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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, 1998
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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
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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:
Title of each class Name of each exchange on
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, 1999: $7,864,758,903.37
The number of the registrant's Common Shares, $1.00 par value, outstanding
as of February 26, 1999: 72,819,870
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Annual Report to Shareholders for the year
ended December 31, 1998 are incorporated by reference in Parts I, II and IV
hereof. Portions of the registrant's Proxy Statement dated March 19, 1999, for
the Annual Meeting of Shareholders to be held on April 23, 1999, are
incorporated by reference in Part III hereof.
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INTRODUCTION
The Progressive Corporation and subsidiaries' (collectively, the "Company") 1998
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 19, 1999, for the Annual Meeting of Shareholders to be
held on April 23, 1999 (the "Proxy Statement") have also been incorporated by
reference herein and are identified under the appropriate items in this
Form 10-K.
PART I
ITEM 1. BUSINESS
(a) General Development of Business
The Progressive insurance organization began business in 1937. The Progressive
Corporation, an insurance holding company formed in 1965, has 82 subsidiaries
and 1 mutual insurance company affiliate. The Progressive Corporation's
insurance subsidiaries and affiliate provide personal automobile insurance and
other specialty property-casualty insurance and related services throughout the
United States and 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.
(b) Financial Information About Industry Segments
Incorporated by reference from Note 11, Segment Information, on
page 46 of the Company's Annual Report.
(c) Narrative Description of Business
The Company offers a number of personal and commercial property-casualty
insurance products primarily related to motor vehicles. Net premiums written
were $5,299.7 million in 1998, compared to $4,665.1 million in 1997 and $3,441.7
million in 1996. The underwriting profit margin was 8.4% in 1998, compared to
6.6% in 1997 and 8.5% in 1996.
Personal Lines
Of the approximately 250 United States insurance company groups writing private
passenger auto insurance, the Company estimates that it ranks fifth in size for
1998. 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 1998, the estimated industry premiums written, which
include personal auto insurance in the United States and Ontario, Canada, were
$121.7 billion, and Progressive's share of this market was approximately 4.0%,
compared to $117.5 billion and 3.7%, respectively, in 1997, and $111.6 billion
and 2.8% in 1996.
The Company's Personal Lines segment writes insurance for private passenger
automobiles and recreational vehicles. This business frequently offers more than
one program in a single state, with each targeted to a specific market segment.
Personal Lines accounted for 93% of the Company's 1998 total net premiums
written, compared to 92% in both 1997 and 1996.
A portion of the Company's Personal Lines consists of nonstandard automobile
insurance products for people who have been cancelled or rejected by other
insurers. The size of the nonstandard automobile insurance market changes with
the insurance environment and is estimated to be about 20% of the United States'
personal automobile insurance market. Volume potential is influenced by the
actions of direct competitors, writers of standard and preferred automobile
insurance and state-mandated involuntary plans. Approximately 355 nonstandard
insurance companies, many of which are part of an affiliated group, compete for
this business. In 1997, the Company ranked second in direct premiums written and
near the top in underwriting performance in the nonstandard market. During 1998,
the Company continued to maintain a major presence in this market.
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The Personal Lines segment also writes standard and preferred automobile risks.
These products accounted for between 30% and 35% of the Company's total Personal
Lines premiums in 1998. Our strategy is to build towards becoming a low-cost
provider of a full line of auto insurance products and related services,
distributed through whichever channel the customer prefers. The Company's goal
is to compete successfully in the standard and preferred market, which comprises
about 80% of the United States' personal automobile insurance market.
The Company's specialty Personal Lines products include motorcycle, recreational
vehicle, mobile home, watercraft and snowmobile insurance. The Company'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. In 1998, Progressive became the market share
leader in the motorcycle product.
