1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1997
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or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ________________ to ________________
Commission file number 1-9518
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THE PROGRESSIVE CORPORATION
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(Exact name of registrant as specified in its charter)
Ohio 34-0963169
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6300 Wilson Mills Road, Mayfield Village, Ohio 44143
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(Address of principal executive offices) (Zip Code)
(440) 461-5000
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
Common Shares, $1.00 Par Value New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the Act:
None
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(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
[X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant at January 31, 1998: $6,748,111,562.50
The number of the registrant's Common Shares, $1.00 par value, outstanding as of
February 27, 1998: 72,427,300
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Annual Report to Shareholders for the year ended
December 31, 1997 are incorporated by reference in Parts I, II and IV hereof.
Portions of the registrant's Proxy Statement dated March 17, 1998, for the
Annual Meeting of Shareholders to be held on April 24, 1998, are incorporated by
reference in Part III hereof.
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INTRODUCTION
The Progressive Corporation and subsidiaries' (collectively, the "Company") 1997
Annual Report to Shareholders (the "Annual Report") contains portions of the
information required to be included in this Form 10-K, which are incorporated
herein by reference. Cross references to relevant sections of the Annual Report
are included under the appropriate items of this Form 10-K.
Portions of the information included in The Progressive Corporation's Proxy
Statement dated March 17, 1998, for the Annual Meeting of Shareholders to be
held on April 24, 1998 (the "Proxy Statement") have also been incorporated by
reference herein and are identified under the appropriate items in this Form
10-K.
PART I
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ITEM 1. BUSINESS
(a) General Development of Business
The Progressive Corporation, an insurance holding company formed in 1965, has 88
subsidiaries and 1 mutual insurance company affiliate. The Progressive
Corporation's insurance subsidiaries and its affiliate (collectively, the
"Insurance Group") provide personal automobile insurance and other specialty
property-casualty insurance and related services throughout the United States
and in Canada. The Company's property-casualty insurance products protect its
customers against collision and physical damage to their motor vehicles and
liability to others for personal injury or property damage arising out of the
use of those vehicles.
Of the approximately 250 United States insurance company groups writing private
passenger auto insurance, the Company estimates that it ranks fifth in size for
1997. Except as otherwise noted, all industry data and Progressive's market
share or ranking in the industry were derived either directly from data reported
by A.M. Best Company Inc. ("A.M. Best") or were estimated using A.M. Best data
as the primary source. For 1997, the estimated industry premiums written, which
include personal auto insurance in the United States and Ontario, Canada, as
well as insurance for commercial vehicles, were $135.4 billion, and
Progressive's share of this market was approximately 3.3%.
(b) Financial Information About Industry Segments
Incorporated by reference from Note 9, SEGMENT INFORMATION, on
page 48 of the Company's Annual Report.
(c) Narrative Description of Business
INSURANCE SEGMENT
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The Insurance Group offers a number of personal and commercial property-casualty
insurance products primarily related to motor vehicles. Net premiums written
were $4,665.1 million in 1997, compared to $3,441.7 million in 1996 and $2,912.8
million in 1995. The underwriting profit margin was 6.6% in 1997, compared to
8.5% in 1996 and 5.7% in 1995.
The Insurance Group's core business writes insurance for private passenger
automobiles, recreational vehicles and small fleets of commercial vehicles. This
business frequently has more than one program in a single state, with each
targeted to a specific market segment. The core business accounted for 96% of
the Company's 1997 total net premiums written.
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A portion of the Insurance Group's core business consists of nonstandard
automobile insurance products for people cancelled or rejected by other
insurers. The size of the nonstandard automobile insurance market changes with
the insurance environment. Volume potential is influenced by the actions of
direct competitors, writers of standard and preferred automobile insurance and
state-mandated involuntary plans. The total direct premiums written in the
nonstandard automobile insurance market, including the involuntary market plans,
were about $25 billion in 1997, $24 billion in 1996 and $22 billion in 1995.
Approximately 340 nonstandard insurance companies, many of which are part of an
affiliated group, wrote an estimated $21 billion of nonstandard auto premiums in
1997, excluding the involuntary market plans. In 1996, the Insurance Group
ranked second in direct premiums written with a 14% share of this market and
near the top in underwriting performance. Although final data has not been
published, the Company estimates that its 1997 ranking and underwriting
performance will be consistent with 1996.
The core business also writes standard and preferred automobile risks in many
states. These products accounted for between 20% and 25% of the Company's total
core business premiums in 1997. The strategy is to build towards becoming a
low-cost provider of a full line of auto insurance and related services,
distributed through whichever channel the customer prefers. The Insurance
Group's goal is to compete successfully in the standard and preferred market,
which comprises 78% of the United States' personal automobile insurance market.
The Insurance Group's specialty personal lines products include motorcycle,
recreational vehicle, mobile home, boat and snowmobile insurance. The Insurance
Group's competitors are specialty companies and large multi-line insurance
carriers. Although industry figures are not available, based on the Company's
analysis of this market, the Company believes that it is a significant
participant in the specialty personal lines market.
Monoline commercial vehicle insurance covers commercial vehicle risks for
primary liability, physical damage and other supplementary insurance coverages.
Based on the Company's analysis of this market, the Company competes with
approximately 150 companies for this business on a nationwide basis. In the
target segment of monoline commercial auto writers, the Company estimates its
1997 ranking to be in the top 10.
In 1997, over 90% of the net premiums written by the core business were written
through a network of more than 30,000 independent insurance agents located
throughout the United States and in Canada. Subject to compliance with certain
Company-mandated procedures, these independent insurance agents have the
authority to bind the Company to specified insurance coverages within prescribed
underwriting guidelines. These guidelines prescribe the kinds and amounts of
coverage that may be written and the premium rates that may be charged for
specified categories of risk. The agents do not have authority on behalf of the
Company to settle or adjust claims, establish underwriting guidelines, develop
rates or enter into other transactions or commitments. The Company also markets
its products through intermediaries such as employers, other insurance companies
and national brokerage agencies, and direct to customers through employed sales
people and owned insurance agencies. The core business currently markets
personal automobile insurance directly to the public by direct mail, television
and radio advertising in 19 states and the District of Columbia.
To facilitate growth and the execution of its strategies, the Company expanded
to 54 the number of local business units to allow the Company to be closer to
the customer. The Company subdivides business units as growth produces enough
customers to warrant more local focus. Each business unit is headed by a
community manager and is headquartered in or near the market served. The
individual business units are responsible for reducing claim costs, improving
agent service and relationships, direct marketing and deciding price levels for
their territory. Processing (customer service calls, direct sales calls and
claims processing) is done at six regional sites located in Austin, Cleveland,
Colorado Springs, Toronto, Sacramento and Tampa.
In addition, the Company organized process teams made up of people from both
staff and line functions to support the business units. The process teams are
respectively responsible for product, independent agent marketing, consumer
marketing, ownership (customer service), technology, community manager support
and claims. The process teams concentrate on improving the processes fast enough
for the Company to meet its high standards for customer service, profit and
growth.
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The Insurance Group's diversified businesses include the United Financial
Casualty Company (UFCC), Professional Liability Group (PLG) and Motor Carrier
business units, which are organized by customer group and headquartered in
Cleveland, Ohio, and the Midland Financial Group (MFG), which is headquartered
in Memphis, Tennessee. These businesses accounted for 4% of total volume in
1997. The choice of distribution channel is driven by each customer group's
buying preference and service needs. Distribution channels include financial
institutions, vehicle dealers and independent agents. Distribution arrangements
are individually negotiated between such intermediaries and the Company and are
tailored to the specific needs of the customer group and the nature of the
related financial or purchase transactions. The diversified businesses also
market their products directly to their customers through company- employed
sales forces.
UFCC provides physical damage insurance and related tracking services to protect
the commercial or retail lender's interest in collateral which is not otherwise
insured against these risks. The principal product is collateral protection for
automobile lenders, which is sold to financial institutions and/or their
customers. Commercial banks are UFCC's largest customer group for these
services. This business also serves savings and loans, finance companies and
credit unions. According to the Company's analysis of this market, numerous
companies offer these products and none of them has a dominant market share.
PLG's principal customers are community banks. Its principal products are
liability insurance for directors and officers and employee dishonesty
insurance. Progressive shares the risk and premium on these coverages with a
small mutual reinsurer controlled by its bank customers. The program is
sponsored by the American Bankers Association. This program represented less
than one-half percent of the Company's total 1997 net premiums written.
On March 7, 1997, the Company acquired MFG for about $50 million. MFG
underwrites and markets nonstandard private passenger automobile insurance
through approximately 3,700 independent agents across 11 states, primarily in
the southern and western United States. During 1997, Midland wrote $66.1 million
of net premiums written.
The Motor Carrier business unit primarily manages involuntary Commercial Auto
Insurance Procedures. See SERVICE OPERATIONS on page 7 for further discussion.
COMPETITIVE FACTORS
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The automobile insurance and other property-casualty markets in which the
Company operates are highly competitive. Property-casualty insurers generally
compete on the basis of price, consumer recognition, coverages offered, claim
handling, financial stability, customer service and geographic coverage.
Vigorous competition is provided by large, well-capitalized national companies,
some of which have broad distribution networks of employed or captive agents,
and by smaller regional insurers. While the Company relies heavily on technology
and extensive data gathering and analysis to segment and price markets according
to risk potential, some competitors merely price their coverage at rates set
lower than the Company's published rates. By avoiding extensive data gathering
and analysis, these competitors incur lower underwriting costs. The Company has
remained competitive by closely managing expenses and achieving operating
efficiencies, and by refining its risk measurement and price segmentation
skills. In addition, the Company offers prices for a wide spectrum of risks and
seeks to offer a wider array of payment plans, limits of liability and
deductibles than its competitors. Superior customer service and claim adjustment
are also important factors in the Company's competitive strategy.
LICENSES
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The Insurance Group operates under licenses issued by various state or
provincial insurance authorities. Such licenses may be of perpetual duration or
renewable periodically, provided the holder continues to meet applicable
regulatory requirements. The licenses govern the kind of insurance coverages
which may be written in the issuing state. Such licenses are normally issued
only after the filing of an appropriate application and the satisfaction of
prescribed criteria. All licenses which are material to the Company's business
are in good standing.
