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EXHIBIT NO. 13
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THE PROGRESSIVE CORPORATION
1996 ANNUAL REPORT
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Exhibit 13
About the Art
A Whether Progressive proactively changes its approach to marketing
or management, or changes in reaction to competition, regulation
or technology, change is constant and requires agility,
flexibility and velocity. To illustrate that Progressive changes
constantly, "Change" was selected as the theme for this Annual
Report. As Progressive continues to reinvent itself to serve
customers, it has become a designer and agent of change, both
internally and throughout the industry. At the same time,
embracing change also facilitates Progressive's ability to adapt
to shifts in the market that are outside of its control. The art
for this years' annual report was commissioned to directly
address the concept of "Change." Russian-born artists, Rimma
Gerlovina and Valeriy Gerlovin use their own faces and bodies as
a canvas for the transformation of their "still performances"
known as photoglyphs. The Gerlovins' work will become part of
Progressive's growing collection of contemporary art.
E 1996 Financial Highlights 2
Vision, Core Values and Objectives 7
Letter to Shareholders 18
Financial Review 32
cover Calendar back cover Spiral Clock
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1996 Financial Highlights 2
(millions-except per share amounts)
Average Annual Compounded
Rate of Increase (Decrease)
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5-Year 10-Year
1996 1995 % Change 1992-1996 1987-1996
For the Year
Direct premiums written $ 3,638.4 $ 3,068.9 19% 19% 16%
Net premiums written 3,441.7 2,912.8 18 21 16
Net premiums earned 3,199.3 2,727.2 17 20 17
Total revenues 3,478.4 3,011.9 15 18 17
Operating income 309.1 220.1 40 29 19
Net income 313.7 250.5 25 57 17
Per share:
Operating income 4.08 2.84 44 28 20
Net income 4.11 3.24 27 59 18
Underwriting margin(1) 8.5% 5.7% 8 6
At Year-End
Consolidated shareholders' equity $ 1,676.9 $ 1,475.8 14 29 18
Common Shares outstanding 71.5 72.1 (1) 3 (2)
Book value per Common Share $ 23.45 $ 19.31 21 32 20
Return on average common shareholders' equity 20.5% 19.6% 25 23
Stock Price Appreciation(2) 1-Year 5-Year 10-Year
Progressive 38.5% 31.0% 21.6%
S&P 500 22.8% 15.2% 15.2%
<FN>
(1) The 5- and 10-year amounts represent averages for the period, not rate of
increase.
(2) Assumes dividend reinvestment.
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1996 Performance Highlights 3
Operating income per share, which excludes
net realized gains on security sales and one-
time items, increased 44 percent to $4.08.
Progressive's stock appreciated 38.5
percent during the year.
The Core business net premiums written
grew 19 percent with an 8.1 percent
underwriting profit margin.
Market capitalization was $4.8
billion at December 31, 1996.
The companywide underwriting profit margin
was 8.5 percent, compared to the personal
auto insurance market's estimated underwriting
loss of 1.0 percent.
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About Progressive
The Progressive insurance organization
began business in 1937. Progressive
Casualty Insurance Company was founded
in 1956 to be among the first specialty
underwriters of nonstandard auto
insurance. The Progressive Corporation,
an insurance holding company formed in
1965, owns 64 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 1996
estimated industry premiums, which
include personal auto insurance in the
U.S. and Ontario, Canada, as well as
insurance for commercial vehicles, were
$129.4 billion, and Progressive's share
was 2.6 percent.
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Vision, Core Values and Objectives 7
Communicating a clear picture of Progressive by stating what we
try to achieve (Vision), what guides our behavior (Core Values), what our people
expect to accomplish (Objectives), and how we evaluate performance
(Measurements), permits all people associated with Progressive to understand
their role and enjoy their contributions.
Vision
We seek to be an excellent, innovative, growing and enduring business by
reducing the human trauma and economic costs of auto accidents, theft and other
perils while building a recognized, trusted, admired, business-generating
consumer brand. 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 and they govern our decisions and behavior. We want them
understood and embraced by all Progressive people. 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 rewards
on results and promotion on ability.
Profit. The opportunity to earn a profit is how the competitive free-enterprise
system motivates investment to enhance human health and happiness. Our
increasing profits reflect our customers and claimants increasingly positive
view of Progressive. We strive to find the most cost-effective ways to reduce
the human trauma and economic costs of automobile accidents. We value social
and economic well-being and strive to give back to our communities.
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Financial Objectives and Measurements
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Consistent achievement of superior results requires that our people understand
Progressive's objectives and their specific role, and that their personal
objectives dovetail with Progressive's. Our objectives are ambitious yet
realistic. We are committed to achieving financial objectives over rolling
five-year periods. Experience always clarifies objectives and illuminates better
strategies. We constantly evolve as we monitor the execution of our strategies
and progress toward achieving our objectives.
Return On Shareholders' Equity. Our most important financial goal is to achieve
an after-tax return on shareholders' equity over a five-year period that is at
least 15 percentage points greater than the rate of inflation (measured by the
Consumer Price Index which was 3.3 percent in 1996, and averaged 2.8 percent
over the past five years and 3.7 percent over the past ten years). Return on
equity was 20.5 percent in 1996, and averaged 25.2 percent over the past five
years and 23.4 percent over the past ten years.
Profitability. Progressive is driven by the goal of producing a 4 percent
underwriting profit over the entire retention period of an insured. Overall, we
had an underwriting profit of 8.5 percent in 1996, 8.1 percent for the past five
years and 5.6 percent for the past ten years. Estimated industry results for the
personal auto insurance market for the same periods were underwriting losses of
1.0 percent, 1.4 percent and 3.9 percent.
Growth. We seek increases in net premium volume that are at least 15 percentage
points greater than the rate of inflation. Companywide net premiums written
increased 18.2 percent in 1996, 21.0 percent compounded annually over the past
five years and 16.0 percent over the past ten years. Net premiums written in the
personal auto insurance market for the same periods grew 5.2 percent, 5.3
percent and 6.5 percent.
Achievements. We are convinced that the best way to maximize shareholder
value is to achieve these financial objectives consistently. An initial
shareholder who purchased 100 shares of Progressive for $1,800 in our
first public stock offering on April 15, 1971, owned 7,689 shares on December
31, 1996, with a market value of $518,000, for a 24.7 percent compounded annual
return, compared to the 8.4 percent return achieved by investors in the
Standard & Poor's 500 during the same period. In addition, the shareholder
received dividends of $1,768 in 1996, bringing their total dividends received
to $14,500 since they purchased the stock.
In the ten years since December 31, 1986, Progressive shareholders have
realized compounded annual returns of 21.6 percent, compared to 15.2 percent for
the S&P 500. In the five years since December 31, 1991, Progressive
shareholders' returns were 31.0 percent, compared to 15.2 percent for the S&P
500. In 1996, the returns were 38.5 percent on Progressive shares and 22.8
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 have spent $568.2 million repurchasing our shares, at an average
cost of $6.92 per share. During 1996, we repurchased 1.0 million Common Shares
at an average cost of $41.73 per share.
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Germination
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Ladder
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1996 Objectives and Accomplishments 13
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1996 Last 5 Years Last 10 Years
Return on Shareholders' Equity
Objective 18.3% 17.8% 18.7%
Accomplishment 20.5 25.2 23.4
Underwriting Profit (Loss) Margin
Objective 4.0 4.0 4.0
Accomplishment 8.5 8.1 5.6
Industry-Personal Auto Insurance Market (1.0) (1.4) (3.9)
Growth (annualized)
Objective 18.3 17.8 18.7
Accomplishment 18.2 21.0 16.0
Industry-Personal Auto Insurance Market 5.2 5.3 6.5
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Claim Stories 14
Sundial
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Following are the claim stories that appeared in our earnings releases
throughout 1996:
A claim representative responded to a call reporting damage to a
policyholder's vehicle after a tornado swept through his neighborhood in
Louisville, Kentucky. Because of possible looting, the police were not allowing
anyone other than residents to drive into the devastated area. So, he parked the
Immediate Response Vehicle and set out on foot, reaching the policyholder within
one hour of the report of loss. Once he arrived at the scene, only one more
problem remained. A huge tree had fallen, completely obscuring the car. To allow
him to settle the claim, the claim representative and the owner of the vehicle
used a chain saw and cleared all of the wood so an estimate could be provided
and the claim could be settled. That's not what you'd expect from an insurance
company . . . well, maybe you should.
On April 25, a new policyholder bought an auto insurance policy in Gainesville,
Florida. On May 29, the same policyholder reported that she hit a deer which
caused extensive damage to her vehicle. While inspecting the damage, our claim
representative removed some hair fibers and took them to a local veterinarian.
The vet advised the claim representative that the hair was from a cow, not a
deer. With this piece of information, our special investigation unit was able to
track down a report of a cow that was killed several hours before the policy was
taken out--a month before the loss was reported! The investigator located the
cow's owner, confirmed when and where the cow had been killed and exhumed the
body. The investigator found that the debris embedded in the cow's flesh matched
the damaged parts on the policyholder's vehicle. The claim was denied. It just
goes to show you that sometimes you have to dig deep down to get all the facts!
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Graphic of Time
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December 22--A policyholder, along with her two children and a carload of
Christmas presents, was on her way from Atlanta to Miami when she ran off the
highway and hit a guardrail. She called to report the accident from the
now-disabled car. It was dark and she was alone with her children on the side of
the interstate. When Progressive received the claim report, the claim
representative immediately called a car rental agency and persuaded the manager,
who was closing the rental office for the night, to stay open just a little
later so a car could be delivered to the policyholder waiting on the side of the
interstate. The claim representative then called a body shop and arranged for a
tow truck to meet him at the accident scene. The claim representative arrived at
the accident scene shortly before the rental car and tow truck and, within two
hours of the accident, helped the policyholder load the Christmas presents and
her children into the rental car so the family could continue their holiday trip
to Miami. That's not what people expect from their insurance company . . . well,
maybe they should.
During peak drive time on a Friday afternoon on one of Miami's busiest highways,
one of Progressive's policyholders was rear-ended on his way to work. Of all
days, this was not a day he could be late for work. The policyholder was a
musician with the Miami Sound Machine and not only was the group about to
perform at the Miami Arena, HBO would be broadcasting the event worldwide. The
policyholder called from the accident scene, explained the situation and
indicated he had no time to spare. No problem for Progressive's Immediate
Response(R) claims service. The claim representative gathered the loss
information and arranged for a tow truck and rental car to be dispatched to the
accident scene. Upon arriving at the scene, the claim representative got the
policyholder into the rental car, assured him the claim was being handled and
sent him off to the hundreds of thousands of fans eagerly anticipating the
concert. That's not what you'd expect from an insurance company . . . well,
maybe you should.
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Letter to Shareholders 18
In 1996, Progressive continued on its path to leadership in automobile
insurance. We expanded from 37 to 43 the number of states where we hope to
convince every auto owner and operator to investigate and buy Progressive's
unique package of low cost auto insurance and extraordinary customer service. We
make it easy for consumers to do business with Progressive by distributing our
products through many different channels.
I am proud and happy to report that we believe that our private passenger auto
premium growth in 1996 made Progressive the 6th largest United States auto
insurance company. We grew in 1996 by increasing our share of the approximately
$22 billion nonstandard auto insurance market and by continuing to grow in the
approximately $85 billion standard and preferred auto insurance market. We work
hard and invest heavily in people and processes to reduce the human trauma and
economic costs of auto accidents. Our results include the cost of these
investments, designed to make us more competitive for all auto insurance.
In 1996, Progressive's organization adapted to the company's larger size and
gained the flexibility and responsiveness required to sustain superior
performance in the face of increasingly intense competition and increasingly
rapid technological change. We are confident that we can continue to grow
profitably by continuing to lower our costs and rates and continuing to improve
customer service and the speed with which we deliver it. The rate, extent and
success of all the change required to accomplish this has earned Progressive
unexpected recognition as a leader among the many organizations which are
re-engineering themselves.
Progressive's strong focus on customers leads to steady growth in market
share which, in turn, permits us to reduce the costs of doing business and
become even more competitive. Our people's superb response to the challenge of
creating and managing growth reaffirms both how committed and how talented they
are. Great people operating with a clear Vision, strong Core Values and creative
Strategies will continue to drive Progressive's profitable growth.
Growing the number of policyholders, particularly standard and preferred risks
with their higher retention rates, builds intrinsic value because renewals are
more profitable than first year business. To encourage writing more standard and
preferred risks and to improve customer retention, we adjusted the 1997
"Gainsharing" program (contingent cash incentive compensation for all
Progressive people) to credit the estimated increase in value created by adding
new customers. The drive to add customers faster will result in more spending
to promote our brand and to develop more claim adjusters and customer service
representatives. These costs, along with expected losses on first year
business, are likely to bring underwriting profit margins more in line with our
4 percent objective.
Like all shareholders, we want premium growth to translate into current
earnings growth and a higher stock price. However, we manage by executing
meaningful, long-term strategies that build value which we expect to be
reflected in the stock price over five-year periods. Therefore, as an
investment, Progressive stock may be most attractive to investors interested in
long-term appreciation.