The Company writes through multiple distribution methods, including Independent
Agents, Direct (via 1 800 AUTO PRO(R) and progressive.com) and through Strategic
Alliances. The majority of the Company's Personal Lines premiums are written
through a network of more than 30,000 Independent Insurance Agents located
throughout the United States and 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. In 1998, the Direct
distribution channel represented between 10% and 15% of the Personal Lines
volume. The Company expanded its television advertising campaign on a national
level in 1998. The Company also introduced its local advertising campaign, which
includes direct mail, radio and television advertising, to 14 more states in
1998 , bringing the total number of states in which the Company advertises to 32
plus Washington, D.C. (83 markets). In addition, the Company is the market
leader in selling auto insurance on the Internet. Consumers can comparison shop
online for auto insurance in 47 states and can buy online in 23 states plus the
District of Columbia. In 1998, Internet sales represented approximately 2% of
the Direct business volume. The Company also writes through its Strategic
Alliances channel, which includes alliances with other insurance companies,
employers, affinity groups and national brokerage agencies. The Strategic
Alliances channel represented between 5% and 10% of the Personal Lines premiums
in 1998.
Auto insurance differs greatly by community because regulations vary by state
and because traffic, law enforcement, cultural attitudes, insurance agents,
medical services and auto repair facilities vary by community. The Company's
matrix organization enables it to meet varied local conditions under a cohesive
set of policies and procedures that ensure consistency and control. The
Company's 44 State and Community Managers run the business in their state(s).
They manage claims, distribution, advertising budgets, price levels, agent
development, regulation and community relations for their territory. State
Managers determine their state(s) organization, and may appoint Community
Managers with responsibilities similar to their own for a large part of the
state. Processing (customer service calls, direct sales calls and claims
processing) is done at ten regional sites in Albany, New York; Austin, Texas;
Cleveland, Ohio; Colorado Springs, Colorado; Richmond, Virginia; Sacramento,
California; Tampa, Florida; Tempe, Arizona; Tigard, Oregon and Toronto, Ontario.
State Managers report directly to members of the Company's Policy Team, which is
the Company's senior policy and decision making body. In 1999, the Policy Team
includes two CEOs (Insurance Operations, Investments and Capital Management),
four Distribution Leaders (Independent Agent, 1 800 AUTO PRO(R),
progressive.com, Strategic Alliances), Chief Pricing/Product Officer, Chief
Claim Officer, Chief Financial Officer, Chief Information Officer, Chief Human
Resources Officer and Chief Communications Officer. The Distribution Leaders are
challenged to develop and manage product offerings and customer service
processes tailored to the unique requirements of customers who discover and
select Progressive through different distribution modes.
Other Businesses
The Company's other lines of business include the commercial vehicle business
unit, United Financial Casualty Company (UFCC), Professional Liability Group
(PLG) and Motor Carrier business unit, which are organized by customer group and
headquartered in Cleveland, Ohio. These businesses accounted for 7% of total
volume in 1998. The choice of distribution channel is driven by each customer
group's buying preference and service needs. Distribution channels include
independent agents, financial institutions and vehicle dealers. 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
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financial or purchase transactions. The other lines of business also market
their products directly to their customers through company-employed sales
forces. Most of these businesses are in markets that are declining in size.
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 for this
business on a nationwide basis with approximately 150 other companies. In the
target segment of monoline commercial auto writers, the Company estimates its
1998 ranking to be in the top 10.
UFCC primarily 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 offered 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 loan
institutions, 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 and various other
reinsurance entities. The program is sponsored by the American Bankers
Association. Additionally, the Company provides similar coverages for credit
unions and savings and loan institutions. The risk and premium on these
coverages are also reinsured by various reinsurance entities. PLG represented
less than one-half percent of the Company's total 1998 net premiums written.
The service operations of the other lines of business consist primarily of
processing business for involuntary plans and providing claim services to fleet
owners and other insurance companies. Service revenues were $38.2 million in
1998, compared to $45.3 million in 1997 and $46.2 million in 1996. Pretax
operating profits were $7.4 million in 1998, compared to $1.4 million and $4.3
million in 1997 and 1996, respectively.
The Motor Carrier business unit currently processes business for the Commercial
Auto Insurance Procedures (CAIP) in 27 states. As a CAIP servicing carrier, the
business unit processes over 50% of the premiums in the CAIP market without
assuming the indemnity risk. It competes with approximately 3 other providers
nationwide.