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INSURANCE REGULATION
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The insurance subsidiaries are generally subject to regulation and supervision
by insurance departments of the jurisdictions in which they are domiciled or
licensed to transact business. At least one of the subsidiaries is licensed and
subject to regulation in each of the 50 states and certain U.S. possessions, in
one Canadian province and by Canadian federal authorities. The nature and extent
of such regulation and supervision varies from jurisdiction to jurisdiction.
Generally, an insurance company is subject to a higher degree of regulation and
supervision in its state of domicile. The Company's principal insurance
subsidiaries are domiciled in the states of California, Colorado, Florida,
Louisiana, Michigan, Mississippi, Missouri, New York, Ohio, Pennsylvania,
Tennessee, Texas, Washington and Wisconsin. State insurance departments have
broad administrative power relating to licensing insurers and agents, regulating
premium rates and policy forms, establishing reserve requirements, prescribing
accounting methods and the form and content of statutory financial reports, and
regulating the type and amount of investments permitted. Rate regulation varies
from "file and use" to prior approval to mandated rates. Most jurisdictions
prohibit rates that are "excessive, inadequate or unfairly discriminatory."
Insurance departments are charged with the responsibility of ensuring that
insurance companies maintain adequate capital and surplus and comply with a
variety of operational standards. Insurance companies are generally required to
file detailed annual and other reports with the insurance department of each
jurisdiction in which they conduct business. Insurance departments are
authorized to make periodic and other examinations of regulated insurers'
financial condition, adherence to statutory accounting principles and compliance
with state insurance laws and regulations.
Insurance holding company laws enacted in many jurisdictions grant to insurance
authorities the power to regulate acquisitions of insurers and certain other
transactions involving insurers and to require periodic disclosure of certain
information. These laws impose prior approval requirements for certain
transactions between regulated insurers and their affiliates and generally
regulate dividend and other distributions, including loans and cash advances,
between regulated insurers and their affiliates. See the "Dividends" discussion
in Item 5(c) for further information on such dividend limitations.
Under state insolvency and guaranty laws, regulated insurers can be assessed or
required to contribute to state guaranty funds to cover policyholder losses
resulting from insurer insolvencies. Insurers are also required by many states,
as a condition of doing business in the state, to provide coverage to certain
risks. These so-called "assigned risk" plans generally specify the types of
insurance and the level of coverage which must be offered to such involuntary
risks, as well as the allowable premium. Many states also have involuntary
market plans which hire a limited number of servicing carriers to provide
insurance to involuntary risks. These plans, through assessments, pass
underwriting and administrative expenses on to insurers that write voluntary
coverages.
Insurance companies are generally required by insurance regulators to maintain
sufficient surplus to support their writings. Although the ratio of writings to
surplus that the regulators will allow is a function of a number of factors,
including the type of business being written, the adequacy of the insurer's
reserves, the quality of the insurer's assets, and the identity of the
regulator, as a general rule, the regulators prefer that annual net written
premium be not more than three times the insurer's total policyholders' surplus.
Thus, the amount of an insurer's surplus may, in certain cases, limit its
ability to grow its business.
Many states have laws and regulations that limit an insurer's ability to exit a
market. For example, certain states limit an automobile insurer's ability to
cancel and non-renew policies. Furthermore, certain states prohibit an insurer
from withdrawing one or more lines of business from the state, except pursuant
to a plan that is approved by the state insurance department. The state
insurance department may disapprove a plan that may lead to market disruption.
Laws and regulations that limit cancellation and non-renewal and that subject
program withdrawals to prior approval requirements may restrict an insurer's
ability to exit unprofitable markets.
Regulation of insurance constantly changes as real or perceived issues and
developments arise. Some changes may be due to technical factors, such as
changes in investment laws made to recognize new investment vehicles; other
changes result from such general pressures as consumer resistance to price
increases and concerns relating to insurer solvency. In recent years,
legislation and voter initiatives have been introduced which deal with insurance
rate development, rate
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determination and the ability of insurers to cancel or renew insurance policies,
reflecting concerns about availability, prices and alleged discriminatory
pricing.
In some states, the automobile insurance industry has been under pressure in
recent years from regulators, legislators or special interest groups to reduce,
freeze or set rates to or at levels that are not necessarily related to
underlying costs, including initiatives to roll back automobile and other
personal lines rates. This kind of activity has adversely affected, and may in
the future adversely affect, the profitability and growth of the subsidiaries'
automobile insurance business in those jurisdictions, and may limit the
subsidiaries' ability to increase rates to compensate for increases in costs.
Adverse legislative and regulatory activity limiting the subsidiaries' ability
to adequately price automobile insurance may occur in the future. The impact of
these regulatory changes on the subsidiaries' businesses cannot be predicted.
The state insurance regulatory framework has come under increased federal
scrutiny, and certain state legislatures have considered or enacted laws that
alter and, in many cases, expand state authority to regulate insurance companies
and insurance holding company systems. Further, the National Association of
Insurance Commissioners (NAIC) and state insurance regulators are re-examining
existing laws and regulations, specifically focusing on insurance company
investments, issues relating to the solvency of insurance companies and further
limitations on the ability of regulated insurers to pay dividends. The NAIC also
developed a risk-based capital (RBC) program to enable regulators to take
appropriate and timely regulatory actions relating to insurers that show signs
of weak or deteriorating financial conditions. RBC is a series of dynamic
surplus-related formulas which contain a variety of factors that are applied to
financial balances based on a degree of certain risks, such as asset, credit and
underwriting risks. In addition, from time to time, the United States Congress
and certain federal agencies investigate the current condition of the insurance
industry to determine whether federal regulation is necessary.
STATUTORY ACCOUNTING PRINCIPLES
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The Insurance Group's results are reported in accordance with generally accepted
accounting principles (GAAP), which differ from amounts reported under statutory
accounting principles (SAP) prescribed by insurance regulatory authorities.
Specifically, under GAAP:
1. Commissions, premium taxes and other costs incurred in connection with
writing new and renewal business are capitalized and amortized on a pro
rata basis over the period in which the related premiums are earned,
rather than expensed as incurred, as required by SAP.
2. Certain assets are included in the consolidated balance sheets, which
for SAP are charged directly against statutory surplus. These assets
consist primarily of premium receivables over 90 days, furniture and
equipment and prepaid expenses.
3. Amounts related to ceded reinsurance are shown gross as prepaid
reinsurance premiums and reinsurance recoverables, rather than netted
against unearned premium reserves and loss and loss adjustment expense
reserves, respectively, as required by SAP.
4. Fixed maturities securities, which are classified as
available-for-sale, are reported at market values, rather than at
amortized cost, or the lower of amortized cost or market depending on
the specific type of security as required by SAP. Equity securities are
reported at quoted market values which may differ from the NAIC market
values as required by SAP.
The differing treatment of income and expense items results in a corresponding
difference in federal income tax expense.
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SERVICE OPERATIONS
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The service operations of the diversified business units consist primarily of
processing business for involuntary plans and providing claim services to fleet
owners and other insurance companies. Service revenues were $45.3 million in
1997, compared to $46.2 million in 1996 and $38.9 million in 1995. Pretax
operating profits were $1.4 million in 1997, compared to $4.3 million and $8.7
million in 1996 and 1995, respectively.
The Motor Carrier business unit currently processes business for the Commercial
Auto Insurance Procedures (CAIP) in 27 states and the New York Public Automobile
Pool (NYPAP), which are both part of the involuntary residual market. As a CAIP
servicing carrier, the business unit processes over 40% of the premiums in the
CAIP market without assuming the indemnity risk. It competes with approximately
7 other providers nationwide. During 1997, the unit increased their share of the
NYPAP to 40% of the new business.
INVESTMENTS
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The Company employs a conservative approach to investment and capital management
intended to ensure that there is sufficient capital to support all the insurance
premium that can be profitably written. The Company's portfolio is invested
primarily in short-term and intermediate-term, investment-grade fixed-income
securities. The Company's investment portfolio, at market value, was $5,270.4
million at December 31, 1997, compared to $4,450.6 million at December 31, 1996.
Investment income is affected by shifts in the types of investments in the
portfolio, changes in interest rates and other factors. Investment income,
including net realized gains on security sales, before expenses and taxes, was
$373.4 million in 1997, compared to $232.9 million in 1996 and $245.8 million in
1995. See MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, beginning on page 14 herein for additional discussion.
EMPLOYEES
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The number of employees, excluding temporary employees, at December 31, 1997,
was 14,126.
LIABILITY FOR PROPERTY-CASUALTY LOSSES AND LOSS ADJUSTMENT EXPENSES
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The consolidated financial statements include the estimated liability for unpaid
losses and loss adjustment expenses (LAE) of the Company's insurance
subsidiaries. Total loss reserves are established at a level that is intended to
represent the midpoint of the reasonable range of loss reserve estimates. The
liabilities for losses and LAE are determined using actuarial and statistical
procedures and represent undiscounted estimates of the ultimate net cost of all
unpaid losses and LAE incurred through December 31 of each year. These estimates
are subject to the effect of future trends on claim settlement. These estimates
are continually reviewed and adjusted as experience develops and new information
becomes known. Such adjustments, if any, are reflected in the current results of
operations.
The accompanying tables present an analysis of property-casualty losses and LAE.
The following table provides a reconciliation of beginning and ending estimated
liability balances for 1997, 1996 and 1995 on a GAAP basis.
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RECONCILIATION OF NET RESERVES FOR LOSSES AND LOSS ADJUSTMENT EXPENSES
(millions) 1997 1996 1995
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Balance at January 1 $1,800.6 $1,610.5 $1,434.4
Less reinsurance recoverables on unpaid losses 267.7 296.1 334.2
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Net balance at January 1 1,532.9 1,314.4 1,100.2
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Net reserves of subsidiary purchased 82.2 -- --
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Incurred related to:
Current year 3,070.8 2,341.9 2,000.4
Prior years (103.3) (105.8) (56.6)
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Total incurred 2,967.5 2,236.1 1,943.8
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Paid related to:
Current year 1,971.5 1,424.7 1,204.3
Prior years 743.6 592.9 525.3
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Total paid 2,715.1 2,017.6 1,729.6
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Net balance at December 31 1,867.5 1,532.9 1,314.4
Plus reinsurance recoverable on unpaid losses 279.1 267.7 296.1
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Balance at December 31 $2,146.6 $1,800.6 $1,610.5
==================================================================
The reconciliation above shows a $103.3 million redundancy, which emerged during
1997, in the 1997 liability and a $105.8 million redundancy in the 1996
liability, based on information known as of December 31, 1997 and December 31,
1996, respectively.