To facilitate growth and the execution of our strategies, we reorganized in
1996 to be less hierarchical, to have managers doing both staff and line work,
and to become closer to customers by expanding the number of local business
units. We eliminated the Chief Operating Officer
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Impulse of Life
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To Be 20
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role and created a "Policy Team" made up of the eleven people who make
Progressive's final management-level decisions--five Process Leaders
respectively responsible for Product, Independent Agent Marketing, Direct
Marketing, Ownership (customer service) and Claims, as well as the Chief
Financial, Human Resources, Legal, Information and International Officers, and
me.
Policy Team member's Gainsharing compensation is targeted between 100 percent
and 135 percent of base salary and is based largely on corporate results, with
Process Leaders incented to achieve world class profit/growth producing
breakthroughs. My role on the team is to ensure that all issues are identified,
articulated and addressed; to decide in the rare instances where there is
sufficient disagreement to warrant my doing so; and to oversee the objective
setting and performance evaluation processes. In 1996, Policy Team members
initiated the practice of evaluating each other and being evaluated by their
direct reports.
We organized process teams made up of people from both staff and line
functions to support the business units serving ever more localized sets of
customers. The teams concentrate on improving the processes fast enough to
sustain Progressive meeting its own high standards for customer service, profit
and growth.
Most business unit general managers report to Process Leaders. General
managers are responsible for reducing claim costs, improving agent service and
relationships, direct marketing and deciding price levels for their territory.
Gainsharing for general managers is targeted at 50 percent to 100 percent of
base salary, depending on business size and process involvement, and is earned
based on the profitability and growth of their business. We subdivide
continuously as growth produces enough customers to warrant more local focus,
which almost always drives costs down and improves customer service. Early in
1997, we had 38 business units, compared to 16 at the end of 1995.
Progressive's unique approach to management continues to evolve along with its
business strategy. Our management philosophy includes the following:
Total Quality Management dovetails with our Excellence Core Value--doing better
than we did before--and empowers Progressive people to change how they function
if the change measurably improves customer service or reduces costs, and if it
does not disrupt others in the work chain. Because measurement is essential to
TQM, we have dramatically improved our ability to measure performance and to
control quality.
Teamwork is the way we work. We continue to improve the ways in which we
motivate, manage, evaluate and reward teams.
Steady Cost Reduction has been, and continues to be, critical to our strategy.
Underwriting expenses were 21.6 percent of premiums in 1996, compared to 23.0
percent in 1995 and 35.0 percent in 1990.
Process Management by top managers eliminates much staff/line friction, fosters
cooperation among business units and departments, and requires balancing
delicate trade-offs between local autonomy and collective effectiveness.
Thorough Testing of new ideas has replaced our former propensity to seize
perceived opportunities and grow them as fast as possible.
Performance-based Compensation pays our people very well for exceptional
performance, makes contingent pay significant to everyone and fosters the
achievement of our demanding objectives. In 1996, 10.8 percent of total
compensation resulted from our Gainsharing program.
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Results
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In 1996, net premiums written increased 18 percent to $3,441.7 million, compared
to $2,912.8 million in 1995. Progressive has posted an annual underwriting
profit in 24 out of the last 30 years and bettered our 4 percent underwriting
goal with an 8.5 percent margin in 1996. We reduced underwriting expenses by 1.4
percentage points in 1996, following a 1.7 point reduction in 1995.
Operating income, which excludes net realized gains on security sales and
one-time items, is the best measure of how well we manage our insurance
operations. Operating income increased to $309.1 million, or $4.08 per share,
compared to $220.1 million, or $2.84 per share, in 1996. Operating income
excludes $7.1 million of net realized gains in 1996, compared to $46.7 million
in 1995. Net income was $313.7 million, or $4.11 per share, this year, compared
to $250.5 million, or $3.24 per share, in 1995. Return on shareholders' equity
was 20.5 percent, compared to 19.6 percent in 1995.
Changing Globe
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Progressive's Core Business 23
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Ninety-eight percent of Progressive's net premiums written is insurance for
private passenger automobiles, recreational vehicles and small fleets of
commercial vehicles, which we categorize as "core." Core business net premiums
written grew 19 percent to $3,367.2 million, compared to $2,824.2 million in
1995. The underwriting profit margin was 8.1 percent, compared to 5.2 percent in
1995.
Three years ago, we consolidated our new, unique and superior customer
services into a Progressive brand by expanding service in a number of states and
testing ways to project the brand to potential customers. We focused managers on
empowering people and constantly improving the delivery of around-the-clock,
immediate response, information-rich service, designed to delight customers.
We use a combination of television commercials, direct mail and other media to
urge consumers to test Progressive's smart new way to shop for auto insurance by
calling 1 800 AUTO PRO(R) (1-800-288-6776). In an average 15-minute call,
consumers can receive a quote for their particular risk profile from Progressive
and comparison rates from up to three other leading auto insurers, including
State Farm and Allstate. Our representative also explains the following service
improvements, which when considered together, are unique to Progressive:
Assistance after an accident, or other loss, is Progressive's most important
service, so we implore our customers to call 1-800-274-4499 immediately after
any incident. Twenty four hours a day, 7 days a week, a Progressive person
answers the phone, takes the information, authorizes emergency measures and
almost always can have a Progressive claim representative face-to-face with the
customer or claimant within a few hours.
Universal acceptance because consumers abhor being rejected or cancelled.
Progressive rarely rejects and never cancels honest customers who pay their
premiums in the 43 states where our complete program is operative.
Competitive rates for risks from ultra-preferred to nonstandard in the states
with the complete program. As experience makes us comfortable with pricing
standard and preferred risks, we concentrate more on this market which accounted
for between 10 and 15 percent of 1996 premium volume and is expected to become
an increasing percentage of total premium volume.
Many different ways to buy, which consumers prefer, so
we offer choices--including over 30,000 independent
insurance agencies (our most important method of
distribution), joint marketing relationships with
national accounts and Progressive's 1 800 AUTO PRO(R)
telephone service. Now that our personal auto product
line includes standard and preferred auto, agents have
found more and better ways to match the product they
offer with the needs of the consumer, spurring our
growth and helping the independent agent channel regain
lost market share.
24 hours a day, 7 days a week service. Consumers want to
do business when it's convenient for them, so we operate
24 hours a day, 7 days a week to provide new insurance
quotes, handle endorsements and questions concerning
current policies, and, most importantly, respond to
accidents and other incidents. Our customers depend upon
our service, which is supported by a real-time disaster
management approach that continuously monitors
performance of internal systems, threatening weather
patterns and other natural events. This approach allows
us to regularly reconfigure our network and place
disaster response teams in motion as soon as we hear of
an event.
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Absolute-Relative
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Progressive's Diversified Businesses
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The United Financial Casualty Company, Professional Liability Group
and Motor Carrier business units provide combinations of service and
indemnity to businesses. Their primary products are collateral
protection coverage for automobile lenders and loan tracking for
financial institutions, directors and officers liability and fidelity
coverage for American Bankers Association member community banks, and
underwriting and claim servicing for state involuntary residual market
commercial and personal auto programs and other commercial
enterprises. Each unit is the largest provider of its specialty in the
country, though the market size for each declined in 1996.
The Diversified businesses produced revenues and pretax profits of
$117.7 million and $24.3 million, respectively, in 1996, compared to
$130.2 million and $29.9 million in 1995. In 1996, Progressive
acquired 50.1 percent of an automobile inspection service company for
$3.0 million.
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Investments and Capital Management 25
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Progressive employs a conservative approach to investment and capital management
intended to ensure that there is sufficient capital to support all the insurance
premium that can be profitably written. Benchmarks for measuring the performance
of our investment professionals discourage the assumption of large amounts of
interest rate risk. The quality of our portfolio remained exceptional.
Fixed-income investments averaged about 89 percent of our portfolio with 63
percent invested in treasuries and other AAA securities. The duration of the
fixed-income portfolio was 3.2 years at year-end.
Our 1996 objective was to increase Progressive's exposure to the equity
markets closer to the 15 percent target established in early 1996 while avoiding
excessive market volatility which could reduce surplus and thus curtail growth.
On December 31, 1996, common stocks comprised 12.1 percent of the portfolio, up
from 8.2 percent at the prior year-end. This percentage will increase as
investment opportunities are identified. Progressive generally pursues a "value"
rather than a "growth" style of equity investing. From this perspective, the
domestic stock markets look over-valued relative to some foreign markets. We
rely on Sanford C. Bernstein & Co., a value-oriented firm, to manage our small
global equity portfolio.
The 1996 taxable equivalent total return for the portfolio was 7.8 percent,
compared to 12.4 percent last year. The average maturity of our fixed-income
portfolio ranged between 3.1 years and 3.9 years throughout the year. The short
average maturity of Progressive's bond portfolio reflects the 1.7 year average
life of our insurance liabilities.
The total portfolio increased to $4,450.6 million at December 31, 1996, from
$3,768.0 million at December 31, 1995. Investment income (interest, dividends
and realized gains and losses) was $232.9 million before taxes and $180.2
million after taxes, compared to $245.8 million before taxes and $186.6 million
after taxes in 1995. On December 31, 1996, our portfolio had $114.1 million in
unrealized capital gains, compared to $78.7 million at the end of 1995,
resulting from increased stock prices as the S&P 500 index rose from 615.9 to
740.7 during the year.
Our ratio of net premiums written to statutory surplus was 2.7 to 1 on
December 31, 1996. The Company has sufficient funds to support anticipated
growth in the operating companies. Progressive's debt to total capital ratio was
32 percent at year-end 1996, compared to 31 percent last year and a range of 24
percent to 61 percent over the past 20 years. During 1996, we issued $100
million of 7.30% 10-year Notes and redeemed our 93/8% Serial Preferred Shares,
Series A, at a price of $25 per share, plus accrued and unpaid dividends through
May 31, 1996, the redemption date, for a total cost of $82.1 million. In
addition, we repurchased 1.0 million Common Shares at an average cost of $41.73
per share.
Progressive supports risk-based capital monitoring by regulators
and endorses the trend toward more demanding standards than those currently in
use. This effort to improve the early detection of financial weakness before it
leads to insolvency should benefit Progressive over time by reducing state
insolvency fund assessments. The risk-based capital calculation reflects
favorably on companies like Progressive with historically high profitability,
short-tailed liabilities, and conservative reserves and investments.
Lunation
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RE:
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Risks
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Progressive faces tremendous opportunity. We point out risks to help our
shareholders understand the company better, not because our risk level is
greater than that of other businesses.
Legislative and Regulatory Risk. Insurance laws and regulations change
continually. There were no significant reforms during the year. We rely on our
general managers to help regulators and legislators resolve issues in the way
that best serves consumers.
Unpredictable Underwriting Margin and Growth Rate. Our strategy is to strive to
achieve a 4 percent underwriting profit margin over the entire retention period
of an insured. We cannot predict with precision the timing and pace of changes
in underwriting margins, in retention nor in the rate of growth. We monitor each
program to ensure that rates are adjusted promptly and adequately to obtain 4
percent margins over the entire retention period of a policyholder.
Pricing Risk. We continue to learn how to price standard and preferred auto
insurance, and to experiment with new ways to price certain segments. We
minimize the risk implicit in new pricing methodology by controlling volume in
new programs and changing rates immediately when experience dictates.
Homeowners Insurance. This type of insurance has the potential to expose
Progressive to catastrophes. Thus, there will be risk if our auto insurance
market share objectives require us to offer it. Our current absence of plans to
write homeowners
is also risky because many consumers prefer to
buy all their insurance from one company. In
1997, we will assess the demand for homeowners
and will develop a plan to satisfy our
customers' needs.
Advertised Brand. Consumer advertising and
brand awareness require higher performance
standards. We continually consider consumers'
demands and appreciate their ability to make
wise choices. In response, we are always
looking for new and innovative ways to improve
service at a lower cost.
Competitor Response. Other insurers are
reacting to Progressive's attempt to change
consumers' auto insurance experience,
but we cannot predict when and how their
response will affect our growth and
profitability. We monitor competitors and will
promptly incorporate their product and service
improvements in our consumer offerings. In
addition, our people, with their knowledge of
our operations along with their skills and
talents, are being sought by companies with
whom we compete.
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Projection
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The Future
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Looking forward prompts me to reminisce. When I leave the office for the last
time in a business year, I think about my Dad, Joe Lewis, Progressive's founder
and driving force for 18 years, and about the challenges implicit in producing
one more record year. As a very young man, I helped Dad with the year-end hand
compilation of policy-by-policy results that was Progressive's annual operating
summary then. The end of 1996 was especially poignant for me because Progressive
is about to celebrate its 60th anniversary and because I was recovering from
surgery to correct a circulation problem in my leg, which I am delighted to
report has healed well.
I start my 33rd year as CEO proud of producing record earnings and volume in
most years and still undaunted by the challenge implicit in Progressive's and my
own high standards. I am excited by the new problems and opportunities that come
faster and are more perplexing than ever. Along with all Progressive people, in
1997 I will focus on and be measured by improving claim handling quality and
efficiency; building the Progressive brand; new process implementation; and
responding to community-specific opportunities.
Progressive is leading a wave of change in the United States' system for
dealing with auto accident injuries and property damage. We are reducing auto
accident victims' trauma and costs, improving how consumers feel about auto
insurance and being rewarded for our leadership and commitment. Success so far
encourages us to expand at a pace that tests our ability to provide the service
we aspire to deliver.