Competitive Factors
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 expenses. 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 adjusting
are also important factors in the Company's competitive strategy.
Licenses
The Company operates under licenses issued by various state or provincial
insurance authorities. These 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
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
three Canadian provinces 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 insurance
subsidiaries and affiliate are domiciled in the states of Arizona, California,
Colorado, Hawaii, Illinois, 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 statutory 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, to ensure 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 these 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 which are not insurable in the voluntary market. 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 in those states.
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
premiums 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 determination and the
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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.
In 1998, the NAIC adopted the Codification of Statutory Accounting Principles
guidance which will replace the current NAIC Annual Statement Instructions and
Accounting Practices and Procedures manual as the NAIC's primary guidance on
statutory accounting. The Codification provides guidance for areas where
statutory accounting has been silent and changes current statutory accounting in
some areas. The implementation date established by the NAIC is January 1, 2001;
however, the effective date will be specified by each insurance company's state
of domicile. The Company is currently evaluating the potential effect of the
Codification guidance, but does not expect it to have a material impact on the
Company's statutory surplus.
Statutory Accounting Principles
The Company'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 that are outstanding 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.
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5. Costs for computer software developed or obtained for internal use are
capitalized and amortized over their useful life, rather then expensed as
incurred, as required by SAP.
The differing treatment of income and expense items results in a corresponding
difference in federal income tax expense.
Investments
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 $5,674.3
million at December 31, 1998, compared to $5,270.4 million at December 31, 1997.
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
$306.2 million in 1998, compared to $373.4 million in 1997 and $232.9 million in
1996. See Management's Discussion and Analysis of Financial Condition and
Results of Operations, beginning on page 14 herein for additional discussion.
Employees
The number of employees, excluding temporary employees, at December 31, 1998,
was 15,735.
Liability for Property-Casualty Losses and Loss Adjustment Expenses
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 1998, 1997 and 1996 on a GAAP basis.
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RECONCILIATION OF NET RESERVES FOR LOSSES AND LOSS ADJUSTMENT EXPENSES
(millions) 1998 1997 1996
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Balance at January 1 $2,146.6 $1,800.6 $1,610.5
Less reinsurance recoverables on unpaid losses 279.1 267.7 296.1
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Net balance at January 1 1,867.5 1,532.9 1,314.4
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Net reserves of subsidiary purchased -- 82.2 --
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Incurred related to:
Current year 3,560.5 3,070.8 2,341.9
Prior years (184.2) (103.3) (105.8)
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Total incurred 3,376.3 2,967.5 2,236.1
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Paid related to:
Current year 2,376.0 1,971.5 1,424.7
Prior years 922.0 743.6 592.9
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Total paid 3,298.0 2,715.1 2,017.6
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Net balance at December 31 1,945.8 1,867.5 1,532.9
Plus reinsurance recoverable on unpaid losses 242.8 279.1 267.7
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Balance at December 31 $2,188.6 $2,146.6 $1,800.6
======== ======== ========
The reconciliation above shows a $184.2 million redundancy, which emerged during
1998, in the 1998 liability and a $103.3 million redundancy in the 1997
liability, based on information known as of December 31, 1998 and December 31,
1997, 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 1988 1989 1990 1991 1992 1993 1994(3) 1995 1996 1997 1998
LIABILITY FOR UNPAID
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LOSSES AND LAE(1) $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 $1,945.8
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PAID (CUMULATIVE) AS OF:
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One year later 283.1 293.1 322.4 353.4 366.8 417.0 525.3 593.0 743.6 922.0
Two years later 393.7 446.8 490.8 518.8 520.0 589.8 706.4 838.9 1,034.5