The anticipated effect of inflation is explicitly considered when estimating
liabilities for losses and LAE. While anticipated increases due to inflation are
considered in estimating the ultimate claim costs, the increase in average
severities of claims is caused by a number of factors that vary with the
individual type of policy written. Future average severities are projected based
on historical trends adjusted for anticipated changes in underwriting standards,
inflation, policy provisions and general economic trends. These anticipated
trends are monitored based on actual development and are modified if necessary.
The Company has not entered into any loss reserve transfers or similar
transactions having a material effect on earnings or reserves.
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ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSES DEVELOPMENT
(millions)
YEAR ENDED 1987 1988 1989 1990 1991 1992 1993 1994(3) 1995 1996 1997
LIABILITY FOR UNPAID
LOSSES AND LAE (1) $471.0 $651.0 $748.6 $791.6 $861.5 $956.4 $1,012.4 $1,098.7 $1,314.4 $1,532.9 $1,867.5
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PAID (CUMULATIVE) AS OF:
One year later 195.0 283.1 293.1 322.4 353.4 366.8 417.0 525.3 593.0 743.6
Two years later 294.9 393.7 446.8 490.8 518.8 520.0 589.8 706.4 838.9 --
Three years later 339.5 465.0 539.8 570.4 583.2 598.2 664.1 810.6 -- --
Four years later 369.9 514.0 588.2 600.0 617.6 632.8 709.9 -- -- --
Five years later 383.5 540.7 603.1 613.6 635.8 658.6 -- -- -- --
Six years later 389.1 545.1 608.1 624.7 651.2 -- -- -- -- --
Seven years later 381.9 545.5 614.7 631.1 -- -- -- -- -- --
Eight years later 384.2 549.0 619.2 -- -- -- -- -- -- --
Nine years later 386.1 551.7 -- -- -- -- -- -- -- --
Ten years later 388.4 -- -- -- -- -- -- -- -- --
LIABILITY RE-ESTIMATED
AS OF:
One year later 446.6 610.3 685.4 748.8 810.0 857.9 869.9 1,042.1 1,208.6 1,429.6
Two years later 422.2 573.4 677.9 726.5 771.9 765.5 837.8 991.7 1,149.5 --
Three years later 402.4 581.3 668.6 712.7 718.7 737.4 811.3 961.2 -- --
Four years later 403.9 575.1 667.1 683.7 700.1 725.2 794.6 -- -- --
Five years later 399.6 578.4 654.7 666.3 695.1 717.3 -- -- -- --
Six years later 400.2 582.2 647.1 664.8 692.6 -- -- -- -- --
Seven years later 408.5 574.3 645.7 664.5 -- -- -- -- -- --
Eight years later 408.1 574.4 645.4 -- -- -- -- -- -- --
Nine years later 407.8 575.0 -- -- -- -- -- -- -- --
Ten years later 408.5 -- -- -- -- -- -- -- -- --
CUMULATIVE REDUNDANCY $62.5 $76.0 $103.2 $127.1 $168.9 $239.1 $217.8 $137.5 $164.9 $103.3
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PERCENTAGE (2) 13.3 11.7 13.8 16.1 19.6 25.0 21.5 12.5 12.6 6.7
<FN>
(1) Represents loss and LAE reserves net of reinsurance recoverables on unpaid
losses at the balance sheet date.
(2) Cumulative redundancy / liability for unpaid losses and LAE.
(3) In 1994, based on a review of its total loss reserves, the Company
eliminated its $71.0 million "supplemental reserve."
</FN>
The above table presents the development of balance sheet liabilities for 1987
through 1996. The top line of the table shows the estimated liability for unpaid
losses and LAE recorded at the balance sheet date for each of the indicated
years for the property-casualty insurance subsidiaries only. Similar reserves
for the life insurance subsidiary, which are immaterial, are excluded. This
liability represents the estimated amount of losses and LAE for claims arising
in all prior years that are unpaid at the balance sheet date, including losses
that had been incurred but not reported.
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The upper section of the table shows the cumulative amount paid with respect to
the previously recorded liability as of the end of each succeeding year. The
lower portion of the table shows the re-estimated amount of the previously
recorded liability based on experience as of the end of each succeeding year.
The estimate is increased or decreased as more information about the claims
becomes known for individual years. For example, as of December 31, 1997 the
companies had paid $551.7 million of the currently estimated $575.0 million of
losses and LAE that had been incurred through the end of 1988; thus an estimated
$23.3 million of losses incurred through 1988 remain unpaid as of the current
financial statement date.
The "Cumulative Redundancy" represents the aggregate change in the estimates
over all prior years. For example, the 1987 liability has developed redundant by
$62.5 million over ten years. That amount has been reflected in income over the
ten years and did not have a significant effect on the income of any one year.
The effects on income during the past three years due to changes in estimates of
the liabilities for losses and LAE is shown in the reconciliation table on page
8 as the "prior years" contribution to incurred losses and LAE.
In evaluating this information, note that each cumulative redundancy amount
includes the effects of all changes in amounts during the current year for prior
periods. For example, the amount of the redundancy related to losses settled in
1990, but incurred in 1987, will be included in the cumulative deficiency or
redundancy amount for years 1987, 1988 and 1989. Conditions and trends that have
affected development of the liability in the past may not necessarily occur in
the future. Accordingly, it generally is not appropriate to extrapolate future
redundancies or deficiencies based on this table.
The Analysis of Loss and Loss Adjustment Expenses Development table on page 9 is
constructed from Schedule P, Part-1, from the 1991 through 1997 Consolidated
Annual Statements, as filed with the state insurance departments, and Schedules
O and P filed for years prior to 1991. This development table differs from the
development displayed in Schedule P, Part-2 due to the fact Schedule P, Part-2
excludes unallocated loss adjustment expenses and reflects the change in the
method of accounting for salvage and subrogation for 1994 and prior.
(d) Financial Information about Foreign and Domestic Operations
The Company operates throughout the United States and in Canada. The amount of
Canadian revenues and assets are approximately 2% of the Company's consolidated
revenues and assets. The amount of operating income (loss) generated by its
Canadian operations is immaterial with respect to the Company's consolidated
operating income.
10
11
ITEM 2. PROPERTIES
The Company's 517,800 square foot corporate office complex is located on a
42-acre parcel in Mayfield Village, Ohio, owned by a subsidiary. The Company's
central data processing facility occupies a building containing approximately
107,000 square feet of office space, on this same parcel.
The Company also owns six other buildings in suburbs adjoining the corporate
office complex, two buildings in Tampa, Florida, a building in Tempe, Arizona
and a building in Tigard, Oregon. In total, these buildings contained
approximately 782,900 square feet of office, warehouse and training facility
space and are owned by subsidiaries of the Company. These locations are occupied
by the Company's business units or other operations.
In December 1997, the Company purchased approximately 72 acres in Tampa, Florida
to construct a three-building regional call center. It is estimated that, when
completed, this facility will consist of approximately 307,000 square feet of
space. The cost of the project is currently estimated at $42.0 million and $8.3
million has been paid as of December 31, 1997. The project is scheduled to be
completed by the end of 1998. In addition, in November 1997, the Company
purchased 91 acres in Mayfield Village, Ohio to construct an office complex,
near the site of its current corporate headquarters. This office complex is part
of a five-year cooperative effort with Mayfield Village to develop over 300
acres -- Progressive would serve as the anchor corporate user with additional
business users and recreational facilities on the site. The Company plans to
construct three buildings containing a total of approximately 485,000 square
feet in 1998 and could build up to three additional buildings, containing about
500,000 additional square feet in total, in the future. The first phase of this
project is estimated to cost $63.5 million. As of December 31, 1997, $5.3
million has been paid. The construction projects will be funded through
operating cash flows or the issuance of new debt securities.
The Company leases approximately 283,000 square feet of office and warehouse
space at various locations throughout the United States for its other business
units and staff functions. In addition, the Company leases approximately 400
claim offices, or 1,665,000 square feet, at various locations throughout the
United States. Two offices are leased in Canada. These leases are generally
short-term to medium-term leases of standard commercial office space.
As the Company continues to grow, it expects the need for additional space and
is actively engaged in seeking out additional locations to meet its current and
anticipated needs.
ITEM 3. LEGAL PROCEEDINGS
Incorporated by reference from Note 11, LITIGATION, on page 48 of the Company's
Annual Report.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated by reference from information with respect to executive officers of
The Progressive Corporation and its subsidiaries set forth in Item 10 of this
Annual Report on Form 10-K.
11
12
PART II
-------
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
(a) Market Information
The Company's Common Shares are traded on the New York Stock Exchange under the
symbol PGR. The high and low prices set forth below are as reported on the
consolidated transaction reporting system.
Dividends
Year Quarter High Low Close Per Share
-------------------------------------------------------------------------------------------------------------------------
1997 1 $ 73 5/8 $ 63 7/8 $ 63 7/8 $.060
2 87 3/8 61 1/2 87 .060
3 111 7/8 86 1/2 107 1/8 .060
4 120 7/8 99 119 7/8 .060
-------------------------------------------------------------------------------------------
$120 7/8 $ 61 1/2 $119 7/8 $.240
===========================================================================================
1996 1 $51 1/4 $43 1/2 $44 5/8 $.055
2 48 7/8 40 3/8 46 1/4 .055
3 58 1/2 43 1/8 57 1/4 .060
4 72 1/4 55 3/8 67 3/8 .060
-------------------------------------------------------------------------------------------
$72 1/4 $40 3/8 $67 3/8 $.230
===========================================================================================
The closing price of the Company's Common Shares on February 27, 1998 was
$115 7/8.
(b) Holders
There were 4,074 shareholders of record on February 27, 1998.
(c) Dividends
Statutory policyholders' surplus was $1,725.3 million and $1,292.4 million at
December 31, 1997 and 1996, respectively. Generally, under state insurance laws,
the net admitted assets of insurance subsidiaries available for transfer to a
corporate parent are limited to those net admitted assets, as determined in
accordance with SAP, which exceed minimum statutory capital requirements. At
December 31, 1997, $234.3 million of consolidated statutory policyholders'
surplus represents net admitted assets of the insurance subsidiaries that are
required to meet minimum statutory surplus requirements in the subsidiaries'
states of domicile. Furthermore, state insurance laws limit the amount that can
be paid as a dividend or other distribution in any given year without prior
regulatory approval and adequate policyholders' surplus must be maintained to
support premiums written. Based on the dividend laws currently in effect, the
insurance subsidiaries may pay aggregate dividends of $191.9 million in 1998 out
of statutory policyholders' surplus, without prior approval by regulatory
authorities.