We begin 1997 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.
Much will be required to realize our Vision. At Progressive, it is always as
if we are just beginning our business and so we look 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 1996. We are
particularly grateful for our shareholders' continued confidence. To the men and
women who make Progressive a great company, thanks for all your contributions in
1996 and the promise you bring to our future.
Joy Love and Peace
/s/ Peter Lewis
Peter B. Lewis
Chairman, President and Chief Executive Officer
32
31
Odd
- ---
Artwork Here
33
1996 Financial Review 32
Artwork Here
Vivid
-----
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
34
Report of Coopers & Lybrand L.L.P., Independent Accountants 33
- -----------------------------------------------------------
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, 1996 and 1995, 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, 1996. 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, 1996 and 1995, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1996 in conformity with generally
accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Cleveland, Ohio
January 21, 1997
The Progressive Corporation and Subsidiaries
35
Consolidated Statements of Income 34
- ---------------------------------
(millions-except per share amounts)
For the years ended December 31, 1996 1995 1994
Net Premiums Written $ 3,441.7 $ 2,912.8 $ 2,457.2
-----------------------------------------
Revenues
Premiums earned $ 3,199.3 $ 2,727.2 $ 2,191.1
Investment income 225.8 199.1 158.5
Net realized gains on security sales 7.1 46.7 23.8
Service revenues 46.2 38.9 41.9
-----------------------------------------
Total revenues 3,478.4 3,011.9 2,415.3
-----------------------------------------
Expenses
Losses and loss adjustment expenses 2,236.1 1,943.8 1,397.3
Policy acquisition costs 482.6 459.6 391.5
Other underwriting expenses 208.5 167.2 150.8
Investment expenses 6.1 8.1 8.7
Service expenses 41.9 30.2 31.9
Interest expense 61.5 57.1 55.3
-----------------------------------------
Total expenses 3,036.7 2,666.0 2,035.5
-----------------------------------------
Net Income
Income before income taxes 441.7 345.9 379.8
Provision for income taxes 128.0 95.4 105.5
-----------------------------------------
Net income $ 313.7 $ 250.5 $ 274.3
=========================================
Per Share
Primary $ 4.14 $ 3.26 $ 3.59
Fully diluted 4.11 3.24 3.59
See notes to consolidated financial statements.
The Progressive Corporation and Subsidiaries
36
Consolidated Balance Sheets 35
- ---------------------------
(millions)
December 31, 1996 1995
Assets
Investments:
Available-for-sale:
Fixed maturities, at market (amortized cost: $3,384.1 and $2,729.5) $3,409.2 $2,772.9
Equity securities, at market
Preferred stocks (cost: $333.8 and $379.4) 341.6 382.3
Common stocks (cost: $458.9 and $277.6) 540.1 310.0
Short-term investments, at amortized cost (market: $159.7 and $302.8) 159.7 302.8
-----------------------
Total investments 4,450.6 3,768.0
Cash 15.4 16.2
Accrued investment income 46.9 39.8
Premiums receivable, net of allowance for doubtful accounts of $23.2 and $19.2 820.8 649.9
Reinsurance recoverables 310.0 338.1
Prepaid reinsurance premiums 85.8 70.5
Deferred acquisition costs 200.1 181.9
Income taxes 62.1 58.3
Property and equipment, net of accumulated depreciation of $126.7 and $128.7 169.9 159.2
Other assets 22.3 70.6
-----------------------
Total assets $6,183.9 $5,352.5
=======================
Liabilities and Shareholders' Equity
Unearned premiums $1,467.3 $1,209.6
Loss and loss adjustment expense reserves 1,800.6 1,610.5
Policy cancellation reserve 43.3 40.8
Accounts payable and accrued expenses 420.1 339.9
Funded debt 775.7 675.9
-----------------------
Total liabilities 4,507.0 3,876.7
-----------------------
Shareholders' equity:
Serial Preferred Shares (authorized 20.0) 93/8% Serial Preferred Shares,
Series A, no par value,
cumulative, liquidation preference $25.00 per share (issued
and outstanding: 0 and 3.4) -- 83.6
Common Shares, $1.00 par value (authorized 200.0, issued 83.1,
including treasury shares of 11.6 and 11.0) 71.5 72.1
Paid-in capital 381.8 374.8
Net unrealized appreciation on investment securities 74.0 51.1
Retained earnings 1,149.6 894.2
-----------------------
Total shareholders' equity 1,676.9 1,475.8
-----------------------
Total liabilities and shareholders' equity $6,183.9 $5,352.5
=======================
See notes to consolidated financial statements.
The Progressive Corporation and Subsidiaries
37
Consolidated Statements of Changes in Shareholders' Equity 36
- ----------------------------------------------------------
(millions-except per share amounts)
For the years ended December 31, 1996 1995 1994
Preferred Shares, No Par Value
Balance, Beginning of year $ 83.6 $ 85.8 $ 87.9
Redemption of shares (77.9) -- --
Treasury shares purchased-cost basis (5.7) (2.2) (2.1)
----------------------------------------
Balance, End of year $ -- $ 83.6 $ 85.8
----------------------------------------
Common Shares, $1.00 Par Value
Balance, Beginning of year $ 72.1 $ 71.2 $ 72.1
Stock options exercised .4 .9 .2
Treasury shares purchased (1.0) -- (1.1)
----------------------------------------
Balance, End of year $ 71.5 $ 72.1 $ 71.2
----------------------------------------
Paid-In Capital
Balance, Beginning of year $ 374.8 $ 357.1 $ 357.6
Stock options exercised 6.5 9.2 2.5
Tax benefits on stock options exercised 5.9 8.5 2.4
Treasury shares purchased (5.4) -- (5.4)
----------------------------------------
Balance, End of year $ 381.8 $ 374.8 $ 357.1
----------------------------------------
Net Unrealized Appreciation (Depreciation) On Investment Securities
Balance, Beginning of year $ 51.1 $ (30.7) $ 33.5
Change in net unrealized appreciation (depreciation) 22.9 81.8 (64.2)
----------------------------------------
Balance, End of year $ 74.0 $ 51.1 $ (30.7)
----------------------------------------
Retained Earnings
Balance, Beginning of year $ 894.2 $ 668.5 $ 446.8
Net income 313.7 250.5 274.3
Cash dividends on Preferred Shares (9 3/8% annually) (3.2) (8.3) (8.5)
Cash dividends on Common Shares ($.23, $.22
and $.21 per share) (16.4) (15.8) (14.9)
Treasury shares purchased: Common Shares (35.5) -- (27.5)
Preferred Shares (.3) (.1) (.2)
Preferred Shares redeemed (2.9) -- --
Other, net -- (.6) (1.5)
----------------------------------------
Balance, End of year $1,149.6 $ 894.2 $ 668.5
----------------------------------------
Total Shareholders' Equity $1,676.9 $1,475.8 $1,151.9
========================================
On May 31, 1996, the Company redeemed, at its option, all of the remaining
9 3/8% Serial Preferred Shares, Series A, at a cost of $25 per share, plus
accrued and unpaid dividends through the redemption date.
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
38
Consolidated Statements of Cash Flows 37
- -------------------------------------
(millions)
For the years ended December 31, 1996 1995 1994
Cash Flows From Operating Activities
Net income $ 313.7 $ 250.5 $ 274.3
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 23.8 20.4 19.3
Net realized gains on security sales (7.1) (46.7) (23.8)
Changes in:
Unearned premiums 257.7 172.9 264.7
Loss and loss adjustment expense reserves 190.1 176.1 85.8
Accounts payable and accrued expenses 50.1 16.5 14.9
Policy cancellation reserve 2.5 (6.5) (12.8)
Prepaid reinsurance premiums (15.3) 12.7 1.4
Reinsurance recoverables 28.1 41.6 1.2
Premiums receivable (170.9) (107.5) (161.8)
Deferred acquisition costs (18.2) (20.3) (37.0)
Income taxes (16.3) .6 9.9
Other, net 14.0 20.3 15.2
----------------------------------------
Net cash provided by operating activities 652.2 530.6 451.3
----------------------------------------
Cash Flows From Investing Activities
Purchases:
Held-to-maturity: fixed maturities -- (.2) (89.6)
Available-for-sale: fixed maturities (4,447.2) (2,575.5) (1,463.1)
equity securities (725.3) (763.1) (350.2)
Sales:
Available-for-sale: fixed maturities 3,306.3 1,744.9 731.6
equity securities 537.7 593.6 298.3
Maturities, paydowns, calls and other:
Held-to-maturity: fixed maturities -- 87.1 58.6
Available-for-sale: fixed maturities 465.7 497.2 354.5
equity securities 62.5 10.4 17.7
Net (purchases) sales of short-term investments 143.1 (23.7) (48.3)
(Receivable) payable on securities 76.3 (52.0) (41.3)
Purchases of property and equipment (35.8) (38.3) (58.2)
----------------------------------------
Net cash used in investing activities (616.7) (519.6) (590.0)
----------------------------------------
Cash Flows From Financing Activities
Proceeds from exercise of stock options 6.9 10.1 2.7
Tax benefits from exercise of stock options 5.9 8.5 2.4
Redemption of Preferred Shares (80.8) -- --
Proceeds from funded debt 99.6 -- 198.4
Payments of funded debt (.4) (.4) (.4)
Dividends paid to shareholders (19.6) (24.1) (23.4)
Acquisition of treasury shares (47.9) (2.3) (36.3)
----------------------------------------
Net cash provided by (used in) financing activities (36.3) (8.2) 143.4
----------------------------------------
Increase (decrease) in cash (.8) 2.8 4.7
Cash, Beginning of year 16.2 13.4 8.7
----------------------------------------
Cash, End of year $ 15.4 $ 16.2 $ 13.4
========================================
See notes to consolidated financial statements.
The Progressive Corporation and Subsidiaries
39
Notes to Consolidated Financial Statements 38
- ------------------------------------------
December 31, 1996, 1995 and 1994
1. Reporting and Accounting Policies
Nature of Operations The Progressive Corporation, an insurance holding company
formed in 1965, owns 64 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.
Basis of Consolidation and Reporting The accompanying consolidated financial
statements include the accounts of The Progressive Corporation, its subsidiaries
and affiliate (the Company). All of the subsidiaries and the affiliate are
wholly owned or controlled. All significant intercompany accounts and
transactions are eliminated in consolidation. The parent company's investments
in subsidiaries exceeded their underlying book value at dates of acquisition by
$7.0 million, of which $1.6 million remains.
Investments Held-to-maturity: fixed-maturity securities are securities which the
Company has the positive intent and ability to hold to maturity. The Company had
no held-to-maturity securities at December 31, 1996 and 1995. In November 1995,
the Financial Accounting Standards Board (FASB) issued a Special Report entitled
"A Guide to Implementation of Statement 115 on Accounting for Certain
Investments in Debt and Equity Securities." In accordance with the
implementation guidance, the Company reclassified its held-to-maturity
securities to available-for-sale and marked the securities to market.
Available-for-sale: fixed-maturity securities are securities held for
indefinite periods of time or sold in response to changes in interest rates,
anticipated prepayments, risk/reward characteristics, liquidity needs or similar
economic factors. These securities are carried at market value with the
corresponding unrealized appreciation or depreciation, net of deferred income
taxes, reflected in shareholders' equity. The asset-backed portfolio is
accounted for under the retrospective method; prepayment assumptions are based
on market expectations.
Available-for-sale: equity securities include common stocks and nonredeemable
preferred stocks and are reported at quoted market values. Changes in the market
values of these securities, net of deferred income taxes, are reflected as
unrealized appreciation or depreciation in shareholders' equity. Changes in
value due to foreign currency exchange are recognized in income in the current
period.
Derivatives, as defined by Statement of Financial Accounting Standards (SFAS)
119, "Disclosures about Derivative Financial Instruments and Fair Value of
Financial Instruments," include futures, options, short positions, forward
positions, foreign currency forwards and interest rate swap agreements, and are
carried in the appropriate available-for-sale portfolio based on the nature of
the instrument. Those instruments held or issued for purposes other than trading
are carried at market value; changes in value of futures, options, foreign
currency forwards and short positions are recorded to income in the current
period, and changes in the value of forward positions and interest rate swaps
are reflected in shareholders' equity as unrealized appreciation or
depreciation, net of deferred income taxes. At disposition, changes in value of
forward positions and interest rate swap agreements are recognized in income as
"net realized gains or losses on security sales." Those instruments entered into
for the purpose of hedging are carried at market value; changes in value follow
the recognition of the asset being hedged. Hedges are evaluated on established
criteria to determine the effectiveness of their correlation and ability to
reduce risk. Gains or losses on closed hedge positions are recorded as basis
adjustments to the cost of the assets hedged and amortized over their expected
life. Unamortized amounts are recognized in income at the disposition of the
assets hedged. Gains and losses on foreign currency hedges are recognized in
income and offset the foreign exchange gains and losses on the underlying
transactions.
Trading securities are securities bought principally for the purpose of
selling them in the near term and are reported at market value. Changes in
market value are recognized in income in the current period. During the year,
the net activity in trading securities was not material to the Company's results
of operations, cash flows and financial position. The Company had no trading
securities or financial instruments with off-balance-sheet risk held or issued
for trading purposes at December 31, 1996 and 1995.