Three years later 465.0 539.8 570.4 583.2 598.2 664.1 810.6 960.1 --
Four years later 514.0 588.2 600.0 617.6 632.8 709.9 857.1 -- --
Five years later 540.7 603.1 613.6 635.8 658.6 729.8 -- -- --
Six years later 545.1 608.1 624.7 651.2 669.7 -- -- -- --
Seven years later 545.5 614.7 631.1 656.2 -- -- -- -- --
Eight years later 549.0 619.2 634.7 -- -- -- -- -- --
Nine years later 551.7 620.9 -- -- -- -- -- -- --
Ten years later 552.9 -- -- -- -- -- -- -- --
LIABILITY RE-ESTIMATED
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AS OF:
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One year later 610.3 685.4 748.8 810.0 857.9 869.9 1,042.1 1,208.6 1,429.6 1,683.3
Two years later 573.4 677.9 726.5 771.9 765.5 837.8 991.7 1,149.5 1,364.5
Three years later 581.3 668.6 712.7 718.7 737.4 811.3 961.2 1,118.6 --
Four years later 575.1 667.1 683.7 700.1 725.2 794.6 940.6 -- --
Five years later 578.4 654.7 666.3 695.1 717.3 782.9 -- -- --
Six years later 582.2 647.1 664.8 692.6 711.1 -- -- -- --
Seven years later 574.3 645.7 664.5 688.2 -- -- -- -- --
Eight years later 574.4 645.4 661.4 -- -- -- -- -- --
Nine years later 575.0 641.9 -- -- -- -- -- -- --
Ten years later 572.4 -- -- -- -- -- -- -- --
CUMULATIVE REDUNDANCY $ 78.6 $106.7 $130.2 $173.3 $245.3 $229.5 $158.1 $195.8 $ 168.4 $ 184.2
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PERCENTAGE(2) 12.1 14.3 16.4 20.1 25.6 22.7 14.4 14.9 11.0 9.9
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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."
The above table presents the development of balance sheet liabilities for
1988 through 1997. 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. 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, 1998 the
companies had paid $620.9 million of the currently estimated $641.9 million of
losses and LAE that had been incurred through the end of 1989; thus an estimated
$21.0 million of losses incurred through 1989 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 1988 liability has developed redundant by
$78.6 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
1991, but incurred in 1988, will be included in the cumulative deficiency or
redundancy amount for years 1988, 1989 and 1990. 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 1998 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 Canada. The amount of
Canadian revenues and assets are less than 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.
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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, five buildings in Tampa, Florida, a building in Tempe, Arizona
and a building in Tigard, Oregon. In total, these buildings contained
approximately 1,088,500 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 and are not segregated by
industry segment. In addition, the Company owns two buildings, one in Tampa,
Florida and one in Plymouth Meeting, Pennsylvania, which are partially leased to
non-affiliates.
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 is constructing three buildings containing a total of
approximately 443,000 square feet on the site and could build up to two
additional buildings, containing about 500,000 additional square feet in total,
in the future. The first three buildings are expected to be completed during
1999 and are estimated to cost $68.3 million. As of December 31, 1998, $28.7
million has been paid. The Company is also constructing a 90,000 square foot
office in Albany, New York, which is expected to be completed during 1999. The
construction projects are being funded through operating cash flows.
The Company leases approximately 490,000 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 365
claim offices, consisting of 1,540,000 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 that it will need 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 2, Litigation, on page 39 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 in
Part III of this Annual Report on Form 10-K.
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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
- ------------------------------------------------------------------------------------------------------------------------------------
1998 1 $135 1/2 $106 11/16 $134 11/16 $.060
2 150 126 1/2 141 .060
3 156 3/4 95 112 3/4 .065
4 172 94 169 3/8 .065
------------------------------------------------------------------------------------------------
$172 $ 94 $169 3/8 $.250
================================================================================================
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
================================================================================================
The closing price of the Company's Common Shares on February 26, 1999 was
$128 1/2.
(b) Holders
There were 3,954 shareholders of record on February 26, 1999.
(c) Dividends
Statutory policyholders' surplus was $2,029.9 million and $1,722.9 million at
December 31, 1998 and 1997, 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, 1998, $245.7 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 to the corporate parent of
$274.2 million in 1999 out of statutory policyholders' surplus, without prior
approval by regulatory authorities.