12
13
ITEM 6. SELECTED FINANCIAL DATA
(millions - except per share amounts)
For the years ended December 31,
1997 1996 1995 1994 1993
--------------------------------------------------------------------------------------------------
Total revenues $4,608.2 $3,478.4 $3,011.9 $2,415.3 $1,954.8
Operating income 336.0 309.1 220.1 212.7 197.3
Net income(1) 400.0 313.7 250.5 274.3 267.3
Per share:
Operating income(2) 4.46 4.12 2.85 2.76 2.62
Net income(1,2) 5.31 4.14 3.26 3.59 3.59
Dividends .240 .230 .220 .210 .200
Total assets 7,559.6 6,183.9 5,352.5 4,675.1 4,011.3
Debt outstanding 775.9 775.7 675.9 675.6 477.1
<FN>
(1) 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.
(2) Presented on a diluted basis. In 1997, the Company adopted Statement of
Financial Accounting Standards (SFAS) 128 "Earnings Per Share," and, as a
result, restated prior periods per share amounts, if applicable.
</FN>
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14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION The Progressive Corporation is a holding company and does
not have any revenue producing operations of its own. It receives cash through
borrowings, equity sales, subsidiary dividends and other transactions, and may
use the proceeds to contribute to the capital of its insurance subsidiaries in
order to support premium growth, to repurchase its Common Shares and other
outstanding securities, to retire its outstanding indebtedness, and for other
business purposes. During 1997, the Company repurchased 30,193 of its Common
Shares at a total cost of $2.9 million in connection with obligations under
various employee benefit plans.
During the three-year period ended December 31, 1997, the Company repurchased
1.0 million of its Common Shares at a total cost of $44.8 million (average
$43.37 per share), .3 million of its 9 3/8% Serial Preferred Shares, Series A,
at a total cost of $8.3 million (average $25.62 per share) and redeemed its
remaining Preferred Shares at a total cost of $82.1 million ($25.00 per share).
The Company also sold $100.0 million of Notes. During the same period, The
Progressive Corporation received $50.8 million from its subsidiaries, net of
capital contributions made to these subsidiaries. The regulatory restrictions on
subsidiary dividends are described in Item 5(c) on page 12 herein.
The Company has substantial capital resources and is unaware of any trends,
events or circumstances that are reasonably likely to affect its capital
resources in a material way. The Company also has available a $10.0 million
revolving credit agreement. With its 27% debt to capital ratio, management
believes the Company 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, 1997, operations generated a positive cash flow
of $1,917.5 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 March 1997, the Company acquired Midland Financial Group, Inc. by purchasing
all of Midland's outstanding stock for about $50 million in cash. Midland
underwrites and markets nonstandard private passenger automobile insurance
through approximately 3,700 independent agents across 11 states, primarily in
the southern and western United States. During 1997, Midland wrote $66.1 million
of net premiums written.
Total capital expenditures for the three years ended December 31, 1997,
aggregated $196.0 million. During 1997, the Company made substantial investments
in property and equipment to support its infrastructure. In December 1997, the
Company purchased approximately 72 acres in Tampa, Florida to construct a
three-building regional call center. It is estimated that, when completed, this
facility will consist of approximately 307,000 square feet of space. The cost of
the project is currently estimated at $42.0 million and $8.3 million has been
paid as of December 31, 1997. The project is scheduled to be completed by the
end of 1998. In addition, in November 1997, the Company purchased 91 acres in
Mayfield Village, Ohio to construct an office complex, near the site of its
current corporate headquarters. This office complex is part of a five-year
cooperative effort with Mayfield Village to develop over 300 acres --
Progressive would serve as the anchor corporate user with additional business
users and recreational facilities on the site. The Company plans to construct
three buildings containing a total of approximately 485,000 square feet, in
1998, and could build up to three additional buildings, containing about 500,000
additional square feet in total, in the future. The first phase of this project
is estimated to cost $63.5 million. As of December 31, 1997, $5.3 million has
been paid. The construction projects will be funded through operating cash flows
or the issuance of new debt securities.
In July 1995, 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). The Company has evaluated internal production
systems, hardware and software products, facilities implications, and
interactions with business partners in relation to year 2000 issues. As of
December 31, 1997, the Company has completed approximately 70% of its efforts to
bring the production systems in compliance, with substantially all production
systems expected to be compliant by the end of 1998. The total cost to modify
these existing production systems, which include both internal and external
costs of programming, coding and testing, is estimated to be $6.4 million, of
which $3.1 million has been expensed as of December 31,
14
15
1997. The Company is also in the process of replacing some of its systems during
1998 with new systems which, in addition to being year 2000 compliant, will add
increased functionality to the Company. The total cost of these systems, which
include both internal and external costs, is estimated to be $4.8 million, and
the projects are expected to be substantially complete by the end of 1998. As of
December 31, 1997, $2.4 million has been expensed for these systems. All costs
are being funded through operating cash flow. The Company continually evaluates
computer hardware and software upgrades and, therefore, many of the costs to
replace existing items with year 2000 compliant upgrades are not likely to be
incremental costs to the Company. It is estimated that the majority of these
upgrades will be completed in 1998. During 1998, the Company will continue to
contact its business partners (e.g. agents, banks, credit bureaus, motor vehicle
departments, rating agencies, etc.) to determine their status of compliance and
to assess the impact of noncompliance to the Company. The Company believes that
it is taking the necessary measures to mitigate issues that may arise relating
to the year 2000. During 1998, the Company will develop contingency plans
relating to year 2000 compliance issues, either internal or external, that
cannot be guaranteed to be timely completed. To the extent any additional issues
arise, the Company will evaluate the impact on its financial condition, cash
flows and results of operations and, if material, make the necessary
disclosures.
INVESTMENTS The Company invests in fixed-maturity, equity and short-term
securities. The Company's investment strategy recognizes its need to maintain
capital adequate to support its insurance operations. The Company evaluates the
risk/reward 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
$4,024.9 million, or 76.4%, at the end of 1997, compared to $3,275.6 million, or
73.6%, at the end of 1996. Long-term investment-grade securities, including
greater than 10-year expected principal paydowns, were $143.4 million, or 2.7%,
at the end of 1997, compared to $187.5 million, or 4.2%, at the end of 1996.
Non-investment- grade fixed-maturity securities were $132.5 million, or 2.5%, at
the end of 1997, compared $105.8 million, or 2.4%, at the end of 1996, and offer
the Company higher returns and added diversification without a significant
adverse effect on the stability and quality of the investment portfolio as a
whole. Non-investment-grade securities may involve greater risks often related
to creditworthiness, solvency and relative liquidity of the secondary trading
market. The duration of the fixed-income portfolio was 3.3 years at December 31,
1997, compared to 3.2 years at December 31, 1996.
A portion of the investment portfolio was invested in marketable equity
securities. Common stocks represented $620.8 million, or 11.8% of the portfolio,
at the end of 1997, compared to $540.1 million, or 12.1%, a year earlier.
Foreign equities, which may include stock index futures and foreign currency
forwards, comprised $106.0 million of the common stock portfolio at the end of
1997, and $149.5 million at the end of 1996. As of December 31, 1997, the
Company's Japanese equity holdings represented 1.5% of the common stock
portfolio. The remainder of the equity portfolio of $348.8 million, or 6.6%, at
the end of 1997, compared to $341.6 million, or 7.7%, at the end of 1996, was
comprised of over 80% of fixed-rate preferred stocks with mechanisms that are
expected to provide an opportunity to liquidate at par.
As of December 31, 1997, the Company's portfolio had $188.4 million in
unrealized gains, compared to $114.1 million a year earlier. This increase in
value was the result of increased stock prices as the S&P 500 index rose from
740.7 to 970.4 and decreased interest rate levels as evidenced by the .3%
decrease in the 3-year treasury note.
The weighted average fully taxable equivalent book yield of the portfolio was
6.6%, 6.7% and 6.9% for the years ended December 31, 1997, 1996 and 1995,
respectively.
15
16
The quality distribution of the fixed-income portfolio is as follows:
Percentage at Percentage at
Rating December 31, 1997 December 31,1996
-------------------------- --------------------- ---------------------
AAA 67.5% 62.8%
AA 13.0 16.2
A 12.9 14.0
BBB 3.4 4.2
Non Rated/Other 3.2 2.8
--------------------- ---------------------
100.0% 100.0%
===================== =====================
As of December 31, 1997, the Company held $1,520.0 million of asset-backed
securities, which represented 28.8% of the total investment portfolio. The
portfolio included collateralized mortgage obligations (CMO) and commercial
mortgage-backed obligations (CMB) totaling $283.2 million and $776.7 million,
respectively. The remainder of the asset-backed portfolio was invested primarily
in auto loan and other asset-backed securities. As of December 31, 1997, the CMO
portfolio included busted planned amortization class bonds and sequential bonds
representing 94.1% of the CMO portfolio ($266.4 million) with an average life of
3.0 years, and planned amortization class bonds representing 5.9% of the CMO
portfolio ($16.8 million) with an average life of .5 years.
At December 31, 1997, the CMO portfolio had a weighted average Moody's or
Standard & Poor's rating of AAA and the CMB portfolio had an average life of 7.4
years and a weighted average Moody's or Standard & Poor's rating of AA. At
December 31, 1997, the CMO and CMB portfolios had unrealized gains of $1.6
million and $14.0 million, respectively. The single largest unrealized loss in
any individual CMO security was $.2 million and in any CMB security was $1.1
million, at December 31, 1997. The CMB portfolio includes $149.6 million of CMB
interest-only certificates, which had an average life of 6.9 years and a
weighted average Moody's or Standard & Poor's rating of AAA at December 31,
1997. Both the CMO and CMB portfolios are highly liquid with readily available
quotes and contain no residual interests. During 1997, the Company sold $178.4
million (proceeds of $200.8 million) of non-investment-grade CMB securities to a
third-party purchaser. The purchaser subsequently transferred the securities to
a trust as collateral in a resecuritized debt offering. The transaction was
accounted for as a sale under SFAS 125, "Accounting for Transfers and Servicing
of Financial Assets and Extinguishments of Liabilities," resulting in a net gain
of $22.4 million. A bankruptcy remote subsidiary of the Company acquired $22.8
million (market value of $25.9 million) of the resecuritized debt. This portion
of the transaction was not accounted for as a sale in accordance with SFAS 125.