Short-term investments include eurodollar deposits, commercial paper and other
securities maturing within one year and are reported at amortized cost, which
approximates market.
Investment securities are exposed to various risks such as interest rate,
market and credit. Market values of securities fluctuate based on the magnitude
of changing market conditions; significant changes in market conditions could
materially affect portfolio value. Risk is individually evaluated for all
positions, including financial instruments with off-balance-sheet risk.
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 of the assets using accelerated
methods for computers and straight line for all other fixed assets.
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.
Loss and Loss Adjustment Expense Reserves Loss reserves represent the estimated
liability on claims reported to the Company, plus reserves for losses incurred
but not yet reported (IBNR). These estimates are reported net of amounts
recoverable from salvage and subrogation. Loss adjustment expense reserves
represent the estimated expenses required to settle these claims and losses. The
methods of making estimates and establishing these reserves are reviewed
regularly, and resulting adjustments are reflected in income currently. Such
loss and loss adjustment expense reserves could be susceptible to significant
change in the near term.
Reinsurance The Company's reinsurance transactions are primarily attributable to
premiums written under state-mandated involuntary plans for commercial vehicles
(Commercial Auto Insurance Procedures-CAIP), for which the Company retains no
indemnity risk. (See Note 3-Reinsurance for further discussion). 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.
The Progressive Corporation and Subsidiaries
40
39
Earnings Per Share Prior to the redemption of the Preferred Shares, net income
was reduced by Preferred Share dividends earned during the period and the excess
of the fair value over the carrying amount of Preferred Shares repurchased for
both the primary and fully diluted earnings per share calculations. Primary and
fully diluted earnings per share are computed using the weighted number of
Common Shares and equivalents, including stock options, assumed outstanding
during the period.
Deferred Acquisition Costs Deferred acquisition costs include commissions,
premium taxes and other costs incurred in connection with writing business.
These costs are deferred and amortized over the period in which the related
premiums are earned. The Company considers anticipated investment income in
determining the recoverability of these costs. There is no indication that these
costs will not be fully recoverable in the near term.
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 income taxes of $121.5 million, $75.5 million and $89.8 million in
1996, 1995 and 1994, respectively. Total interest paid was $60.3 million for
1996, $56.6 million for 1995 and $48.3 million for 1994.
As discussed above, on December 1, 1995, the Company reclassified $248.4
million of its held-to-maturity securities to available-for-sale, recognizing
$10.4 million in gross unrealized gains.
Stock Options The Company follows the provisions of Accounting Principles Board
(APB) Opinion No. 25, "Accounting for Stock Issued to Employees," to account for
its stock option activity in the financial statements. The Company granted all
options currently outstanding at an exercise price equal to the market price at
the date of grant and, therefore, under APB 25, no compensation expense is
recorded. The Company follows the disclosure provisions of SFAS 123, "Accounting
for Stock-Based Compensation."
Estimates The Company is required to make estimates and assumptions when
preparing its financial statements and accompanying notes in conformity with
generally accepted accounting principles (GAAP). Actual results could differ
from those estimates.
Reclassifications Certain amounts in the financial statements for prior periods
were reclassified to conform with the 1996 presentation.
2. Investments
The components of pretax investment income at December 31 were:
(millions) 1996 1995 1994
Held-to-maturity: fixed maturities $ -- $ 15.8 $ 18.4
Available-for-sale: fixed maturities 183.9 140.3 103.8
equity securities 27.7 23.9 23.2
Short-term investments 14.2 19.1 13.1
----------------------------------
Investment income 225.8 199.1 158.5
----------------------------------
Gross realized gains:
Held-to-maturity: fixed maturities -- .8 1.1
Available-for-sale: fixed maturities 23.9 49.0 49.6
equity securities 39.7 32.5 23.0
Short-term investments -- .1 --
Gross realized losses:
Held-to-maturity: fixed maturities -- (.6) (.7)
Available-for-sale: fixed maturities (29.6) (22.3) (40.2)
equity securities (26.9) (12.8) (9.0)
----------------------------------
Net realized gains on security sales 7.1 46.7 23.8
----------------------------------
$232.9 $245.8 $182.3
==================================
Changes in net unrealized gains (losses) on fixed maturities and equity
securities were:
(millions) 1996 1995 1994
Unrealized gains (losses):
Held-to-maturity: fixed maturities $ -- $(6.2) $(12.1)
==================================
Available-for-sale: fixed maturities $(18.3) $86.1 $(73.4)
equity securities 53.7 40.0 (25.4)
Deferred income taxes (12.5) (44.3) 34.6
----------------------------------
$ 22.9 $81.8 $(64.2)
==================================
41
40
The composition of the investment portfolio at December 31 was:
(millions) Gross Gross
Unrealized Unrealized Market
Cost Gains Losses Value
1996
Available-for-sale:
U.S. government obligations $ 830.1 $ 1.5 $ (2.5) $ 829.1
State and local government obligations 1,314.7 24.0 (7.4) 1,331.3
Foreign government obligations 48.7 2.4 -- 51.1
Corporate debt securities 48.6 2.2 -- 50.8
Asset-backed securities 1,084.3 10.5 (6.5) 1,088.3
Other debt securities 57.7 .9 -- 58.6
-----------------------------------------------------------
3,384.1 41.5 (16.4) 3,409.2
Preferred stocks 333.8 8.5 (.7) 341.6
Common stocks 458.9 92.9 (11.7) 540.1
Short-term investments 159.7 -- -- 159.7
-----------------------------------------------------------
$ 4,336.5 $ 142.9 $ (28.8) $ 4,450.6
===========================================================
1995
Available-for-sale:
U.S. government obligations $ 676.7 $ 9.5 $ (.1) $ 686.1
State and local government obligations 1,186.9 32.6 (7.9) 1,211.6
Foreign government obligations 33.9 1.0 -- 34.9
Corporate debt securities 59.7 1.4 -- 61.1
Asset-backed securities 722.3 8.8 (2.0) 729.1
Other debt securities 50.0 .8 (.7) 50.1
-----------------------------------------------------------
2,729.5 54.1 (10.7) 2,772.9
Preferred stocks 379.4 3.7 (.8) 382.3
Common stocks 277.6 43.6 (11.2) 310.0
Short-term investments 302.8 -- -- 302.8
-----------------------------------------------------------
$ 3,689.3 $ 101.4 $ (22.7) $ 3,768.0
===========================================================
The composition of fixed maturities by maturity at December 31, 1996 was:
(millions) Market
Cost Value
Less than one year $ 482.6 $ 486.8
One to five years 1,903.0 1,915.3
Five to ten years 769.2 771.9
Ten years or greater 229.3 235.2
---------------------------
$ 3,384.1 $ 3,409.2
===========================
Asset-backed securities are reported based upon their projected cash flows. All
other securities which do not have a single maturity date are reported at
average maturity.
At December 31, 1996, bonds in the principal amount of $64.0 million were on
deposit with various regulatory agencies to meet statutory requirements.
The components of derivative financial instruments were:
(millions) Market Value/Carrying Value Contract/Notional Value
at December 31, at December 31,
--------------------------- -----------------------
1996 1995 1996 1995
Forward and future positions:
Assets $ (.3) $ .1 $ 16.5 $ 4.6
Liabilities .8 (3.0) 34.0 54.7
Option positions-assets -- (.3) -- 50.0
Foreign currency forward positions:
Assets .5 .1 62.0 21.2
Liabilities 1.0 .4 145.4 97.1
------------------ -------------------
$ 2.0 $ (2.7) $257.9 $227.6
================== ===================
42
41
Derivatives are used to manage the risks and enhance the yields of
the available-for-sale portfolio. This is accomplished by modifying the basis,
duration, interest rate or foreign currency characteristics of the portfolio or
hedged securities. Net cash requirements are limited to changes in market
values, which may vary based upon changes in interest rates and other factors.
Exposure to credit risk is limited to the carrying value; unless otherwise
noted, collateral is not required to support the credit risk.
The Company had open investment funding commitments of $13.7 million and $12.7
million as of December 31, 1996 and 1995, respectively. The Company had no
uncollateralized lines and letters of credit as of December 31, 1996 or 1995.
3. Reinsurance
Reinsurance contracts do not relieve the Company from its obligations to
policyholders. Failure of reinsurers to honor their obligations could result in
losses to the Company. The Company evaluates the financial condition of its
reinsurers and monitors concentrations of credit risk to minimize its exposure
to significant losses from reinsurer insolvencies. As of December 31, 1996 and
1995, 52 percent and 69 percent, respectively, of the "prepaid reinsurance
premiums" and 68 percent and 70 percent, respectively, 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) 1996 1995 1994
---------------------- ------------------------ -------------------------
Written Earned Written Earned Written Earned
Direct premiums $ 3,638.4 $ 3,380.7 $ 3,068.9 $ 2,895.9 $ 2,645.1 $ 2,378.4
Assumed 3.8 3.8 .1 .1 2.9 4.9
Ceded (200.5) (185.2) (156.2) (168.8) (190.8) (192.2)
----------------------- ------------------------ ------------------------
Net premiums $ 3,441.7 $ 3,199.3 $ 2,912.8 $ 2,727.2 $ 2,457.2 $ 2,191.1
======================= ======================== ========================
Losses and loss adjustment expenses are net of reinsurance ceded of $117.3
million in 1996, $104.1 million in 1995 and $145.9 million in 1994.
4. Litigation
The Company is named as defendant in various lawsuits generally relating to its
insurance operations. 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 and loss adjustment expense reserves. The Company believes
that the ultimate disposition of these and other pending lawsuits will not
materially impact the Company's results of operations, cash flows or financial
position.
5. Income Taxes
The provision for income taxes in the accompanying consolidated statements of
income differs from the statutory rate as follows:
(millions) 1996 1995 1994
-------------------- ------------------- ---------------
Income before income taxes $ 441.7 $ 345.9 $ 379.8
========== =========== =======
Tax at statutory rate $ 154.6 35% $ 121.1 35% $ 132.9 35%
Tax effect of:
Exempt interest income (21.1) (5) (21.9) (6) (24.8) (6)
Dividends received deduction (7.7) (2) (5.7) (2) (3.4) (1)
Other items, net 2.2 1 1.9 1 .8 --
-------------------- ------------------- ---------------
$ 128.0 29% $ 95.4 28% $ 105.5 28%
==================== =================== ===============
The current portion of the income tax provision was $157.2 million in 1996,
$95.2 million in 1995 and $113.0 million in 1994.
43
42
Deferred income taxes reflect the impact for financial statement reporting
purposes of temporary differences between the financial statement carrying
amounts and the tax bases of assets and liabilities. At December 31, 1996 and
1995, the components of the net deferred tax assets were as follows:
(millions) 1996 1995
Deferred tax assets:
Unearned premium reserve $ 96.7 $ 79.7
Non-deductible accruals 38.8 29.4
Off-balance-sheet financial instruments 2.8 --
Capitalized expenditures 8.3 5.2
Loss reserve discounting 7.3 10.5
Other 10.3 7.4
Deferred tax liabilities:
Deferred acquisition costs (70.0) (63.7)
Unrealized gains (40.1) (27.6)
---------------------------
Net deferred tax assets $ 54.1 $ 40.9
===========================
The Company is able to demonstrate that the benefit of its deferred tax assets
is fully realizable.
Deferred income taxes include noninterest bearing special estimated tax deposits
made pursuant to Section 847 of the Internal Revenue Code of $48.7 million and
$38.5 million at December 31, 1996 and 1995, respectively.
6. Statutory Financial Information
At December 31, 1996, $167.3 million of consolidated statutory policyholders'
surplus represents net admitted assets of the Company's insurance subsidiaries
that are required to meet minimum statutory surplus requirements in the
subsidiaries' states of domicile. The subsidiaries may be licensed in states,
other than their states of domicile, which may have higher minimum statutory
surplus requirements. Generally, the net admitted assets of insurance
subsidiaries that, subject to other applicable insurance laws and regulations,
are available for transfer to the parent company cannot include the net admitted
assets required to meet the minimum statutory surplus requirements of the states
where the subsidiaries are licensed.
During 1996, the insurance subsidiaries paid aggregate cash dividends of
$125.0 million to the parent company. Based on the dividend laws currently in
effect, the insurance subsidiaries may pay aggregate dividends of $216.4 million
in 1997 without prior approval from regulatory authorities.
Statutory policyholders' surplus was $1,292.4 million and $1,055.1 million at
December 31, 1996 and 1995, respectively. Statutory net income was $277.9
million, $200.0 million and $230.3 million for the years ended December 31,
1996, 1995 and 1994, respectively.
The Company's insurance subsidiaries, as part of their statutory filings, are
required to disclose their risk-based capital (RBC) requirements. The National
Association of Insurance Commissioners developed the RBC program to enable
regulators to take appropriate and timely regulatory actions with respect to
insurers that show signs of weak or deteriorating financial condition. RBC is a
series of dynamic surplus-related formulas which contain a variety of factors
that are applied to financial balances based on a degree of certain risks, such
as asset, credit and underwriting risks.