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ITEM 6. SELECTED FINANCIAL DATA
(millions - except per share amounts)
For the years ended December 31,
1998 1997 1996 1995 1994
-----------------------------------------------------
Total revenues $5,292.4 $4,608.2 $3,478.4 $3,011.9 $2,415.3
Operating income 449.3 336.0 309.1 220.1 212.7
Net income(1) 456.7 400.0 313.7 250.5 274.3
Per share:
Operating income(2) 6.01 4.46 4.12 2.85 2.76
Net income(1),(2) 6.11 5.31 4.14 3.26 3.59
Dividends .250 .240 .230 .220 .210
Total assets 8,463.1 7,559.6 6,183.9 5,352.5 4,675.1
Debt outstanding 776.6 775.9 775.7 675.9 675.6
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.
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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, to pay dividends
and for other business purposes.
During 1998, the Company repurchased 404,079 of its Common Shares at a total
cost of $42.6 million (average $105.28 per share), including 11,079 Common
Shares repurchased to satisfy obligations under the Company's benefit plans.
During the three-year period ended December 31, 1998, the Company repurchased
1.4 million of its Common Shares at a total cost of $87.4 million (average
$60.75 per share), .2 million of its 9 3/8% Serial Preferred Shares, Series A,
at a total cost of $6.0 million (average $25.60 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 made $1.1 million of capital contributions to its
subsidiaries, net of dividends received from 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. In March 1999, the Company issued $300 million of
6 5/8% Senior Notes due 2029 under an outstanding shelf registration, which
became effective in 1998. The net proceeds of $293.7 million are intended to
replace current outstanding debt upon its maturity. The Company also has
available a $10.0 million revolving credit agreement. With its current 29% 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, 1998, operations generated positive cash flows of
$2,004.9 million, and cash flows are 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. for about $50
million in cash. Midland underwrites and markets nonstandard private passenger
automobile insurance through Independent Agents across 11 states, primarily in
the southeastern and western United States.
Total capital expenditures for the three years ended December 31, 1998,
aggregated $331.9 million. In December 1997, the Company purchased approximately
72 acres in Tampa, Florida to construct a three-building, 307,000 square foot,
regional call center. The cost of the project is currently estimated at $45.2
million; $41.3 million has been paid as of December 31, 1998. The first two
buildings were completed during 1998. The third building was completed in
February 1999. In addition, in November 1997, the Company purchased 91 acres in
Mayfield Village, Ohio to construct an office complex, near the site of its
current corporate headquarters. This office complex is part of a five-year
cooperative effort with Mayfield Village to develop over 300 acres. Progressive
will serve as the anchor corporate user with additional business users and
recreational facilities on the site. The Company is constructing three buildings
containing a total of approximately 443,000 square feet on the site and could
build up to two additional buildings, containing about 500,000 square feet in
total, in the future. The first three buildings are expected to be completed
during 1999 and are estimated to cost $68.3 million. As of December 31, 1998,
$28.7 million has been paid. The construction projects are being funded through
operating cash flows.
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INVESTMENTS The Company invests in fixed-maturity, equity and short-term
securities. The Company's investment strategy recognizes its need to maintain
capital adequate to support its insurance operations. The Company evaluates the
risk/reward tradeoffs of investment opportunities, measuring their effects on
stability, diversity, overall quality and liquidity of the investment portfolio.
The majority of the portfolio is invested in high-grade, fixed-maturity
securities, of which short- and intermediate-term securities represented
$4,439.4 million, or 78.3%, at the end of 1998, compared to $4,024.9 million, or
76.4%, at the end of 1997. Long-term investment-grade securities, including
those principal paydowns from asset-backed securities that are greater than 10
years, were $93.5 million, or 1.6%, at the end of 1998, compared to $143.4
million, or 2.7%, at the end of 1997. Non-investment-grade fixed-maturity
securities were $128.0 million, or 2.3%, at the end of 1998, compared to $132.5
million, or 2.5%, at the end of 1997, 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 2.8 years at December 31, 1998, compared to 3.3 years
at December 31, 1997.