Investments in the Company's portfolio have varying degrees of risk. The primary
market risk exposure to the fixed-income portfolio is interest rate risk, which
is limited by managing duration to a defined range of 1.8 to 5 years. The
distribution of maturities and convexity are monitored on a regular basis.
Common stocks and similar investments, which generally have greater risk and
volatility of market value, are limited to a target of 15%, with a range of 0 to
25%. Market values, along with industry and sector concentrations of common
stocks and similar investments, are monitored daily. Exposure to foreign
currency exchange risk is limited by Company restrictions and is monitored
regularly. Exposures are evaluated individually and as a whole, considering the
effects of cross correlation. For the quantitative market risk disclosures, see
page 54 of the Company's 1997 Annual Report. The Company regularly examines its
portfolio for evidence of impairment. In such cases, changes in market value are
evaluated to determine the extent to which such changes are attributable to: (i)
interest rates, (ii) market-related factors other than interest rates and (iii)
financial conditions, business prospects and other fundamental factors specific
to the issuer. Declines attributable to issuer fundamentals are reviewed in
further detail. Available evidence is considered to estimate the realizable
value of the investment. When a security in the Company's investment portfolio
has a decline in market value which is other than temporary, the Company is
required by generally accepted accounting principles (GAAP) to reduce the
carrying value of such security to its net realizable value.
Derivative instruments are primarily used to manage the risks and enhance the
returns of the available-for-sale portfolio. This is accomplished by modifying
the basis, duration, interest rate or foreign currency characteristics of the
portfolio or
16
17
hedged securities. Derivative instruments may also be used for trading purposes.
During 1997, net activity in the trading portfolio was not material to the
Company's financial position, cash flows and results of operations. Net cash
requirements of derivative instruments 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. The Company has stringent restrictions on the amount of
open positions in the trading portfolios, limiting exposure to levels management
deems acceptable. At December 31, 1997, trading positions had a net market value
of $1.1 million; at December 31, 1996, there were no trading positions.
RESULTS OF OPERATIONS Operating income, which excludes net realized gains and
losses from security sales and one-time items, was $336.0 million, or $4.46 per
share, in 1997, $309.1 million, or $4.12 per share, in 1996 and $220.1 million,
or $2.85 per share, in 1995. The GAAP combined ratio was 93.4 in 1997, 91.5 in
1996 and 94.3 in 1995.
Direct premiums written increased 33% to $4,825.2 million in 1997, compared to
$3,638.4 million in 1996 and $3,068.9 million in 1995. Net premiums written
increased 36% to $4,665.1 million in 1997, compared to $3,441.7 million in 1996
and $2,912.8 million in 1995. 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 $78.4 million in 1997, $99.5 million in 1996 and
$105.4 million in 1995. The Company provided policy and claim processing
services to 27 state CAIPs in 1997 and 1996, compared to 28 in 1995. Premiums
earned, which are a function of the amount of premiums written in the current
and prior periods, increased 31% in 1997, compared to 17% in 1996 and 24% in
1995.
In the Company's core business units, which write insurance for private
passenger automobiles, recreational vehicles and small fleets of commercial
vehicles, net premiums written grew 33%, 19% and 21% in 1997, 1996 and 1995,
respectively, reflecting an increase in unit sales driven by the Company's
competitive rates. The Company decreased rates an average of .9% in 1997,
compared to rate increases of 2.5% and 6.5% in 1996 and 1995, respectively. The
Company continues to write, through multiple distribution methods, standard and
preferred risks, which represented between 20% and 25% of total 1997 core
business volume. In 1997, the Company used rating criteria based partially upon
consumer financial responsibility. This approach has been approved by numerous
regulators and is in use in the 31 states that represent 80% of the core
business units' volume; the Company expects to complete rollout of this approach
into the remaining states where it can be offered in 1998. The Company believes
that its use of financial responsibility in auto insurance rating produces a
more accurate distribution of losses among consumers and, therefore, produces
more accurate pricing resulting in lower rates for most consumers. In addition,
in order to encourage writing more standard and preferred risks and to improve
customer retention, the Company in 1996 adjusted its contingent cash incentive
compensation program for employees to reflect 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 resulted in more
spending to promote the Progressive brand and to hire and develop more claim
adjusters and customer service representatives, and the Company expects this to
continue at least in the near term. These costs, along with lower margins 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 1997, the core business units generated an
underwriting profit margin of 7%, compared to 8% in 1996 and 5% in 1995.
Claim costs, the Company's most significant expense, represent actual payments
made and changes in estimated future payments to be made to or on behalf of its
policyholders, including expenses required to settle claims and losses. These
costs include a loss estimate for future assignments and assessments, based on
current business, under state-mandated involuntary automobile programs. Claims
costs are influenced by inflation and loss severity and frequency, the impact of
which is mitigated by adequate pricing. Increases in the rate of inflation
increase loss payments, which are made after premiums are established.
Accordingly, anticipated rates of inflation are taken into account when the
Company establishes premium rates and loss reserves. Claim costs, expressed as a
percentage of premiums earned, were 71% in 1997, compared to 70% in 1996 and 71%
in 1995.
The Company writes directors and officers and other professional liability
coverage for community banks and credit unions and, therefore, could potentially
be exposed to liability for errors made by these institutions relating to the
year 2000 conversion. To minimize its risk, in October 1997, the Company began
including year
17
18
2000 exclusions in all new and renewal policies for commercial banks
(representing approximately 70% of all policies written since that date) which
have multi-year terms that extend beyond December 31, 1999. The Company is not
currently aware of any other company in the industry that is including such
exclusion provisions or increasing their premiums to cover potential exposure on
year 2000 compliance issues. As a regulated industry, financial institutions are
under pressure from government regulatory agencies and other interested parties
to ensure they achieve readiness for the year 2000. The Company is monitoring
its customers' compliance efforts and believes that substantially all such
customers are pursuing plans to achieve year 2000 compliance. It is currently
unknown whether the financial institutions will be able to completely avoid
errors relating to year 2000 compliance and the Company is unable to predict to
what extent such financial institutions will incur losses as a result of
noncompliance and whether their directors and officers will be subject to
individual liability for such noncompliance. At December 31, 1997, approximately
200 professional liability policies, or about 17% of all policies, do not
contain year 2000 exclusion provisions and extend into the year 2000. In the
event of a claim, applicable factual and coverage issues would have to be
resolved. Based on information currently available and management's best
estimate, the Company does not believe that it will incur any costs that will
have a material impact on the Company's financial condition, cash flows or
results of operations.
Because the Company is primarily an insurer of motor vehicles, it has limited
exposure for environmental, product and general liability claims. The Company
has established reserves for these exposures, in amounts which it believes to be
adequate based on information currently known by it. Management does not believe
that these claims will have a material impact on the Company's liquidity,
financial condition, cash flows or results of operations.
Policy acquisition and other underwriting expenses as a percentage of premiums
earned were 23% in 1997, compared to 22% in 1996 and 23% in 1995. In 1997, the
Company incurred additional expenses to support its infrastructure and to hire
and train people in anticipation of growth. The Company also introduced its
advertising campaign to 13 states during 1997, bringing the total number of
states where the Company advertises to 19 (40 markets).
Recurring investment income (interest and dividends) increased 22% to $274.9
million in 1997, compared to $225.8 million in 1996 and $199.1 million in 1995,
primarily due to an increase in the size of the investment portfolio. Net
realized gains on security sales were $98.5 million in 1997, $7.1 million in
1996 and $46.7 million in 1995. Investment expenses were $9.9 million in 1997,
compared to $6.1 million in 1996 and $8.1 million in 1995; in 1997, the Company
purchased a new portfolio management system and incurred expenses related to the
sale of the commercial mortgage-backed securities.
Safe Harbor statement under the Private Securities Litigation Reform Act of
1995: Except for historical information, the matters discussed in this annual
report on Form 10-K 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.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements of the Company, along with the related
notes, supplementary data and report of independent accountants, are
incorporated by reference from the Company's 1997 Annual Report, pages 35
through 48 and pages 53 through 59.
The following note is hereby added to Item 8 of the Company's 1997 Annual Report
on Form 10-K, supplementing the Notes to the Consolidated Financial Statements
which are incorporated by reference therein:
Note 1. Reporting and Accounting Policies
- ------- ---------------------------------
NEW ACCOUNTING STANDARDS - In March 1998, the American Institute of Certified
Public Accountants issued Statement of Position (SOP) 98-1, "Accounting for the
Costs of Computer Software Developed or Obtained for Internal Use," which is
effective for fiscal years beginning after December 15, 1998, with early
adoption permitted. SOP 98-1 provides guidance on accounting for the costs of
computer software developed or obtained for internal use, identifying when such
costs should be capitalized rather than expensed as incurred. The Company
currently expenses all computer software costs. The Company is planning to early
adopt SOP 98-1 in the first quarter 1998 and is currently quantifying the impact
to its financial condition and results of operations.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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PART III
--------
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
A description of all of the directors, three of whom have been nominated for
election as directors at the 1998 Annual Meeting of Shareholders of the
Registrant, is incorporated herein by reference from the section entitled
"Election of Directors" in the Proxy Statement, pages 2 through 4.
A description of the executive officers of the Registrant and its subsidiaries
follows. These descriptions reflect the Company's termination of its officership
program and consequent elimination of many officer positions, effective December
31, 1993. Unless otherwise indicated, the executive officer has held the
position(s) indicated for at least the last five years.
Offices Held and
Name Age Last Five Years' Business Experience
---- --- ------------------------------------
Peter B. Lewis 64 Chairman since April 1993;
President, Chief Executive Officer
and a director of the Registrant and
Progressive Casualty Insurance
Company ("Progressive Casualty"),
the principal subsidiary of the
Registrant.
Alan R. Bauer 45 International/Internet Officer since
December 1996; Independent Agent
Marketing Process Leader from March
1996 to December 1996; West Division
President prior to March 1996.
Charles B. Chokel 44 Treasurer and Chief Financial Officer
of the Registrant since December
1994; Chief Financial Officer prior
to December 1994; Senior Vice
President - Finance of Progressive
Casualty prior to December 1993.