7. Loss and Loss Adjustment Expense Reserves
Activity in the loss and loss adjustment expense reserves, prepared in
accordance with GAAP, is summarized as follows:
(millions) 1996 1995 1994
Balance at January 1 $ 1,610.5 $ 1,434.4 $ 1,348.6
Less reinsurance recoverables on unpaid losses 296.1 334.2 334.8
-------------------------------------------
Net balance at January 1 1,314.4 1,100.2 1,013.8
-------------------------------------------
Incurred related to:
Current year 2,341.9 2,000.4 1,539.8
Prior years (105.8) (56.6) (142.5)
-------------------------------------------
Total incurred 2,236.1 1,943.8 1,397.3
-------------------------------------------
Paid related to:
Current year 1,424.7 1,204.3 893.9
Prior years 592.9 525.3 417.0
-------------------------------------------
Total paid 2,017.6 1,729.6 1,310.9
-------------------------------------------
Net balance at December 31 1,532.9 1,314.4 1,100.2
Plus reinsurance recoverables on unpaid losses 267.7 296.1 334.2
-------------------------------------------
Balance at December 31 $ 1,800.6 $ 1,610.5 $ 1,434.4
===========================================
44
43
During 1994, based on a review of the adequacy of its total loss reserves, the
Company eliminated its $71.0 million "supplemental reserve" ($46.2 million after
tax), resulting in a one-time increase in earnings of $.62 per share. The
Company historically established case and IBNR reserves by product with the
objective of being accurate to within plus or minus 2 percent. Pricing had been
based on these estimates of reserves by product. Because the Company desired a
very high degree of comfort that aggregate reserves were adequate, aggregate
reserves were established near the upper end of the reasonable range of
reserves, and the difference between such aggregate reserves and the midpoint of
the reasonable range of case and IBNR reserves was called the "supplemental
reserve." The Company concluded, after examining its historical aggregate
reserves, that the practice of setting aggregate reserves at the upper end of
the range of reasonable reserves provided an unnecessarily high level of
comfort. At December 31, 1994, even without the high level of comfort provided
by the "supplemental reserve," the Company's reserves would have been redundant
by approximately 2 percent to 4 percent over the previous 5 years. The Company
believes that this change in the estimate of its reserves placed it more in line
with the practices of other companies in the industry.
Because the Company is primarily an insurer of motor vehicles, it has limited
exposure for environmental, product and general liability claims. The Company
has established reserves for these exposures, in amounts which it believes to be
adequate based on information currently known by it. The Company does not
believe that these claims will have a material impact on the Company's
liquidity, results of operations, cash flows or financial condition.
During 1994, the Company settled the dispute arising out of its 1985
acquisition of American Star Insurance Company, over the seller's refusal to pay
certain losses on pre-sale business written by American Star. Total reserves on
this business, which are mainly for product liability and environmental claims,
are $26.4 million, of which $9.4 million is recoverable from reinsurers. The
Company will continue to monitor these exposures, adjust the related reserves
appropriately as additional information becomes known and disclose any material
developments.
The Company writes auto insurance in the coastal states, which could be
exposed to natural catastrophes, such as hurricanes. Although the occurrence of
a major catastrophe could have a significant impact on the Company's quarterly
results, the Company believes such an event would not be so material as to
disrupt the overall normal operations of the Company. The Company is unable to
predict if any such events will occur in the near term.
8. Employee Benefit Plans
Retirement Plans. The Company has a two-tiered Retirement Security Program. The
first tier is a defined contribution pension plan covering all employees who
meet requirements as to age and length of service. Contributions vary from one
percent to five percent of annual eligible compensation up to the Social
Security wage base, based on years of eligible service. Prior to January 1,
1994, the defined contribution plan covered only eligible employees hired after
December 31, 1988, and was funded at 1.3 percent of annual eligible compensation
up to the Social Security wage base. Company contributions were $4.2 million in
1996, $3.6 million in 1995 and $3.2 million in 1994.
The second tier is a long-term savings plan under which the Company matches,
into a Company stock account, amounts contributed to the plan by an employee up
to a maximum of three percent of the employee's eligible compensation. Company
contributions were $5.8 million in 1996 and $4.4 million in 1995 and 1994.
The Company has a defined benefit pension plan which covered employees hired
before January 1, 1989, who met requirements as to age and length of service.
This plan and future benefit accruals were frozen on December 31, 1993, and
the Company recognized a $1.5 million gain; the benefits accruals through the
date the plan was frozen were based on years of service and career average
compensation up to the Social Security tax base. The Company's funding policy is
to contribute annually the minimum amount required by the Employee Retirement
Income Security Act of 1974, as amended. There is no past service liability
requiring funding by the Company.
The following table sets forth the defined benefit plan information as of
December 31:
(millions) 1996 1995 1994
Actuarial present value of benefit obligations:
Vested benefit obligation $ 18.8 $ 19.6 $ 13.6
============================================
Accumulated benefit obligation $ 18.8 $ 19.6 $ 13.6
============================================
Projected benefit obligation for service rendered to date $ 18.8 $ 19.6 $ 13.6
Plan assets at fair value, primarily government and corporate taxable bonds 17.6 18.1 17.1
--------------------------------------------
Plan assets net of projected benefit obligation (1.2) (1.5) 3.5
Unrecognized actuarial (gains) losses 1.9 2.2 (3.0)
Required minimum liability (1.7) (2.0) --
Unrecognized transition asset at January 1, 1987, recognized over 21 years (.2) (.2) (.3)
--------------------------------------------
Pension asset (liability) recognized in the consolidated balance sheets $ (1.2) $ (1.5) $ .2
============================================
Net pension cost included the following components:
Service cost-benefits earned during the period $ -- $ -- $ --
Interest cost on projected benefit obligation 1.4 1.2 1.3
Actual return on plan assets (.6) (2.2) .1
Net amortization and deferral (.8) .8 (1.6)
--------------------------------------------
Net periodic pension return $ -- $ (.2) $ (.2)
============================================
The weighted average discount rate used in determining the actuarial present
value of the projected benefit obligation was 7.25 percent for 1996, 7.0 percent
for 1995 and 8.0 percent for 1994. The expected long-term rate of return on
assets was 8.0 percent for 1996, 1995 and 1994.
45
44
Postemployment Benefits. The Company provides various postemployment benefits
to former or inactive employees who meet eligibility requirements, their
beneficiaries and covered dependents. Postemployment benefits include salary
continuation and disability-related benefits including workers' compensation
and, if elected, continuation of health care benefits. The Company's obligations
were $1.5 million, $1.7 million and $1.3 million at December 31, 1996, 1995 and
1994, respectively.
Postretirement Benefits. The Company provides postretirement health and life
insurance benefits to all employees who met requirements as to age and length of
service at December 31, 1988. The Company recognized its current obligation of
$.4 million in 1996, $.3 million in 1995 and $.4 million in 1994. The Company's
funding policy is to contribute annually the maximum amount that can be deducted
for Federal income tax purposes. Contributions are intended to provide not only
for benefits attributed to services to date, but also for those expected to be
earned in the future.
Deferred Compensation. In April 1995, the Company's shareholders approved The
Progressive Corporation Executive Deferred Compensation Plan (Deferral Plan),
which permits eligible executives to defer receipt of some or all of their
annual bonuses or other incentive awards. These deferred amounts will be
invested in one or more investment funds, including Common Shares of the
Company, offered under the Deferral Plan. All distributions from the Deferral
Plan will be made in cash, except that distributions representing amounts deemed
invested in Common Shares will be made in Common Shares. The Company reserved
300,000 Common Shares for issuance under the Deferral Plan. The Company
established an irrevocable grantor trust to provide a source of funds to assist
the Company in meeting its liabilities under the Deferral Plan. At December 31,
1996 and 1995, the trust held assets of $2.6 million and $.9 million,
respectively, of which $.7 million and $.2 million were held in Common Shares,
to cover its liabilities.
Incentive Compensation. Plans The Company's 1989 Incentive Plan and 1995
Incentive Plan provide for the granting of stock options and other stock-based
awards to key employees of the Company. The 1989 Incentive Plan has 6,500,000
shares authorized and the 1995 Incentive Plan has 5,000,000 shares authorized.
All outstanding grants are nonqualified stock options awarded under the 1989
Incentive Plan. Outside of the Incentive Plans, the Company registered 1,425,000
Common Shares relating to nonqualified stock options granted to key employees of
the Company. The nonqualified stock options are granted for periods up to ten
years, become exercisable at various dates not earlier than six months after the
date of grant, and remain exercisable for specified periods thereafter. All
options granted have an exercise price equal to the market value of the Common
Shares on the date of grant.
A summary of all stock option activity during the three years ended December 31,
follows:
1996 1995 1994
---------------------------- ----------------------------- ----------------------------
Weighted Weighted Weighted
Number of Average Number of Average Number of Average
Options Outstanding Shares Exercise Price Shares Exercise Price Shares Exercise Price
Beginning of year 4,943,324 $ 23.76 5,263,822 $ 19.49 4,488,887 $ 16.21
Add (deduct):
Granted 852,989 47.52 888,725 38.27 1,156,450 31.06
Exercised (454,348) 14.89 (861,802) 11.54 (198,959) 13.59
Cancelled (232,575) 32.95 (347,421) 26.51 (182,556) 18.65
---------------------------- ----------------------------- ----------------------------
End of year 5,109,390 $ 28.09 4,943,324 $ 23.76 5,263,822 $ 19.49
============================ ============================= ============================
Exercisable, end of year 1,561,428 $ 15.75 984,099 $ 12.61 1,128,902 $ 10.87
============================ ============================= ============================
Available, end of year 5,672,561 6,292,975 1,834,279
========= ========= =========
The following options were outstanding or exercisable as of December 31, 1996:
Options Outstanding Options Exercisable
-------------------------------------------------- ----------------------------
Weighted Average Weighted Weighted
Range of Number of Remaining Average Number of Average
Exercise Prices Shares Contractual Life Exercise Price Shares Exercise Price
$ 9- 20 2,045,351 4.05 years $ 14.53 1,408,751 $ 14.08
21- 40 2,181,950 7.09 years 33.00 150,040 30.92
41- 60 869,362 8.97 years 47.14 2,637 46.23
61- 71 12,727 9.16 years 64.98 -- --
--------- ---------
$ 9- 71 5,109,390 1,561,428
========= =========
46
45
During 1996, the Company adopted the disclosure provisions of SFAS 123,
"Accounting for Stock-Based Compensation." SFAS 123 introduced a fair-value
based method of accounting for stock-based compensation. To calculate the fair
value of the options awarded, the Company elected to use the Black-Scholes
pricing model which produced a value of 41.4 percent for 1996 awards and 42.8
percent for 1995 awards. The following assumptions were used to derive the
ratio: a 7-year option term; an annualized volatility rate of .246 for 1996 and
.275 for 1995; a risk-free rate of return of 6.69 percent for 1996 and 6.53
percent for 1995; and a dividend yield of .5 percent for both years. The Company
elected to account for terminations when they occur rather than include an
attrition factor into its model.
If compensation cost had been measured based on the fair-value based accounting
method under SFAS 123, the following would have been disclosed for December 31:
(millions-except per share amounts) 1996 1995
Pro forma
Net income $ 310.3 $ 249.1
===========================
Earnings per share
Primary $ 4.09 $ 3.24
Fully diluted 4.06 3.22
The effect of applying SFAS 123 in the current year is not representative of the
effect on income for future years since each subsequent year will reflect
expense for additional years' vesting.
The amounts charged to income for incentive compensation plans, including an
executive cash bonus program for key members of management and a gainsharing
program for all other employees, were $45.3 million in 1996, $33.9 million in
1995 and $32.0 million in 1994.
9. Contractual Commitments
The Company has operating lease commitments and service agreements with terms
greater than one year for equipment, office space and telecommunications
services, some with options to renew at the end of the contract periods. The
minimum commitments under such noncancelable leases and service contracts at
December 31, 1996 are as follows (in millions): 1997- $32.8; 1998-$20.1;
1999-$7.4; 2000-$3.0; 2001-$.6; and thereafter-$0. Total expense incurred by the
Company for such purposes for 1996, 1995 and 1994 was $57.5 million, $51.3
million and $42.6 million, respectively.
10. Debt
During 1996, bank borrowings of $10.0 million were outstanding for one day at an
annual interest rate of 5.8 percent. Funded debt includes amounts the Company
has borrowed and contributed to the capital of its insurance subsidiaries or
borrowed for other long-term purposes.
Funded Debt at December 31 consisted of:
(millions) 1996 1995
7.30% Notes $ 99.6 $ --
6.60% Notes 198.8 198.7
7% Notes 148.3 148.3
8 3/4% Notes 29.5 29.2
10% Notes 149.6 149.5
10 1/8% Subordinated Notes 149.5 149.4
Other funded debt .4 .8
---------------------------
$ 775.7 $ 675.9
===========================
47
46
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. By
selecting from available credit options, the Company may elect to pay interest
at rates related to the London interbank offered rate, the bank's base rate or
at a money market rate. A commitment fee is payable on any unused portion of the
committed amount at the rate of .125 percent per annum. The Company had no
borrowings under this arrangement at December 31, 1996 or 1995.
In May 1996, the Company sold $100.0 million of noncallable 7.30% Notes due
2006 with interest payable semiannually. The fair value of these Notes was
$101.7 million at December 31, 1996.
In January 1994, the Company sold $200.0 million of noncallable 6.60% Notes
due 2004 with interest payable semiannually. The fair value of these Notes was
$197.1 million and $203.6 million at December 31, 1996 and 1995, respectively.