A portion of the investment portfolio is invested in marketable equity
securities. Common stocks represented $636.9 million, or 11.2%, of the
portfolio, at the end of 1998, compared to $620.8 million, or 11.8%, a year
earlier. The majority of the common stock portfolio is invested in domestic
equities traded on nationally recognized securities exchanges. In addition, the
Company invests in foreign equities, which may include stock index futures and
foreign currency forwards, which comprised $130.7 million of the common stock
portfolio at the end of 1998, compared to $106.0 million last year, and
partnership investments, which comprised $63.7 million of the common stock
portfolio at the end of 1998, compared to $31.8 million last year. Preferred
stocks represented $376.5 million, or 6.6%, of the portfolio at the end of 1998,
compared to $348.8 million, or 6.6%, a year earlier, and was comprised of over
72% of fixed-rate preferred stocks with mechanisms that are expected to provide
an opportunity to liquidate at par.
As of December 31, 1998, the Company's portfolio had $174.3 million in
unrealized gains, compared to $188.4 million in 1997. This decrease in value was
the result of widening credit spreads on all non-treasury related products and
the Company's underperformance relative to the S&P 500, due to overweighting in
smaller capitalization value stocks.
The weighted average fully taxable equivalent book yield of the portfolio was
6.3%, 6.6% and 6.7% for the years ended December 31, 1998, 1997 and 1996,
respectively.
The quality distribution of the fixed-income portfolio is as follows:
Percentage at Percentage at
Rating December 31, 1998 December 31,1997
---------------- ----------------- ----------------
AAA 57.7% 67.5%
AA 14.3 13.0
A 20.4 12.9
BBB 4.1 3.4
Non Rated/Other 3.5 3.2
----------------- ----------------
100.0% 100.0%
================= ================
As of December 31, 1998, the Company held $1,486.9 million of asset-backed
securities, which represented 26.2% of the total investment portfolio. The
asset-backed portfolio included collateralized mortgage obligations (CMO) and
commercial mortgage-backed obligations (CMB) totaling $325.3 million and $728.9
million, respectively. The remainder of the asset-backed portfolio was invested
primarily in auto loan and other asset-backed securities. As of December 31,
1998, the CMO portfolio primarily included sequential bonds, representing 90.3%
of the CMO portfolio ($293.7 million)
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with an average life of 3.6 years. At December 31, 1998, 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 6.1 years and a weighted average Moody's or
Standard & Poor's rating of AA. At December 31, 1998, the CMO and CMB portfolios
had unrealized gains/(losses) of $.1 million and $(8.2) million, respectively.
The single largest unrealized loss in any individual CMO security was $.9
million and in any CMB security was $5.4 million, at December 31, 1998. The CMB
portfolio includes $132.5 million of CMB interest-only certificates, which had
an average life of 6.6 years and a weighted average Moody's or Standard & Poor's
rating of AAA at December 31, 1998. 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
Statement of Financial Accounting Standards (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 of the resecuritized debt, which was subsequently
sold in 1998 for a net gain of $3.5 million. This portion of the transaction was
not accounted for as a sale in 1997 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 56 of the Company's 1998 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. In 1998, the
Company wrote down $32.2 million, including $20.8 million in two securities in
emerging markets driven by changing economic conditions.
Included in the Company's non-investment-grade fixed-maturity securities and
common stock portfolios are $299.6 million of other risk assets. Other risk
assets include such items as high yield and distressed debt, private equities
and warrants, mezzanine investments, and securities in emerging markets. No
individual security in the other risk asset portfolio comprised more than one
percent of Progressive's total investment portfolio. The total return on the
average amount invested in this asset class in 1998 was (4.4)% with a total net
unrealized gain of $4.7 million at December 31, 1998. The single largest
unrealized loss in any individual other risk asset security was $5.4 million.
Derivative instruments are primarily used to manage the risks and enhance the
returns of the available-for-sale portfolio. This is accomplished by modifying
the basis, duration, interest rate or foreign currency characteristics of the
portfolio, hedged securities or hedged cash flows. During 1998, the Company
entered into two transactions, an interest rate swap hedge and a short futures
position, to hedge against possible rises in interest rates prior to the
issuance of debt under the $300 million shelf registration. The interest rate
swap hedge performed as expected and is recorded as an $11.0 million deferred
asset under SFAS 80, "Accounting for Futures Contracts," as a qualified hedge.