Allan W. Ditchfield 60 Chief Information Officer of the
Registrant; Senior Vice President -
Information Services of Progressive
Casualty prior to December 1993.
W. Thomas Forrester II 49 Ownership Process Leader of the
Registrant since March 1996; Central
States Division President from
January 1995 to March 1996;
Diversified Division President in
1994; CAIP/Transportation Division
President in 1993.
William H. Graves 41 Claims Process Leader of the
Registrant since March 1996; South
Central Division President prior to
March 1996.
Moira A. Lardakis 46 Community Manager Support Process
Leader since January 1998; General
Manager of Ohio Business Unit from
March 1996 to December 1997; Ohio
Division President prior to March
1996.
Daniel R. Lewis 51 Independent Agent Marketing Process
Leader of the Registrant since
December 1996; General Manager of
South Florida Community from
November 1994 to December 1996;
Treasurer of the Registrant and
Central Division President prior to
December 1994.
Robert J. McMillan 46 Consumer Marketing Process Leader of
the Registrant since January 1998;
Product Process Leader from March
1996 to December 1997; Florida
Division President prior to March
1996.
Glenn M. Renwick 42 Technology Process Leader of the
Registrant since January 1998;
Consumer Marketing Process Leader
from March 1996 to December 1997;
Director of Consumer Marketing prior
to March 1996.
20
21
David M. Schneider 60 Chief Legal Officer and Secretary of
the Registrant; Senior Vice
President of Progressive Casualty
prior to December 1993.
Tiona M. Thompson 47 Chief Human Resources Officer of the
Registrant since December 1993; Vice
President - Human Resources of
Progressive Casualty prior to
December 1993.
Robert T. Williams 41 Product Process Leader of the
Registrant since January 1998;
General Manager of New York Business
Unit from March 1996 to December
1997; New York Division President
from December 1994 to March 1996;
Manager of Special Lines prior to
March 1997.
Section 16(a) Beneficial Ownership Reporting Compliance. Due to a typographical
error in Milton N. Allen's April 1997 Form 4, a sale of 155 shares by Mr. Allen,
as trustee of a charitable remainder trust, was incorrectly reported as being
the sale of 115 shares. An amended Form 4 was filed as soon as this error was
discovered. The November 1, 1996 sale of 200 shares by a trust of which Daniel
R. Lewis' wife is the beneficiary was reported in a Form 4 filed in February
1998. A Form 4 reporting the January 31, 1997 sale of 10,000 shares by Peter B.
Lewis, as trustee of the D. R. Lewis Flint Trust, was filed 17 days late.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference from the section of the Proxy Statement entitled
"Executive Compensation," pages 9 through 21.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Incorporated by reference from the section of the Proxy Statement entitled
"Security Ownership of Certain Beneficial Owners and Management," pages 6
through 8.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference from the section of the Proxy statement entitled
"Election of Directors - Certain Relationships and Related Transactions," pages
4 and 5.
21
22
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K.
(a)(1) Listing of Financial Statements
The following consolidated financial statements of the
Registrant and its subsidiaries, included in the Registrant's
Annual Report, are incorporated by reference in Item 8:
Report of Independent Accountants
Consolidated Statements of Income -
December 31, 1997, 1996 and 1995
Consolidated Balance Sheets - December 31, 1997
and 1996
Consolidated Statements of Changes in Shareholders'
Equity - December 31, 1997, 1996 and 1995
Consolidated Statements of Cash Flows -
December 31, 1997, 1996 and 1995
Notes to Consolidated Financial Statements
Supplemental Information*
*Not covered by Report of Independent Accountants.
(a)(2) Listing of Financial Statement Schedules
The following financial statement schedules of the Registrant
and its subsidiaries, Report of Independent Accountants and
Consent of Independent Accountants are included in Item 14(d):
Schedules
---------
Report of Independent Accountants
Consent of Independent Accountants
Schedule I - Summary of Investments -
Other than Investments in Related Parties
Schedule II - Condensed Financial
Information of Registrant
Schedule III - Supplementary Insurance
Information
22
23
Schedule IV - Reinsurance
Schedule VI - Supplemental Information Concerning
Property-Casualty Insurance Operations
No other schedules are required to be filed herewith
pursuant to Article 7 of Regulation S-X.
(a)(3) Listing of Exhibits
See exhibit index contained herein at pages 38 through 42.
Management contracts and compensatory plans and arrangements
are identified in the Exhibit Index as Exhibit Nos. (10)(B)
through (10)(O).
(b) Reports on Form 8-K
None.
(c) Exhibits
The exhibits in response to this portion of Item 14 are
submitted concurrently with this report.
(d) Financial Statement Schedules
The response to this portion of Item 14 is located at pages 29
through 37.
23
24
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
THE PROGRESSIVE CORPORATION
March 27, 1998 BY: /s/ Peter B. Lewis
------------------
Peter B. Lewis
Chairman, President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant in
the capacities and on the dates indicated.
/s/ Peter B. Lewis Chairman, President, Chief Executive March 27, 1998
- ---------------------
Peter B. Lewis Officer and a Director
/s/ Charles B. Chokel Treasurer and Chief Financial Officer March 27, 1998
- ---------------------
Charles B. Chokel
/s/ Jeffrey W. Basch Chief Accounting Officer March 27, 1998
- ---------------------
Jeffrey W. Basch
* Director March 27, 1998
- ---------------------
Milton N. Allen
* Director March 27, 1998
- ---------------------
B. Charles Ames
* Director March 27, 1998
- ---------------------
Charles A. Davis
* Director March 27, 1998
- ---------------------
Stephen R. Hardis
* Director March 27, 1998
- ---------------------
Janet Hill
* Director March 27, 1998
- ---------------------
Norman S. Matthews
24
25
* Director March 27, 1998
- ---------------------
Donald B. Shackelford
* Director March 27, 1998
- ---------------------
Paul B. Sigler
* DAVID M. SCHNEIDER, by signing his name hereto, does sign this document on
behalf of the persons indicated above pursuant to a power of attorney duly
executed by such persons.
By /s/ David M. Schneider March 27, 1998
----------------------
David M. Schneider
Attorney-in-fact
25
26
ANNUAL REPORT ON FORM 10-K
ITEM 14(d)
FINANCIAL STATEMENT SCHEDULES
YEAR ENDED DECEMBER 31, 1997
THE PROGRESSIVE CORPORATION
MAYFIELD VILLAGE, OHIO
26
27
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders,
The Progressive Corporation:
Our report on the consolidated financial statements of The Progressive
Corporation and subsidiaries has been incorporated by reference in this Form
10-K from page 35 of the 1997 Annual Report to Shareholders of The Progressive
Corporation. In connection with our audits of such financial statements, we have
also audited the related financial statement schedules listed in the index on
pages 22 and 23 of this Form 10-K.
In our opinion, the financial statement schedules referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information required to be
included therein.
COOPERS & LYBRAND L.L.P.
Cleveland, Ohio
January 27, 1998
27
28
CONSENT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders,
The Progressive Corporation:
We consent to the incorporation by reference in the Registration Statement of
The Progressive Corporation on Form S-8 (File No. 333-25197) filed April 15,
1997, the Registration Statement on Form S-8 (File No. 33-57121) filed December
29, 1994, the Registration Statement on Form S-8 (File No. 33-64210) filed June
10, 1993, the Registration Statement on Form S-8 (File No. 33-51034) filed
August 20, 1992, the Registration Statement on Form S-8 (File No. 33-46944)
filed April 3, 1992, the Registration Statement on Form S-8 (File No. 33-38793)
filed February 4, 1991, the Registration Statement on Form S-8 (File No.
33-38107) filed December 6, 1990, the Registration Statement on Form S-8 (File
No. 33-37707) filed November 9, 1990, the Registration Statement on Form S-8
(File No. 33-33240) filed January 31, 1990, and the Registration Statement on
Form S-8 (File No. 33-16509) filed August 14, 1987, of our reports dated
January 27, 1998, on our audits of the consolidated financial statements and
financial statement schedules of The Progressive Corporation and subsidiaries
as of December 31, 1997 and 1996, and for each of the three years in the period
ended December 31, 1997, which reports are included in this Annual Report on
Form 10-K.
COOPERS & LYBRAND L.L.P.
Cleveland, Ohio
March 27, 1998
28
29
SCHEDULE I -- SUMMARY OF INVESTMENTS -- OTHER
THAN INVESTMENTS IN RELATED PARTIES
THE PROGRESSIVE CORPORATION AND SUBSIDIARIES
- --------------------------------------------
(millions)
December 31, 1997
-----------------------------------------------------------------
Amount At Which Shown
In The
Type of Investment Cost Market Value Balance Sheet
-----------------------------------------------------------------
Fixed Maturities:
Available-for-sale:
United States Government and
government agencies and
authorities $ 918.1 $ 919.6 $ 919.6
States, municipalities and political
subdivisions 1,231.8 1,264.2 1,264.2
Asset-backed securities 1,501.4 1,520.0 1,520.0
Foreign government obligations 57.6 58.5 58.5
Corporate and other debt securities 94.7 95.2 95.2
Redeemable preferred stock 33.2 33.9 33.9
-----------------------------------------------------------------
Total fixed maturities 3,836.8 3,891.4 3,891.4
-----------------------------------------------------------------
Equity securities:
Common stocks 501.9 620.8 620.8
Preferred stocks 333.9 348.8 348.8
-----------------------------------------------------------------
Total equity securities 835.8 969.6 969.6
-----------------------------------------------------------------
Short-term investments 409.4 409.4 409.4
-----------------------------------------------------------------
Total investments $5,082.0 $5,270.4 $5,270.4
=================================================================
The Company did not have any securities of one issuer with an aggregate cost or
market value exceeding 10% of total shareholders' equity at December 31, 1997.
29
30
SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF INCOME
THE PROGRESSIVE CORPORATION (PARENT COMPANY)
- --------------------------------------------
(millions)
Years Ended December 31,
1997 1996 1995
----------------------------------------------------
Revenues
Dividends from subsidiaries* $108.1 $125.0 $120.8
Intercompany investment income* 35.3 36.5 37.2
----------------------------------------------------
143.4 161.5 158.0
----------------------------------------------------
Expenses
Interest expense 64.5 61.4 57.1
Other operating costs and expenses 6.2 4.1 3.6
----------------------------------------------------
70.7 65.5 60.7
----------------------------------------------------
Operating income and income before income
taxes and other items below 72.7 96.0 97.3
Income tax benefit (12.7) (10.2) (7.3)
----------------------------------------------------
Income before equity in undistributed earnings of
subsidiaries 85.4 106.2 104.6
Equity in undistributed net income of consolidated
subsidiaries* 314.6 207.5 145.9
----------------------------------------------------
Net income $400.0 $313.7 $250.5
====================================================
<FN>
*Eliminated in consolidation.