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
$144.3 million and $156.6 million at December 31, 1996 and 1995, respectively.
In May 1989, the Company issued $30.0 million of noncallable 83/4% Notes due
1999 with interest payable semiannually. The fair value of these Notes was $31.6
million and $32.7 million at December 31, 1996 and 1995, respectively.
In December 1988, the Company sold $150.0 million of 10% Notes due 2000 and
$150.0 million of 101/8% Subordinated Notes due 2000. All such Notes are
noncallable with interest payable semiannually on both issues. The fair values
of the 10% Notes and 101/8% Subordinated Notes were $167.8 million and $168.4
million, respectively, at December 31, 1996, and $175.9 million and $176.1
million, respectively, at December 31, 1995.
As of December 31, 1996, the Company was in compliance with its debt
covenants.
Aggregate principal payments on funded debt outstanding at December
31, 1996, are $.3 million for 1997, $.1 million for 1998, $30.0 million for
1999, $300.0 million for 2000, $0 for 2001, and $450.0 million thereafter.
11. Segment Information
The operating segments of the Company 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, 1996 1995 1994
------------------------ --------------------- ---------------------
Pretax Pretax Pretax
(millions) Revenues Profit (Loss) Revenues Profit (Loss) Revenues Profit (Loss)
Insurance operations $ 3,199.3 $ 272.1 $ 2,727.2 $ 156.6 $ 2,191.1 $ 251.5
Service operations 46.2 4.3 38.9 8.7 41.9 10.0
------------------------ --------------------- ---------------------
Total operations 3,245.5 276.4 2,766.1 165.3 2,233.0 261.5
Total investment income 232.9 232.9 245.8 245.8 182.3 182.3
Interest expense and other costs -- (67.6) -- (65.2) -- (64.0)
------------------------ --------------------- ---------------------
$ 3,478.4 $ 441.7 $ 3,011.9 $ 345.9 $ 2,415.3 $ 379.8
======================== ===================== =====================
12. Fair Value of Financial Instruments
Information about specific valuation techniques and related fair value detail is
provided in Note 1-Reporting and Accounting Policies, Note 2-Investments and
Note 10-Debt. Pursuant to SFAS 119, the cost and market value of the financial
instruments as of December 31 are summarized as follows:
(millions) 1996 1995
---------------------- --------------------
Market Market
Cost Value Cost Value
Investments:
Available-for-sale: fixed maturities $ 3,384.1 $ 3,409.2 $ 2,729.5 $ 2,772.9
preferred stocks 333.8 341.6 379.4 382.3
common stocks 458.9 540.1 277.6 310.0
Short-term investments 159.7 159.7 302.8 302.8
Funded debt (775.7) (811.3) (675.9) (745.7)
13. Pending Acquisitions
In November 1996, the Company signed a definitive agreement to acquire all of
Midland Financial Group, Inc.'s outstanding stock; the transaction is subject to
approval by Midland's shareholders and other customary conditions. In addition,
in January 1997, the Company signed a letter of intent under which it is
contemplated that it would purchase approximately 42% of the outstanding voting
stock of Danielson Holding Corporation. See Management's Discussion and Analysis
for further discussion on these pending acquisitions.
48
Management's Discussion and Analysis of Financial Condition and Results of 47
- --------------------------------------------------------------------------
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 the consolidated financial
condition and results of operations.
Financial Condition. The Progressive Corporation is a holding company
and does not have any revenue producing operations of its own. It receives cash
through borrowings, equity sales, subsidiary dividends and other transactions,
and may use the proceeds to contribute to the capital of its insurance
subsidiaries in order to support premium growth, to repurchase its Common Shares
and other outstanding securities, to redeem its outstanding securities and for
other business purposes. During 1996, the Company repurchased 1.0 million of its
Common Shares at a total cost of $41.9 million (average cost of $41.73 per
share), .2 million of its 9 3/8% Serial Preferred Shares, Series A, at a total
cost of $6.0 million (average cost of $25.60 per share) and redeemed the
remaining Preferred Shares at a total cost of $82.1 million, including accrued
and unpaid dividends through the redemption date.
During the three-year period ended December 31, 1996, the Company repurchased
2.1 million Common Shares at a total cost of $75.9 million (average cost of
$36.42 per share) and .4 million of its 9 3/8% Serial Preferred Shares, Series
A, at a total cost of $10.6 million (average cost $25.69 per share). The Company
also sold $300.0 million of Notes. During the same period, The Progressive
Corporation received $178.2 million from its insurance subsidiaries, net of
capital contributions made to these subsidiaries. The regulatory restrictions on
subsidiary dividends are described in Note 6 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. Given its 32% debt to equity ratio, 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 from new and renewal business in advance of paying claims.
For the three years ended December 31, 1996, operations generated a positive
cash flow of $1,634.1 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.
In November 1996, the Company signed a definitive agreement to acquire all of
Midland Financial Group, Inc.'s outstanding stock (approximately 5.5 million
shares) for a total cost of $49.5 million, or $9 per share, in cash. Midland
underwrites and markets nonstandard private passenger automobile insurance
through approximately 8,500 independent agents across 20 states, primarily in
the southern and western United States. During 1996, Midland wrote $116.6
million of net premiums written. The Company expects the transaction to be
completed during the first quarter 1997, subject to approval by Midland's
shareholders and other customary conditions, and will be funded with cash
generated by operating cash flows or investments.
In January 1997, the Company signed a letter of intent under which it is
contemplated that it will purchase approximately 11 million newly-issued
shares (42% of the outstanding voting stock) of Danielson Holding Corporation
for consideration having a total value of approximately $73 million, or $6.60
per share. Danielson is engaged, through its subsidiaries, in insurance
services, primarily writing private and commercial nonstandard insurance in
California and workers' compensation insurance in California and certain other
western states. During 1996, Danielson's insurance subsidiaries wrote $36.1
million of net premiums written. The proposed transaction is subject to, among
other things, additional due diligence by the parties and the execution of
mutually satisfactory documentation. If the transaction proceeds, a definitive
agreement is expected to be signed in the first quarter 1997 and will be subject
to approval of Danielson's shareholders and regulatory authorities.
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.
In January 1996, the Company began converting its computer systems
to be year 2000 compliant (e.g. to recognize the difference between '99 and '00
as one year instead of negative 99 years). Approximately 40% of the Company's
systems are now compliant, with all systems expected to be compliant by the end
of 1998. The total cost of the project is estimated to be $4.3 million and is
being funded through operating cash flows. The Company is expensing all costs
associated with these system changes. As of December 31, 1996, $1.6 million has
been expensed.
Total capital expenditures for the three years ended December 31, 1996,
aggregated $132.3 million.
Investments. The Company invests in fixed-maturity, equity and short-term
securities. The Company's investment strategy recognizes its need to maintain
capital adequate to support its insurance operations and commitment to risk
adverse investment policies. 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 is invested in high-grade, fixed-maturity securities,
of which short- and intermediate-term securities represented $3,275.6 million,
or 73.6%, in 1996, and $2,876.2 million, or 76.4%, in 1995. Long-term
investment-grade securities were $187.5 million, or 4.2%, in 1996, and $191.9
million, or 5.1%, in 1995. Non-investment-grade fixed-maturity securities were
$105.8 million, or 2.4%, in 1996, and $7.6 million, or .2%, in 1995 and offer
the Company high returns and added diversification without a significant adverse
effect on the stability and quality of the investment portfolio as a whole.
Non-investment-grade securities may involve greater risks often related to
creditworthiness, solvency and relative liquidity of the secondary trading
market. The duration of the fixed-income portfolio was 3.2 years at December 31,
1996.
A relatively small portion of the investment portfolio was invested in
marketable equity securities providing risk/reward balance and diversification.
Common stocks represented $540.1 million, or 12.1%, in 1996, and $310.0 million,
or 8.2%, in 1995. The increase in common stocks reflects the Company's objective
of increasing its position in common stock investments to approximately 15% of
the entire portfolio and to optimize value and further diversify the portfolio
through foreign equity investments. The foreign equity portfolio, which may
utilize stock index futures and foreign currency forwards, comprised $149.5
million of the common stock portfolio at December 31, 1996, and $46.4 million at
December 31, 1995. The remainder of the
The Progressive Corporation and Subsidiaries
49
48
equity portfolio of $341.6 million, or 7.7%, in 1996, and $382.3 million, or
10.1%, in 1995, was comprised of over 94% of fixed-rate preferred stocks with
mechanisms that may provide an opportunity to liquidate at par.
As of December 31, 1996, the Company's portfolio had $114.1 million in
unrealized gains, compared to $78.7 million in 1995, resulting from increased
stock prices as the S&P 500 index rose from 615.9 to 740.7 during the year. The
weighted average fully taxable equivalent book yield of the portfolio was 6.7%,
6.9% and 6.7% for the years ended December 31, 1996, 1995 and 1994,
respectively.
As of December 31, 1996, the Company held $1,088.3 million of asset-backed
securities which represented 24.5% of the total investment portfolio. The
portfolio included collateralized mortgage obligations (CMOs) and commercial
mortgage-backed obligations (CMBs) totaling $303.0 million and $480.2 million,
respectively. As of December 31, 1996, the CMO portfolio included sequential
bonds representing 88.8% of the CMO portfolio ($269.0 million) with an average
life of 2.9 years, and planned amortization class bonds representing 11.2% of
the CMO portfolio ($34.0 million) with an average life of 1.4 years. The CMO
portfolio had a weighted average Moody's or Standard & Poor's rating of AAA. At
December 31, 1996, the CMB portfolio had an average life of 5.4 years and a
weighted average Moody's or Standard & Poor's rating of AA-. The CMB portfolio
included $122.7 million of CMB interest-only certificates, which had an average
life of 5.1 years and a weighted average Moody's or S&P's rating of AAA at
December 31, 1996. At December 31, 1996, the CMO and CMB portfolios had
unrealized gains of $1.7 million and $2.1 million, respectively. The single
largest unrealized loss in any individual CMO and CMB security was $.3 million
and $.8 million, respectively, at December 31, 1996. Both the CMO and CMB
portfolios are highly liquid with readily available quotes and contain no
residual interests. The remainder of the asset-backed portfolio is invested
primarily in auto loan and other asset-backed securities.
Investments in the Company's portfolio have varying degrees of risk. The
primary market risk exposure to the fixed-income portfolio is interest rate
risk, which is limited by Company restrictions as to the acceptable range of
duration. Equity securities generally have greater risks than the non-equity
portion of the portfolio since these securities are subordinate to rights of
debt holders and other creditors of the issuer and are subject to the volatility
of the equity markets. In addition, the foreign equity portfolio is exposed to
foreign currency exchange risk, which is reduced by an active hedging policy.
The Company regularly evaluates individual holdings for evidence of impairment.
Changes in market value are evaluated to determine the extent to which such
changes are attributable to: (i) interest rates, (ii) market-related factors
other than interest rates and (iii) financial conditions, business prospects and
other fundamental factors specific to the issuer. Declines attributable to
issuer fundamentals are reviewed in further detail. Available evidence is
considered to estimate the realizable value of the investment. When a security
in the Company's investment portfolio has a decline in market value which is
other than temporary, the Company is required by GAAP to reduce the carrying
value of such security to its net realizable value.
Financial instruments with off-balance-sheet risk are used to manage the risks
and enhance the yields of the available-for-sale portfolio. This is accomplished
by modifying the basis, duration, interest rate or foreign currency
characteristics of the portfolio or hedged securities. Net cash requirements are
limited to changes in market values which may vary based upon changes in
interest rates and other factors. Exposure to credit risk is limited to the
carrying value; collateral is not required to support the credit risk. During
1995, the Company added a government bond trading portfolio to benefit from
short-term market rate opportunities. The Company has stringent restrictions on
the amount of open positions in the trading portfolio limiting its exposure to
acceptable levels. At December 31, 1996 and 1995, there were no trading
securities or off-balance-sheet trading positions.
Results of Operations. Operating income, which excludes net realized gains and
losses from security sales and one-time items, was $309.1 million, or $4.08 per
share, in 1996, $220.1 million, or $2.84 per share, in 1995 and $212.7 million,
or $2.76 per share, in 1994. The GAAP combined ratio was 91.5 in 1996, 94.3 in
1995 and 91.7 (88.5 including the elimination of the "supplemental reserve"
discussed below) in 1994.
Direct premiums written increased 19% to $3,638.4 million in 1996, compared to
$3,068.9 million in 1995 and $2,645.1 million in 1994. Net premiums written
increased 18% to $3,441.7 million, compared to $2,912.8 million in 1995 and
$2,457.2 million in 1994. The difference between direct and net premiums written
is largely attributable to premiums written under state-mandated involuntary
Commercial Auto Insurance Procedures (CAIP), for which the Company retains no
indemnity risk, of $99.5 million in 1996, $105.4 million in 1995 and $115.4
million in 1994. The Company provided policy and claim processing services to 27
state CAIPs in 1996, compared to 28 in 1995 and 1994. Premiums earned, which are
a function of the amount of premiums written in the current and prior periods,
increased 17% in 1996, compared to 24% in 1995 and 31% in 1994.