The short futures position, driven by changing economic conditions, did not meet
the established criteria for hedging correlation and was discontinued as a
hedge, recognizing a net realized loss of $9.2 million in 1998. The Company
continues to hold the short futures position for risk management of the
anticipated debt offering. Derivative instruments may also be used for trading
purposes. During 1998, net activity in the trading portfolio was not material to
the Company's financial position, cash flows or 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
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positions in the trading portfolios, limiting exposure to defined levels.
At December 31, 1998, trading positions had a net market value of $(.4) million;
at December 31, 1997, the net market value was $1.1 million.
RESULTS OF OPERATIONS Operating income, which excludes net realized gains and
losses from security sales and one-time items, was $449.3 million, or $6.01 per
share, in 1998, $336.0 million, or $4.46 per share, in 1997 and $309.1 million,
or $4.12 per share, in 1996. The GAAP combined ratio was 91.6 in 1998, 93.4 in
1997 and 91.5 in 1996.
Direct premiums written increased 13% to $5,451.3 million in 1998, compared to
$4,825.2 million in 1997 and $3,638.4 million in 1996. Net premiums written
increased 14% to $5,299.7 million in 1998, compared to $4,665.1 million in 1997
and $3,441.7 million in 1996. The difference between direct and net premiums
written is partially attributable to premiums written under state-mandated
involuntary Commercial Auto Insurance Procedures (CAIP), for which the Company
retains no indemnity risk, of $60.7 million in 1998, $78.4 million in 1997 and
$99.5 million in 1996. The Company provided policy and claim processing services
to 27 state CAIPs in all three years. Premiums earned, which are a function of
the amount of premiums written in the current and prior periods, increased 18%
in 1998, compared to 31% in 1997 and 17% in 1996.
Net premiums written in the Company's Personal Lines, which write insurance for
private passenger automobiles and recreational vehicles, grew 15%, 36% and 20%
in 1998, 1997 and 1996, respectively, primarily reflecting an increase in unit
sales. The slower growth in 1998 is a result of intensified competition in the
auto insurance market. Many of the Company's competitors reduced rates,
increased advertising, entered new states, expanded their distribution channels,
entered the nonstandard auto insurance market and increased agents'
compensation. The Company expects continued growth in 1999 despite increased
competition. The Company decreased rates an average of 5.3% in 1998, compared to
rate decreases of .9% in 1997 and rate increases of 2.5% in 1996. The Company
continues to write through multiple distribution methods, including Independent
Agents, Direct (via 1 800 AUTO PRO(R) and progressive.com) and through Strategic
Alliances. In 1998, the Direct distribution channel represented between 10% and
15% of the Personal Lines volume, compared to between 5% and 10% in 1997 and
less than 5% in 1996. The sales generated via the Internet represented
approximately 2% of the Direct business net premiums written in 1998. The
Company also writes through its Strategic Alliances channel, which includes
alliances with other insurance companies, employers, affinity groups and
national brokerage agencies. The Strategic Alliances channel represented between
5% and 10% of the Personal Lines premiums in all three years. The remainder of
the Personal Lines premiums are written through a network of over 30,000
Independent Insurance Agents. Through these multiple distribution channels, the
Company continues to write standard and preferred risks, which represented
between 30% and 35% of total 1998 Personal Lines volume, compared to between 20%
and 25% in 1997 and between 10% and 15% in 1996, as well as its traditional
nonstandard auto products.
In 1997, the Company began using rating criteria based partially on consumer
financial responsibility. This approach is in use in 43 states that represent
91% of the Personal Lines volume. The Company expects product design and pricing
methods to evolve constantly, based on the developing understanding of loss
data, work flows, market conditions and technology, as well as consumer
acceptance of the Progressive brand as an insurer for all drivers. The Company
introduced the next generation of product design in mid-1998 and expects to have
it in markets representing 80% of premium by April 1999. Early results suggest
that the Company is attracting drivers from all risk profiles and retaining them
longer. 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
expected 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 a
policyholder. In 1998, Personal Lines generated an underwriting profit margin of
8%, compared to 6% in 1997 and 8% in 1996.