</FN>
See notes to condensed financial statements.
30
31
SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
CONDENSED BALANCE SHEETS
THE PROGRESSIVE CORPORATION (PARENT COMPANY)
- --------------------------------------------
(millions)
December 31,
1997 1996
-----------------------------------------------
ASSETS
Investment in non-consolidated affiliates $ .4 $ .4
Investment in subsidiaries* 2,437.8 1,755.7
Receivable from subsidiary* 489.4 695.8
Intercompany receivable* -- 6.6
Income taxes 28.9 13.0
Other assets 6.7 2.8
-----------------------------------------------
TOTAL ASSETS $2,963.2 $2,474.3
===============================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued expenses $ 23.5 $ 22.1
Intercompany payable* 27.9 --
Debt 775.9 775.3
-----------------------------------------------
Total liabilities 827.3 797.4
-----------------------------------------------
Shareholders' equity:
Common Shares, $1.00 par value, authorized 200.0
shares, issued 83.1, including treasury
shares of 10.8 and 11.6 72.3 71.5
Paid-in capital 412.8 381.8
Net unrealized appreciation of investment
in equity securities of consolidated subsidiaries 122.3 74.0
Retained earnings 1,528.5 1,149.6
-----------------------------------------------
Total shareholders' equity 2,135.9 1,676.9
-----------------------------------------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $2,963.2 $2,474.3
===============================================
<FN>
*Eliminated in consolidation.
</FN>
See notes to condensed financial statements.
31
32
SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
CONDENSED STATEMENTS OF CASH FLOWS
THE PROGRESSIVE CORPORATION (PARENT COMPANY)
- --------------------------------------------
(millions)
Years Ended December 31,
1997 1996 1995
--------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $400.0 $313.7 $250.5
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Equity in income of consolidated subsidiaries (422.7) (332.5) (266.7)
Changes in:
Intercompany receivable or payable 34.5 19.0 1.6
Accounts payable and accrued expenses 1.4 1.8 1.3
Income taxes (15.9) 13.1 3.9
Other, net (3.5) (.9) (.1)
--------------------------------------------------
Net cash provided by (used in) operating (6.2) 14.2 (9.5)
activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Additional investments in equity securities of
consolidated subsidiaries (219.3) (42.2) (42.1)
Return of capital from consolidated subsidiary -- .5 --
Purchase of consolidated subsidiaries (100.5) (26.6) --
Dividends received from consolidated subsidiaries 108.1 125.0 120.8
--------------------------------------------------
Net cash provided by (used in) investing (211.7) 56.7 78.7
activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 14.1 6.9 10.1
Tax benefits from exercise of stock options 17.6 5.9 8.5
Redemption of Preferred Shares -- (80.8) --
Proceeds from Debt -- 99.6 --
Receivable from subsidiary 206.4 (35.0) (61.4)
Dividends paid to shareholders (17.3) (19.6) (24.1)
Acquisition of treasury shares (2.9) (47.9) (2.3)
--------------------------------------------------
Net cash provided by (used in) financing
activities 217.9 (70.9) (69.2)
--------------------------------------------------
Change in cash -- -- --
Cash, beginning of year -- -- --
--------------------------------------------------
Cash, end of year $ -- $ -- $ --
==================================================
See notes to condensed financial statements.
32
33
SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
NOTES TO CONDENSED FINANCIAL STATEMENTS
- ---------------------------------------
The accompanying condensed financial statements of The Progressive Corporation
(the "Registrant") should be read in conjunction with the consolidated financial
statements and notes thereto of The Progressive Corporation and subsidiaries
included in the Registrant's 1997 Annual Report.
STATEMENTS OF CASH FLOWS -- For the purpose of the Statements of Cash Flows,
cash includes only bank demand deposits. The Registrant paid income taxes of
$166.9 million in 1997, and $120.4 million, and $75.5 million million in 1996
and 1995, respectively. Total interest paid was $63.8 million for 1997, $60.2
million for 1996 and $56.5 million for 1995.
DEBT -- Debt at December 31 consisted of:
1997 1996
--------------------------- ---------------------------
(millions) Market Market
Cost Value Cost Value
------------------------------------------------------------
7.30% Notes, due 2006 (issued: $100.0, May 1996) $ 99.7 $105.3 $ 99.6 $101.7
6.60% Notes, due 2004 (issued: $200.0, January 1994) 198.9 200.7 198.8 197.1
7% Notes, due 2013 (issued: $150.0, October 1993) 148.4 154.4 148.3 144.3
8 3/4% Notes, due 1999 (issued: $30.0, May 1989) 29.7 30.9 29.5 31.6
10% Notes, due 2000 (issued: $150.0, December 1988) 149.6 164.6 149.6 167.8
10 1/8% Subordinated Notes, due 2000 (issued: 149.6 164.6 149.5 168.4
$150.0, December 1988)
------------------------------------------------------------
$775.9 $820.5 $775.3 $810.9
============================================================
Debt includes amounts the Registrant has borrowed and contributed to the capital
of its insurance subsidiaries or borrowed for other long-term purposes.
All debt is noncallable with interest payable semiannually.
In May 1990, the Registrant entered into a revolving credit arrangement with
National City Bank, which is reviewed by the bank annually. Under this
agreement, the Registrant had the right to borrow up to $50.0 million. In
February 1994, the Registrant reduced this revolving credit arrangement to $20.0
million and in May 1997, further reduced it to $10.0 million. By selecting from
available credit options, the Registrant may elect to pay interest at rates
related to the London interbank offered rate, the bank's base rate or at a money
market rate. A commitment fee is payable on any unused portion of the committed
amount at the rate of .125% per annum. At December 31, 1997 and 1996, the
Registrant had no borrowings under this arrangement.
33
34
SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
NOTES TO CONDENSED FINANCIAL STATEMENTS
- ---------------------------------------
As of December 31, 1997, the Registrant was in compliance with its debt
covenants.
Aggregate principal payments on debt outstanding at December 31, 1997 are
$0 for 1998, $30.0 million for 1999, $300.0 million for 2000, $0 for 2001 and
2002 and $450.0 million thereafter.
INCOME TAXES -- The Registrant files a consolidated Federal income tax return
with all eligible subsidiaries. The Federal income taxes in the accompanying
Condensed Balance Sheets represent amounts recoverable from the Internal Revenue
Service by the Registrant as agent for the consolidated tax group. The
Registrant and its subsidiaries have adopted, pursuant to a written agreement, a
method of allocating consolidated Federal income taxes. Amounts allocated to the
subsidiaries under the written agreement are included in Intercompany Receivable
from Subsidiaries in the accompanying Condensed Balance Sheets.
INVESTMENTS IN CONSOLIDATED SUBSIDIARIES -- The Registrant, through its
investment in consolidated subsidiaries, recognizes the changes in unrealized
gains (losses) on equity securities of the subsidiaries. These amounts were:
(millions) 1997 1996 1995
-----------------------------------------------------------------
Unrealized gains (losses):
Available-for-sale: fixed maturities $29.5 $(18.3) $ 86.1
equity securities 44.8 53.7 40.0
Deferred income taxes (26.0) (12.5) (44.3)
-----------------------------------------------------------------
$48.3 $ 22.9 $ 81.8
=================================================================
OTHER MATTERS -- The information relating to incentive compensation plans is
incorporated by reference from Note 7, EMPLOYEE BENEFIT PLANS, "Incentive
Compensation Plans" on pages 46 and 47 of the Registrant's 1997 Annual Report.
34
35
SCHEDULE III -- SUPPLEMENTARY INSURANCE INFORMATION
THE PROGRESSIVE CORPORATION AND SUBSIDIARIES
- --------------------------------------------
(millions)
Future
policy Other
benefits, policy Benefits, Amortization
Deferred losses, claims claims, of deferred
policy claims and and losses and policy
acquisition loss Unearned benefits Premium Investment settlement acquisition
Segment costs expenses premiums payable revenue income(1) expenses costs
----------------------------------------------------------------------------------------------
Year ended December 31, 1997:
Insurance Lines $259.6 $2,146.6 $1,980.1 $ -- $4,189.5 $274.9 $2,967.5 $607.8
==============================================================================================
Year ended December 31, 1996:
Insurance Lines $200.1 $1,800.6 $1,467.3 $ -- $3,199.3 $225.8 $2,236.1 $482.6
==============================================================================================
Year ended December 31, 1995:
Insurance Lines $181.9 $1,610.5 $1,209.6 $ -- $2,727.2 $199.1 $1,943.8 $459.6
==============================================================================================
Other Net
operating premiums
Segment expenses written
------------------------
Year ended December 31, 1997:
Insurance Lines $336.0 $4,665.1
========================
Year ended December 31, 1996:
Insurance Lines $208.5 $3,441.7
========================
Year ended December 31, 1995:
Insurance Lines $167.2 $2,912.8
========================
<FN>
(1)Excluding investment expenses of $9.9 million in 1997, $6.1 million in 1996
and $8.1 million in 1995.