The Company's Core business units' net premiums written grew 19%, 21% and 38%
in 1996, 1995 and 1994, respectively, primarily driven by an increase in unit
sales. In 1996, the Company raised rates an average of 2.5%, compared 6.5% in
1995 and no rate changes in 1994. The Company continues to write standard and
preferred auto risks which represented between 10% and 15% of total Core
business volume. To encourage writing more standard and preferred risks and to
improve customer retention, the Company adjusted the contingent cash incentive
compensation program for 1997 to credit its conservative estimates of the
increase in value created by adding new customers. The Company believes that
growing the numbers of policyholders, particularly standard and preferred risks
with their higher retention rates, builds intrinsic value because renewals are
more profitable than first year business. The drive to add customers faster will
result in more spending to promote our brand and to develop more claim adjusters
and customer service representatives. These costs, along with expected losses on
first year business, are likely to bring profit margins more in line with the
Company's objective of achieving a 4% underwriting profit margin over the entire
retention period of an insured. In 1996, the Core business units generated an
underwriting profit margin of 8%, compared to 5% in 1995 and 7% in 1994.
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
50
49
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
70% in 1996, compared to 71% in 1995 and 67% (excluding the elimination of the
"supplemental reserve") in 1994.
During 1994, based on a review of the adequacy of its total loss reserves, the
Company eliminated its $71.0 million "supplemental reserve," resulting in a
one-time increase in earnings of $.62 per share, a 3.2 point increase in the
underwriting profit margin and a $46.2 million increase in capital. The Company
historically established case and IBNR reserves by product with the objective of
being accurate to within plus or minus 2%. Pricing had been based on these
estimates of reserves by product. Because the Company desired a very high degree
of comfort that aggregate reserves were adequate, aggregate reserves were
established near the upper end of the reasonable range of reserves, and the
difference between such aggregate reserves and the midpoint of the reasonable
range of case and IBNR reserves was called the "supplemental reserve." The
Company concluded, after examining its historical aggregate reserves, that the
practice of setting aggregate reserves at the upper end of the range of
reasonable reserves provided an unnecessarily high level of comfort. At December
31, 1994, even without the high level of comfort provided by the "supplemental
reserve," the Company's reserves would have been redundant by approximately 2%
to 4% over the previous 5 years. The Company believes that this change in the
estimate of its reserves placed it more in line with the practices of other
companies in the industry.
Because the Company is primarily an insurer of motor vehicles, it has
limited exposure for environmental, product and general liability claims. The
Company has established reserves for these exposures, in amounts which it
believes to be adequate based on information currently known by it. The Company
does not believe that these claims will have a material impact on the Company's
liquidity, results of operation, cash flows or financial condition.
During 1994, the Company settled the dispute, arising out of its 1985
acquisition of American Star Insurance Company (since renamed National
Continental Insurance Company) over the seller's refusal to pay certain losses
on pre-sale business written by American Star. Under the settlement, National
Continental received $10.1 million from the seller and agreed to be solely
responsible for the next $20 million of gross losses. The seller will thereafter
be responsible for half the losses, net of reinsurance, if it achieves certain
minimum net worth requirements. In addition to the $10.1 million, National
Continental will be entitled to the proceeds of various treaty and facultative
reinsurance policies that had been purchased by American Star. National
Continental has established reserves for these exposures, which are mainly for
product liability and environmental claims, in amounts it believes to be
adequate based on information currently available to it, including a study by
independent actuaries for the seller. Total reserves on this business are $26.4
million, of which $9.4 million is recoverable from reinsurers. The Company will
continue to monitor these exposures, adjust the related reserves appropriately
as additional information becomes known and disclose any material developments.
Policy acquisition and other underwriting expenses as a percentage of premiums
earned were 22% in 1996, compared to 23% in 1995 and 25% in 1994.
Service businesses generated a pretax operating profit of $4.3 million in
1996, compared to $8.7 million in 1995 and $10.0 million in 1994. The decrease
in operating profit is partially attributable to new businesses entered into
during 1996.
Recurring investment income (interest and dividends) increased 13% to $225.8
million in 1996, compared to $199.1 million in 1995 and $158.5 million in 1994,
primarily due to an increase in the average investment portfolio. Net realized
gains on security sales were $7.1 million in 1996, $46.7 million in 1995 and
$23.8 million in 1994.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995: EXCEPT FOR HISTORICAL INFORMATION, THE MATTERS DISCUSSED IN THIS ANNUAL
REPORT ARE FORWARD-LOOKING STATEMENTS THAT ARE SUBJECT TO CERTAIN RISKS AND
UNCERTAINTIES THAT COULD CAUSE THE ACTUAL RESULTS TO DIFFER MATERIALLY FROM
THOSE PROJECTED, INCLUDING ACCEPTANCE OF THE PRODUCTS, PRICING COMPETITION,
MARKET CONDITIONS AND OTHER RISKS DETAILED FROM TIME TO TIME IN THE COMPANY'S
SEC REPORTS. THE COMPANY ASSUMES NO OBLIGATION TO UPDATE THE INFORMATION IN THIS
ANNUAL REPORT.
51
Ten Year Summary-Financial Highlights 50
- -------------------------------------
not covered by report of independent accountants
(millions-except per share amounts and number of people employed)
1996 1995
Insurance Companies Selected Financial Information
and Operating Statistics-Statutory Basis
Reserves:
Loss and loss adjustment expense(1) $ 1,532.9 $ 1,314.4
Unearned premiums 1,382.9 1,140.4
Policyholders' surplus(1) 1,292.4 1,055.1
Ratios:
Net premiums written to policyholders' surplus 2.7 2.8
Loss and loss adjustment expense reserves to policyholders' surplus 1.2 1.2
Loss and loss adjustment expense 70.2 71.6
Underwriting expense 19.8 21.4
----------------------------
Statutory combined ratio 90.0 93.0
Selected Consolidated Financial Information-GAAP Basis
Total revenues $ 3,478.4 $ 3,011.9
Total assets 6,183.9 5,352.5
Total shareholders' equity(2) 1,676.9 1,475.8
Common Shares outstanding 71.5 72.1
Common Share price
High $ 72 1/4 $ 49 1/2
Low 40 3/8 34 3/4
Close(3) 67 3/8 48 7/8
Market capitalization $ 4,817.3 $ 3,523.9
Book value per Common Share(2) $ 23.45 $ 19.31
Return on average shareholders' equity(4) 20.5% 19.6%
Funded debt outstanding $ 775.7 $ 675.9
Ratio of funded debt to capital 32% 31%
GAAP underwriting margin(2) 8.5 5.7
Number of people employed 9,557 8,025
<FN>
(1) During 1994, the Company began accruing salvage and subrogation recoverables.
(2) In 1994, the $71.0 million "supplemental reserve" was eliminated, increasing
book value per share $.65, underwriting profit margin 3.2% and shareholders'
equity $46.2 million. See Management's Discussion and Analysis for further
discussion.
(3) Represents the closing price at December 31.
(4) Net income minus preferred share dividends / average common shareholders'
equity.
All share and per share amounts were adjusted for stock splits.
The Progressive Corporation and Subsidiaries
52
51
1994 1993 1992 1991 1990 1989 1988 1987
$ 1,100.2 $ 1,053.7 $ 994.7 $ 901.7 $ 827.4 $ 787.7 $ 685.5 $ 496.1
954.8 688.9 538.5 513.6 474.1 467.6 505.0 446.8
945.1 701.9 658.3 676.7 636.7 578.1 495.0 452.0
2.6 2.6 2.2 2.0 1.9 2.0 2.6 2.5
1.2 1.5 1.5 1.3 1.3 1.4 1.4 1.1
64.2 62.6 68.3 65.7 62.1 65.9 62.9 58.3
22.4 25.4 29.8 33.5 31.1 31.4 33.2 35.8
- ----------------------------------------------------------------------------------------------------------------------------------
86.6 88.0 98.1 99.2 93.2 97.3 96.1 94.1
$ 2,415.3 $ 1,954.8 $ 1,738.9 $ 1,493.1 $ 1,376.2 $ 1,392.7 $ 1,355.8 $ 1,066.2
4,675.1 4,011.3 3,440.9 3,317.2 2,912.4 2,643.7 2,316.3 1,782.5
1,151.9 997.9 629.0 465.7 408.5 435.2 417.2 395.0
71.2 72.1 67.1 63.3 69.3 76.2 80.7 86.1
$ 40 1/2 $ 46 1/8 $ 29 3/8 $ 20 5/8 $ 18 3/4 $ 14 1/2 $ 10 3/4 $ 11 7/8
27 3/4 26 5/8 14 3/4 15 11 7 1/2 7 1/4 8 1/2
35 40 1/2 29 1/8 18 17 1/8 12 7/8 7 5/8 10 1/8
$ 2,492.0 $ 2,920.1 $ 1,954.3 $ 1,139.4 $ 1,186.8 $ 981.1 $ 615.3 $ 871.8
$ 14.97 $ 12.62 $ 7.94 $ 5.83 $ 5.89 $ 5.71 $ 5.17 $ 4.59
27.4% 36.0% 34.7% 6.7% 21.5% 17.4% 25.9% 24.7%
$ 675.6 $ 477.1 $ 568.5 $ 644.0 $ 644.4 $ 645.9 $ 479.2 $ 216.9
37% 32% 47% 58% 61% 60% 53% 35%
11.5 10.7 3.5 (3.7) 1.0 (1.2) 2.9 5.6
7,544 6,101 5,591 6,918 6,370 6,049 5,854 5,879
53
Ten Year Summary-GAAP Consolidated Operating Results 52
not covered by report of independent accountants
(millions-except per share amounts)
1996 1995
Direct premiums written:
Personal lines $ 3,165.4 $ 2,644.6
Commercial lines 473.0 424.3
----------------------------
Total direct premiums written 3,638.4 3,068.9
Reinsurance assumed 3.8 .1
Reinsurance ceded (200.5) (156.2)
----------------------------
Net premiums written 3,441.7 2,912.8
Net change in unearned premiums reserve1 (242.4) (185.6)
----------------------------
Premiums earned 3,199.3 2,727.2
----------------------------
Expenses:
Losses and loss adjustment expenses2 2,236.1 1,943.8
Policy acquisition costs 482.6 459.6
Other underwriting expenses 208.5 167.2
----------------------------
Total underwriting expenses 2,927.2 2,570.6
----------------------------
Underwriting profit (loss) before taxes 272.1 156.6
Provision (benefit) for income taxes 95.2 54.8
----------------------------
Underwriting profit (loss) after taxes 176.9 101.8
Service operations profit (loss) after taxes 2.8 5.6
----------------------------
179.7 107.4
Investment income after taxes 175.6 156.2
Net realized gains (losses) on security sales after taxes 4.6 30.4
Interest expense after taxes (40.0) (37.1)
Proposition 103 reserve reduction after taxes -- --
Non-recurring items after taxes -- --
Other expenses after taxes3 (6.2) (6.4)
----------------------------
Income before tax adjustments and cumulative
effect of accounting change 313.7 250.5
Tax adjustments4 -- --
Cumulative effect of accounting change5 -- --
----------------------------
Net income $ 313.7 $ 250.5
============================
Per share
Net income2 $ 4.11 $ 3.24
Dividends .230 .220
Average equivalent shares
Primary 74.2 74.2
Fully diluted 74.8 74.7
<FN>
1 Amount represents change in unearned premiums reserve less change in prepaid
reinsurance premiums.
2 In 1994, the "supplemental reserve" was eliminated, resulting in a one-time
decrease to losses and loss adjustment expenses of $71.0 million, or $.62 per
share. See Management's Discussion and Analysis for further discussion.
3 Reflects investment expenses after taxes and other tax adjustments.
4 1991 reflects a deferred tax asset write-down and 1990 reflects a fresh start
tax benefit.
