDENDS STOCK PRICE
YEAR QUARTER REVENUES TOTAL SHARE1 TOTAL3 SHARE1 PRICE4 PER SHARE APPRECIATION5
1993 . . . . . . . 1 $ 382.8 $ 51.6 $ .71 $ 39.9 $ .54 $ 36 1/8-26 5/8 $.050
2 423.3 79.7 1.11 54.5 .75 36 1/4-27 1/2 .050
3 442.8 82.6 1.09 54.7 .71 44 1/4-31 3/4 .050
4 463.5 53.4 .68 49.3 .63 46 1/8-38 3/8 .050
------- ------ ----- ------ ------ --------------- ----- ----
1,712.4 267.3 3.58 197.3 2.61 46 1/8-26 5/8 .200 39.8%
======= ====== ===== ====== ====== =============== ===== ====
1992 . . . . . . . 1 346.4 36.1 .47(6) 18.0 .22 18 7/8-14 3/4 .047
2 365.7 40.1 .53 32.4 .41 19 -15 5/8 .047
3 373.7 44.7 .62 42.0 .58 22 -18 7/8 .047
4 393.6 32.9 .45(7) 37.4 .51 29 3/8-21 3/8 .050
------- ------ ----- ------ ------ --------------- ----- ----
1,479.4 153.8 2.05 129.8 1.72 29 3/8-14 3/4 .191 63.3%
======= ====== ===== ====== ====== =============== ===== ====
1991 . . . . . . . 1 318.3 25.7 .34 35.5 .47 20 1/4-15 3/8 .043
2 338.6 9.7 .13 18.6 .24 20 5/8-17 3/8 .043
3 349.3 11.2 .13 25.8 .33 18 3/4-15 1/2 .043
4 334.7 (13.7) (.25)(8) 5.2 .04 18 -15 .043
------- ------ ----- ------ ------ --------------- ----- ----
1,340.9 32.9 .41 85.1 1.19 20 5/8-15 .172 6.4%
======= ====== ===== ====== ====== =============== ===== ====
<FN>
All per share amounts and stock prices were adjusted for the December 8, 1992, 3-for-1 stock split.
1 Presented on a fully diluted basis. For 1993 and 1992, the sum does not equal the total because the average equivalent shares
differ in the periods. For 1991, the sum of the quarterly earnings per share does not equal the total because fourth quarter
earnings per share were antidilutive and, therefore, reported on a primary basis.
2 Represents net income less realized gains and losses and one-time non-operating items.
3 For 1993, the sum of the quarterly operating income does not equal the total due to the retroactive impact of the Omnibus Budget
Reconciliation Act of 1993.
4 Prices as reported on the New York Stock Exchange.
5 Represents annual rate of return on Progressive Common Shares, including quarterly dividend reinvestment.
6 For the first quarter 1992, income before cumulative effect of accounting change was $21.9 million, or $.28 per share.
7 Adjustments which adversely impacted earnings during the fourth quarter 1992 were the payment to Alfred Lerner (see Note
10-Related Party Transactions for further discussion) and reserve adjustments based on routine actuarial analysis completed
during the quarter.
8 Adjustments which adversely impacted earnings during the fourth quarter 1991 were an additional write-down of a deferred tax
asset due to the Company's inability to realize this asset under the provisions of SFAS 96, an accrual for severance costs as
part of the program finalized during the fourth quarter to further align staffing with declining California volume and to
streamline other operations, and reserve adjustments based on routine actuarial analysis completed during the period.
The Progressive Corporation and Subsidiaries
56
DIRECTORS
Milton N. Allen1,2,3
Director,
Various Corporations
B. Charles Ames
Partner,
Clayton, Dubilier & Rice, Inc.
(management consulting)
Stephen R. Hardis1,2
Vice Chairman, Chief
Financial and Administrative
Officer,
Eaton Corporation
(manufacturing)
Peter B. Lewis2
Chairman of the Board,
President and Chief
Executive Officer
Norman S. Matthews3
Consultant,
Formerly President,
Federated Department
Stores, Inc.
(retailing)
Donald B. Shackelford1,3
Chairman,
State Savings Bank
(savings and loan)
Dr. Paul B. Sigler1
Professor, Yale University and
Investigator,
Howard Hughes Medical
Institute
(education)
1 Audit Committee member
2 Executive Committee member
3 Executive Compensation Committee member
CORPORATE OFFICERS
Peter B. Lewis, Chairman,
President and Chief
Executive Officer
David M. Schneider, Secretary
Daniel R. Lewis, Treasurer
CORPORATE SUPPORT TEAM
Charles B. Chokel
Peter B. Lewis
Bruce W. Marlow
Michael C. Murr
David M. Schneider
Tiona M. Thompson
DIVISION PRESIDENTS, PRODUCT AND PROCESS LEADERS
Alan R. Bauer
William P. Cadden
G. Edward Combs
Jeffrey J. Dailey
Allan W. Ditchfield
W. Thomas Forrester
Steven B. Gellen
William H. Graves
Michael J. Hanerty
Stephen G. Klug
Moira A. Lardakis
Daniel R. Lewis
Robert E. Mathe
Robert J. McMillan
Glenn M. Renwick
Andrew W. Rogacki
David L. Roush
Gregory J. Trapp
Robert T. Williams
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
22, 1994, at 10:00 a.m. There were 4,859 shareholders of record on December 31,
1993.
PRINCIPAL OFFICE
The principal office of The Progressive Corporation is at 6300 Wilson Mills
Road, Mayfield Village, Ohio 44143.
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: (216) 575-2498 or (800) 622-6757
COUNSEL
Baker & Hostetler, Cleveland, Ohio
COMMON AND PREFERRED SHARES
The Progressive Corporation's Common Shares (symbol PGR) and Series A Preferred
Shares (symbol PGRPrA) are traded on the New York Stock Exchange. Dividends are
customarily paid on the last day of each quarter.
INTERIM REPORT DISTRIBUTION
The Progressive Corporation has discontinued its practice of automatically
mailing quarterly reports to shareholders whose shares are registered in the
name of a bank, broker or nominee. Any such shareholder wishing to receive
copies of the Company's quarterly shareholder reports may annually send a
letter requesting the reports to The Progressive Corporation, Investor
Relations, 6300 Wilson Mills Road, Box E61, Mayfield Village, Ohio 44143. All
requests must be received by April 15 of the year for which such reports are
requested.