</FN>
35
36
SCHEDULE IV -- REINSURANCE
THE PROGRESSIVE CORPORATION AND SUBSIDIARIES
(millions)
Assumed Percentage
Year Ended Ceded to From of Amount
---------- Gross Other Other Assumed
Amount Companies Companies Net Amount to Net
-----------------------------------------------------------------------------------
DECEMBER 31, 1997
Life Insurance in force $ -- $ -- $ -- $ -- --
===================================================================================
Premiums earned:
Accident and health $ -- $ -- $ -- $ -- --
Property and liability 4,382.9 193.4 -- 4,189.5 --
Life -- -- -- -- --
-------------------------------------------------------------------
Total premiums earned $ 4,382.9 $ 193.4 $ -- $4,189.5 --
===================================================================
DECEMBER 31, 1996
Life Insurance in force $ .1 $ .1 $ -- $ -- --
===================================================================================
Premiums earned:
Accident and health $ -- $ -- $ -- $ -- --
Property and liability 3,380.7 185.2 3.8 3,199.3 .1 %
Life -- -- -- -- --
-------------------------------------------------------------------
Total premiums earned $3,380.7 $185.2 $ 3.8 $3,199.3 --
===================================================================
DECEMBER 31, 1995
Life Insurance in force $ .4 $ .1 $ -- $ .3 --
===================================================================================
Premiums earned:
Accident and health $ -- $ -- $ -- $ -- --
Property and liability 2,895.9 168.8 .1 2,727.2 --
Life -- -- -- -- --
-------------------------------------------------------------------
Total premiums earned $2,895.9 $168.8 $ .1 $2,727.2 --
===================================================================
36
37
SCHEDULE VI -SUPPLEMENTAL INFORMATION CONCERNING PROPERTY - CASUALTY INSURANCE
OPERATIONS
THE PROGRESSIVE CORPORATION AND SUBSIDIARIES
- --------------------------------------------
(millions)
Paid Losses and
Losses and Loss Adjustment Expenses Loss Adjustment
Incurred Related to Expenses
--------------------------------------------------- -------------------
Current Prior
Year Ended Year Years
---------- -------------------------- ----------------------
December 31, 1997 $3,070.8 $(103.3) $2,715.1
========================== ====================== ===================
December 31, 1996 $2,341.9 $(105.8) $2,017.6
========================== ====================== ===================
December 31, 1995 $2,000.4 $ (56.6) $1,729.6
========================== ====================== ===================
Pursuant to Rule 12-18 of Regulation S-X. See Schedule III, page 35, for the
additional information required in Schedule VI.
37
38
Exhibit No.
Under Reg. Form 10-K If Incorporated by Reference, Documents with Which
S-K, Item 601 Exhibit No. Description of Exhibit Exhibit was Previously Filed with SEC
(3)(i) 3(A) Amended Articles of Incorporation Quarterly Report on Form 10-Q
of The Progressive Corporation (Filed with SEC on April 23, 1993; see
("Progressive"), as amended Exhibit 3 therein)
(3)(ii) 3(B) Code of Regulations of Progressive Quarterly Report on Form 10-Q (filed with
SEC on May 15, 1997; see Exhibit 3 therein)
(4) 4(A) Indenture dated as of November Annual Report on Form 10-K (Filed with SEC
15, 1988 between Progressive on March 29, 1994; see Exhibit 4(B) therein)
and State Street Bank and
Trust Company (successor in
interest to Rhode Island
Hospital Trust National Bank),
as Trustee ("Subordinated
Indenture") (including Table
of Contents and cross-reference
sheet)
(4) 4(B) Form of 10 1/8% Subordinated Notes Annual Report on Form 10-K (Filed with SEC
due 2000 issued in the aggregate on March 29, 1994; see Exhibit 4(C) therein)
principal amount of $150,000,000
under the Subordinated Indenture
(4) 4(C) Indenture dated as of November 15, Annual Report on Form 10-K (Filed with
1988 between Progressive and State SEC on March 29, 1994; see Exhibit 4(D) therein)
Street Bank and Trust Company (successor
in interest to The First National
Bank of Boston), as Trustee ("1988
Senior Indenture") (including Table
of Contents and cross-reference sheet)
(4) 4(D) Form of 10% Notes due 2000 issued in Annual Report on Form 10-K (Filed with SEC
the aggregate principal amount of on March 29, 1994; see Exhibit 4(E) therein)
$150,000,000 under the 1988 Senior
Indenture
(4) 4(E) Form of 8 3/4% Notes due 1999 issued in Annual Report on Form 10-K (Filed with SEC
the aggregate principal amount of on March 28, 1995; see Exhibit 4(F) therein)
$30,000,000 under the 1988 Senior
Indenture
38
39
EXHIBIT INDEX
Exhibit No. If Incorporated by Reference, Documents
Under Reg. Form 10-K with Which Exhibit was Previously Filed
S-K, Item 601 Exhibit No. Description of Exhibit with SEC
(4) 4(F) $10,000,000 Unsecured Line of Credit Contained in Exhibit Binder
with National City Bank (dated May 23,
1990; renewed May 20, 1992; amended
February 1, 1994 and May 1, 1997)
(4) 4(G) Indenture dated as of September 15, 1993 Quarterly Report on Form 10-Q (Filed
between Progressive and State Street with SEC on November 5, 1993; see
Bank and Trust Company (successor in Exhibit 4(A) therein)
interest to The First National Bank of
Boston), as Trustee ("1993 Senior
Indenture") (including Table of Contents
and cross-reference sheet)
(4) 4(H) Form of 7% Notes due 2013 issued in the Quarterly Report on Form 10-Q (Filed
aggregate principal amount of with SEC on November 5, 1993; see
$150,000,000 under the 1993 Senior Exhibit 4(B) therein)
Indenture
(4) 4(I) Form of 6.60% Notes due 2004 issued in Annual Report on Form 10-K (Filed with
the aggregate principal amount of SEC on March 29, 1994; see Exhibit 4(L)
$200,000,000 under the 1993 Senior therein)
Indenture
(4) 4(J) First Supplemental Indenture dated March Registration Statement No. 333-0175 (Filed
15, 1996 between the Registrant and with SEC on March 15, 1996; see Exhibit
State Street Bank and Trust Company, 4.2 therein)
evidencing the designation of State
Street Bank and Trust Company, as
successor Trustee under the 1993 Senior
Indenture
(4) 4(K) Form of 7.30% Notes due 2006, issued in Quarterly Report on Form 10-Q (Filed
the aggregate principal amount of with SEC on July 31, 1996; see Exhibit 4
$100,000,000 under the Senior Indenture therein)
dated September 15, 1993, between the
Company and State Street Bank and Trust,
as amended and supplemented
(10)(i) 10(A) Construction Agreements dated November Contained in Exhibit Binder
3, 1997 between Progressive Casualty
Insurance Company, and HCB Contractors
39
40
EXHIBIT INDEX
Exhibit No. If Incorporated by Reference, Documents
Under Reg. Form 10-K with Which Exhibit was Previously Filed
S-K, Item 601 Exhibit No. Description of Exhibit with SEC
(10)(iii) 10(B) The Progressive Corporation 1997 Annual Report on Form 10-K (Filed with SEC
Gainsharing Plan on March 31, 1997; see Exhibit 10(B) therein)
(10)(iii) 10(C) The Progressive Corporation 1997 Annual Report on Form 10-K (Filed with SEC
Executive Bonus Plan on March 31, 1997; see Exhibit 10(D) therein)
(10)(iii) 10(D) The Progressive Corporation 1996 Process Quarterly Report on Form 10-Q (Filed with SEC
Management Bonus Plan on May 1, 1996; see Exhibit 10(A) therein)
(10)(iii) 10(E) The Progressive Corporation Directors Quarterly Report on Form 10-Q (Filed
Deferral Plan (Amendment and with SEC on November 13, 1996; see
Restatement), as further amended on Exhibit 10 therein)
October 25, 1996
(10)(iii) 10(F) The Progressive Corporation 1989 Annual Report on Form 10-K (Filed with
Incentive Plan (amended and restated as SEC on March 30, 1993; see Exhibit 10(G)
of April 24, 1992, as further amended on therein)
July 1, 1992 and February 5, 1993)
(10)(iii) 10(G) Share Option Agreement dated March 17, Annual Report on Form 10-K (Filed with
1989, between Progressive and David M. SEC on March 28, 1995; see Exhibit 10(H)
Schneider therein)
(10)(iii) 10(H) The Progressive Corporation 1998 Contained in Exhibit Binder
Directors' Stock Option Plan
(10)(iii) 10(I) The Progressive Corporation 1990 Contained in Exhibit Binder
Directors' Stock Option Plan (Amended
and Restated as of April 24, 1992 and as
further amended on July 1, 1992)
(10)(iii) 10(J) Agreement dated March 11, 1996 with Annual Report on Form 10-K (Filed with SEC on
Bruce W. Marlow March 15, 1996; see Exhibit 10(H) therein)
40
41
EXHIBIT INDEX
Exhibit No. If Incorporated by Reference, Documents
Under Reg. Form 10-K with Which Exhibit was Previously Filed
S-K, Item 601 Exhibit No. Description of Exhibit with SEC
(10)(iii) 10(K) Amending Agreement dated April 1, 1996 Quarterly Report on Form 10-Q (Filed
between the Company and Bruce W. Marlow with SEC on July 31, 1996; see Exhibit
relating to certain outstanding stock 10 therein)
options previously granted to Mr. Marlow
(10)(iii) 10(L) The Progressive Corporation 1995 Annual Report on Form 10-K (Filed with SEC on
Incentive Plan March 28, 1995; see Exhibit 10(L) therein)
(10)(iii) 10(M) The Progressive Corporation Executive Contained in Exhibit Binder
Deferred Compensation Plan (Amended and
Restated as of January 1, 1997), as
further amended December 1, 1997
(10)(iii) 10(N) Form of Non-Qualified Stock Option Quarterly Report on Form 10-Q (Filed
Agreement under The Progressive with SEC on May 1, 1996; see Exhibit
Corporation 1989 Incentive Plan (single 10(B) therein)
award)
(10)(iii) 10(O) Form of Non-Qualified Stock Option Quarterly Report on Form 10-Q (Filed
Agreement under The Progressive with SEC on May 1, 1996; see Exhibit
Corporation 1989 Incentive Plan 10(C) therein)
(multiple awards)
(11) 11 Computation of Earnings Per Share Contained in Exhibit Binder
(12) 12 Computation of Ratio of Earnings to Contained in Exhibit Binder
Fixed Charges
(13) 13 The Progressive Corporation 1997 Annual Contained in Exhibit Binder
Report
(21) 21 Subsidiaries of The Progressive Contained in Exhibit Binder
Corporation
(23) 23 Consent of Independent Accountants Incorporated herein by reference to page
28 of this Annual Report on Form 10-K
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42
EXHIBIT INDEX
Exhibit No. If Incorporated by Reference, Documents
Under Reg. Form 10-K with Which Exhibit was Previously Filed
S-K, Item 601 Exhibit No. Description of Exhibit with SEC
(24) 24 Powers of Attorney Contained in Exhibit Binder
(27) 27 Financial Data Schedule for current These exhibits are contained in the EDGAR filing of
period and Restated Financial the Annual Report on Form 10-K for the year ended
Data Schedules for other periods December 31, 1997 only
No other exhibits are required to be filed herewith pursuant to Item
601 of Regulation S-K.
42