5 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
54
53
1994 1993 1992 1991 1990 1989 1988 1987
$ 2,181.7 $ 1,548.9 $ 1,214.6 $ 1,047.4 $ 876.0 $ 800.1 $ 817.0 $ 690.2
463.4 417.5 422.2 489.4 482.8 487.0 521.0 488.0
- ----------------------------------------------------------------------------------------------------------------------------------
2,645.1 1,966.4 1,636.8 1,536.8 1,358.8 1,287.1 1,338.0 1,178.2
2.9 9.2 4.3 .1 .1 7.2 9.4 19.5
(190.8) (156.4) (189.9) (212.3) (162.6) (134.0) (72.4) (81.2)
- ----------------------------------------------------------------------------------------------------------------------------------
2,457.2 1,819.2 1,451.2 1,324.6 1,196.3 1,160.3 1,275.0 1,116.5
(266.1) (150.5) (25.1) (37.7) (5.1) 36.2 (59.6) (122.1)
- ----------------------------------------------------------------------------------------------------------------------------------
2,191.1 1,668.7 1,426.1 1,286.9 1,191.2 1,196.5 1,215.4 994.4
- ----------------------------------------------------------------------------------------------------------------------------------
1,397.3 1,028.0 930.9 858.0 762.9 799.3 752.0 571.9
391.5 311.6 304.1 313.7 292.7 296.7 321.3 292.6
150.8 151.3 141.5 162.1 123.7 114.9 106.6 74.4
- ----------------------------------------------------------------------------------------------------------------------------------
1,939.6 1,490.9 1,376.5 1,333.8 1,179.3 1,210.9 1,179.9 938.9
- ----------------------------------------------------------------------------------------------------------------------------------
251.5 177.8 49.6 (46.9) 11.9 (14.4) 35.5 55.5
88.0 62.2 16.9 (15.9) 4.0 (2.9) 10.0 12.2
- ----------------------------------------------------------------------------------------------------------------------------------
163.5 115.6 32.7 (31.0) 7.9 (11.5) 25.5 43.3
6.5 4.4 (2.8) (1.4) 2.8 2.5 (1.3) (1.0)
- ----------------------------------------------------------------------------------------------------------------------------------
170.0 120.0 29.9 (32.4) 10.7 (9.0) 24.2 42.3
131.2 107.1 110.4 121.1 126.4 135.3 91.3 59.3
15.5 70.1 9.6 4.9 (8.4) (.4) 12.3 (1.9)
(35.9) (25.8) (29.4) (31.6) (32.0) (32.5) (10.5) (6.5)
-- -- 70.0 -- -- -- -- --
-- (2.6) (42.6) -- -- -- -- --
(6.5) (1.5) (8.3) (14.9) (13.2) (15.4) (9.2) (3.4)
- ----------------------------------------------------------------------------------------------------------------------------------
274.3 267.3 139.6 47.1 83.5 78.0 108.1 89.8
-- -- -- (14.2) 9.9 -- -- --
-- -- 14.2 -- -- -- -- 3.7
- ----------------------------------------------------------------------------------------------------------------------------------
$ 274.3 $ 267.3 $ 153.8 $ 32.9 $ 93.4 $ 78.0 $ 108.1 $ 93.5
==================================================================================================================================
$ 3.59 $ 3.58 $ 2.05 $ .41 $ 1.19 $ .94 $ 1.23 $ 1.08
.210 .200 .191 .172 .160 .147 .133 .077
74.0 71.8 62.3 66.6 72.9 79.8 84.0 86.7
74.0 72.0 71.9 75.6 82.5 89.1 90.9 86.7
55
Analysis of Loss and Loss Adjustment Expenses (LAE) Development 54
- ---------------------------------------------------------------
not covered by report of independent accountants
(millions)
For the years ended
December 31, 1986 1987 1988 1989 1990 1991 1992 1993 19943 1995 1996
Loss and LAE
reserves1 $ 323.8 $ 471.0 $ 651.0 $ 748.6 $ 791.6 $ 861.5 $ 956.4 $1,012.4 $1,098.7 $1,314.4 $1,532.9
Re-estimated
reserves as of:
One year later 300.6 446.6 610.3 685.4 748.8 810.0 857.9 869.9 1,042.1 1,208.6
Two years later 293.6 422.2 573.4 677.9 726.5 771.9 765.5 837.8 991.7
Three years later 282.8 402.4 581.3 668.6 712.7 718.7 737.4 811.3
Four years later 274.1 403.9 575.1 667.1 683.7 700.1 725.2
Five years later 275.6 399.6 578.4 654.7 666.3 695.1
Six years later 275.8 400.2 582.2 647.1 664.8
Seven years later 277.5 408.5 574.3 645.7
Eight years later 285.7 408.1 574.4
Nine years later 286.7 407.8
Ten years later 285.7
Cumulative redundancy $ 38.1 $ 63.2 $ 76.6 $ 102.9 $ 126.8 $ 166.4 $ 231.2 $ 201.1 $ 107.0 $ 105.8
Percentage2 11.8 13.4 11.8 13.7 16.0 19.3 24.2 19.9 9.7 8.0
<FN>
The chart represents the development of the property-casualty loss and LAE
reserves for 1986 through 1995. The reserves are re-estimated based on
experience as of the end of each succeeding year and are increased or
decreased as more information becomes known about the frequency and severity
of claims for individual years. The cumulative redundancy represents the
aggregate change in the estimates over all prior years.
1 Represents loss and LAE reserves net of reinsurance recoverables on unpaid
losses at the balance sheet date.
2 Cumulative redundancy / loss and LAE reserves.
3 In 1994, based on a review of its total loss reserves, the Company eliminated
its $71.0 million "supplemental reserve." See Management's Discussion and
Analysis for further discussion.
Direct Premiums Written by State
- --------------------------------
not covered by report of independent accountants
(millions) 1996 1995 1994 1993 1992
------------------ ------------------ ------------------ ------------------ ------------------
Florida $ 467.4 12.9% $ 421.9 13.7% $ 369.9 14.0% $ 265.6 13.5% $ 195.3 11.9%
New York 358.0 9.8 225.6 7.4 195.2 7.4 170.4 8.7 156.8 9.6
Texas 349.9 9.6 313.2 10.2 246.4 9.3 146.6 7.4 117.0 7.2
Ohio 340.8 9.4 284.1 9.3 232.0 8.8 175.9 8.9 140.7 8.6
Georgia 212.1 5.8 155.1 5.1 129.7 4.9 120.0 6.1 114.6 7.0
Pennsylvania 201.3 5.5 184.9 6.0 161.2 6.1 113.0 5.8 70.1 4.3
California 171.6 4.7 126.6 4.1 126.8 4.8 80.2 4.1 90.6 5.5
All other 1,537.3 42.3 1,357.5 44.2 1,183.9 44.7 894.7 45.5 751.7 45.9
----------------- ----------------- ----------------- ----------------- -----------------
Total $ 3,638.4 100.0% $ 3,068.9 100.0% $ 2,645.1 100.0% $ 1,966.4 100.0% $ 1,636.8 100.0%
================= ================= ================= ================= =================
The Progressive Corporation and Subsidiaries
56
Quarterly Financial and Common Share Data 55
- -----------------------------------------
not covered by report of independent accountants
(millions)
Net Income Operating Income(1) Stock Price(3)
----------------- ------------------- ----------------------------------
Operating Per Per Rate of Dividends
Quarter Revenues Total Share(2) Total Share(2) High-Low Close Return(4) Per Share
1996
1 $ 741.4 $ 63.3 $ .82 $ 60.2 $ .78 $51 1/4 - 43 1/2 $ 44 5/8 $ .055
2 794.9 78.4 1.01 78.5 1.05 48 7/8 - 40 3/8 46 1/4 .055
3 840.3 80.3 1.08 82.5 1.11 58 1/2 - 43 1/8 57 1/4 .060
4 868.9 91.7 1.23 87.9 1.18 72 1/4 - 55 3/8 67 3/8 .060
-------- --------------- ------------------ ---------------- ----------------- -------
$3,245.5 $ 313.7 $ 4.11 $ 309.1 $ 4.08 $72 1/4 - 40 3/8 $ 67 3/8 38.5% $ .230
======== =============== ================== ================ ================= =======
1995
1 $ 633.6 $ 60.7 $ .79 $ 50.7 $ .66 $42 1/8 - 34 3/4 $ 40 5/8 $ .055
2 687.4 60.8 .79 46.4 .60 41 7/8 - 37 1/8 38 3/8 .055
3 719.0 62.5 .81 59.0 .76 48 - 37 3/4 44 3/4 .055
4 726.1 66.5 .86 64.0 .83 49 1/2 - 41 1/2 48 7/8 .055
-------- --------------- ------------------ ---------------- ----------------- -------
$2,766.1 $ 250.5 $ 3.24 $ 220.1 $ 2.84 $49 1/2 - 34 3/4 $ 48 7/8 40.4% $ .220
======== =============== ================== ================ ================= =======
1994
1 $ 488.2 $ 48.1 $ .62 $ 49.8 $ .64 $40 1/2 - 27 3/4 $ 29 1/8 $ .050
2 547.1 60.5 .79 54.7 .71 35 5/8 - 28 1/2 33 1/4 .050
3 582.3 64.8 .85 57.4 .75 38 7/8 - 33 1/4 35 5/8 .055
4 615.4 100.95 1.345 50.8 .66 38 3/8 - 32 1/4 35 .055
-------- --------------- ------------------ ---------------- ----------------- -------
$2,233.0 $ 274.35 $ 3.595 $ 212.7 $ 2.76 $40 1/2 - 27 3/4 $ 35 (13.1)% $ .210
======== =============== ================== ================ ================= =======
<FN>
(1) Represents net income less net realized gains and losses on security sales and
one-time items.
(2) Presented on a fully diluted basis. The sum does not equal the total because
the average equivalent shares differ in the periods.
(3) Prices as reported on the consolidated transaction reporting system. The
Company's Common Shares are listed on the New York Stock Exchange.
(4) Represents annual appreciation (depreciation) on the Company's Common Shares,
including quarterly dividend reinvestment.
(5) In the fourth quarter 1994, the "supplemental reserve" was eliminated,
resulting in a one-time increase of $71.0 million before taxes, or $.63 per
share for the quarter and $.62 per share for the year. See Management's
Discussion and Analysis for further discussion.
The Progressive Corporation and Subsidiaries
57
Directors and Officers 56
- ----------------------
Directors Policy Team Annual Meeting
Milton N. Allen1,2 Alan R. Bauer The Annual Meeting of Shareholders will be held at the
Director, Charles B. Chokel offices of The Progressive Corporation, 6671 Beta Drive,
various corporations Allan W. Ditchfield Mayfield Village, Ohio 44143 on April 25, 1997, at 10:00 a.m.
W. Thomas Forrester There were 4,184 shareholders of record on December 31, 1996.
B. Charles Ames1 William H. Graves
Partner, Daniel R. Lewis Principal Office
Clayton, Dubilier & Rice, Inc. Peter B. Lewis
(management consulting) Robert J. McMillan The principal office of The Progressive Corporation is at
Glenn M. Renwick 6300 Wilson Mills Road, Mayfield Village, Ohio 44143
Charles A. Davis1 David M. Schneider
Limited Partner, Tiona M. Thompson World Wide Web address: http://www.auto-insurance.com
Goldman Sachs Group L.P.
(investment banking) Toll-free Telephone Numbers
General Managers
Stephen R. Hardis1,2 For assistance after an accident or to report a loss, 24 hours a
Chairman of the Board Jeffrey W. Adler day, 7 days a week, call: 1-800-274-4499
and Chief Executive Officer, Mark H. Arnell
Eaton Corporation Jose R. Benitez For Progressive's smart new way to shop for auto insurance,
(manufacturing) Charles C. Boucherle available 24 hours a day, 7 days a week, call: 1 800 AUTO PRO(R)
Alan D. Brannan (1-800-288-6776)
Janet Hill3 William P. Cadden
Vice President Gerald E. Combs For 24 Hour Policy Service, call: 1-800-888-7764
Alexander & Associates, Inc. John M. Davies
(management consulting) and Brian C. Domeck Transfer Agent and Registrar
President, Brian J. Dwyer
Staubach Alexander Hill, LLC Steven B. Gellen If you have questions about a specific stock ownership
(commercial real estate consulting) James F. Gerstner account, write or call: Corporate Trust Customer
Meryl S. Golden Service, National City Bank, 1900 East Ninth Street,
Peter B. Lewis2 Michael J. Hanerty Cleveland, Ohio 44114. Phone: 800-622-6757
Chairman of the Board, President Robin A. Harbage
and Chief Executive Officer Thomas H. Hollyer Counsel
Richard A. Hutchinson
Norman S. Matthews3 Steven W. Jones Baker & Hostetler, Cleveland, Ohio
Consultant, Thomas A. King
formerly President, Federated Moira A. Lardakis Common Shares
Department Stores, Inc. Robert E. Mathe
(retailing) Eric W. Neely The Progressive Corporation's Common Shares (symbol PGR) are
Mark D. Niehaus traded on the New York Stock Exchange. Dividends are
Donald B. Shackelford3 Christopher B. Olie customarily paid on the last day of each quarter.
Chairman, Karen L. Palmer
State Savings Bank Brian J. Passell Interim Reporting
(savings and loan) Victor Politzi
Michael J. Randall The Progressive Corporation is no longer distributing quarterly
Dr. Paul B. Sigler3 Andrew W. Rogacki shareholders' reports. To hear the text of the latest earnings
Professor, Yale University and Robert J. Rose release, receive key financial information for the past several
Investigator, David L. Roush quarters, receive dividend and other information, or request
Howard Hughes Medical Institute Michael D. Sieger copies of public documents, shareholders can call
(medical research and education) Brian A. Silva 1-800-879-PROG. This toll-free shareholder services line is
David J. Skove available 24 hours a day, 7 days a week. Such information is also
Julia Clark Sweeney available from the Company's internet site:
Corporate Officers Gregory J. Trapp http://www.auto-insurance.com
Richard H. Watts
Peter B. Lewis, Chairman, Jeffrey G. West Investor Relations
President and Robert T. Williams
Chief Executive Officer David W. Young Any shareholder wishing to receive public financial
information on the Company may write or call: The Progressive
David M. Schneider, Secretary Corporation, Investor Relations, 6300 Wilson Mills Road, Box E61,
Mayfield Village, Ohio 44143.
Charles B. Chokel, Treasurer Phone: 216-446-2851
<FN>
1 Audit Committee member
2 Executive Committee membe
3 Executive Compensation
Committee member
Design: Nesnadny + Schwartz, Cleveland + New York + Toronto Artwork: Rimma
Gerlovina and Valeriy Gerlovin Printing: Fortran Printing, Cleveland
Printed on Recycled Paper