The Company's other lines of business include writing insurance for small
fleets of commercial vehicles, collateral protection and loan tracking for
auto lenders and financial institutions, directors' and officers'
liability and fidelity coverage for American Bankers Association member
community banks and independent credit unions, and providing related claim,
underwriting and system services. Revenues in these businesses were $405
million in 1998, compared to
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18
$402 million in 1997 and $330 million in 1996. Pretax operating profit was $62
million in 1998, compared to $37 million in 1997 and $46 million in 1996. Most
of these businesses are in markets that are declining in size.
Claim costs, the Company's most significant expense, represent actual payments
made and changes in estimated future payments to be made to or on behalf of its
policyholders, including expenses required to settle claims and losses. These
costs include a loss estimate for future assignments and assessments, based on
current business, under state-mandated involuntary automobile programs. Claim
costs are influenced by inflation and loss severity and frequency, the impact of
which is mitigated by adequate pricing. Increases in the rate of inflation
increase loss payments, which are made after premiums are established.
Accordingly, anticipated rates of inflation are taken into account when the
Company establishes premium rates and loss reserves. Claim costs, expressed as a
percentage of premiums earned, were 68% in 1998, compared to 71% in 1997 and 70%
in 1996. In recent years, the industry has had favorable loss experience driven
by continuing trends with respect to safer cars and roads, the impaired driving
crackdown, better law enforcement and insurers operating more efficiently.
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, from October 1997 through May 1998,
the Company included year 2000 exclusions in all new and renewal policies for
commercial banks which have multi-year terms that extend beyond December 31,
1999. This placed the Company at a competitive disadvantage since few of its
competitors included similar exclusions. The Company has obtained additional
reinsurance to limit its potential exposure to about 7% of the average policy
limits in the event any of the insured directors or officers are held liable for
year 2000 noncompliance by their financial institutions. In light of this
additional reinsurance contract, which reduced the Company's net exposure by 68%
and covers all of the Company's in-force directors and officers insurance
business, in June 1998, the Company stopped including year 2000 exclusions in
its multi-year policies. Additionally, the Company has begun to selectively
remove previously issued year 2000 exclusions. 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 these 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. In the event of
a claim, applicable factual and coverage issues would have to be resolved. Based
on information currently available and management's best estimate, the Company
does not believe that any losses resulting from this exposure will have a
material impact on the Company's liquidity, financial condition, cash flows or
results of operations.
Because the Company is primarily an insurer of motor vehicles, it has limited
exposure for environmental, product and general liability claims. The Company
has established reserves for these exposures, in amounts which it believes to be
adequate based on information currently known by it. Management does not believe
that these claims will have a material impact on the Company's liquidity,
financial condition, cash flows or results of operations.
Policy acquisition and other underwriting expenses as a percentage of premiums
earned were 23% in 1998 and 1997 and 22% in 1996. During 1998, the Company
expanded its television advertising campaign on a national level. The Company
also introduced its local advertising campaign to 14 more states during 1998,
bringing the total number of states in which the Company advertises to 32 plus
Washington D.C. (83 markets).
Recurring investment income (interest and dividends) increased 7% to $294.8
million in 1998, compared to $274.9 million in 1997 and $225.8 million in 1996,
primarily due to an increase in the size of the investment portfolio. Net
realized gains on security sales were $11.4 million in 1998, $98.5 million in
1997 and $7.1 million in 1996. Investment expenses were $7.4 million in 1998,
compared to $9.9 million in 1997 and $6.1 million in 1996; in 1997, the Company
purchased a new portfolio management system and incurred expenses related to the
sale of the commercial mortgage-backed securities.
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YEAR 2000 COMPLIANCE The year 2000 problem exists because many computer programs
only use the last two digits to refer to a year and could recognize "00" as 1900
instead of 2000. If not corrected, many computer and other microchip supported
applications could fail or create erroneous results. The extent of the potential
impact is still unknown but could affect the global economy. In response to this
issue, the Company has evaluated its applications and operating software
(including its claims reporting, financial reporting, policy issuance, policy
maintenance and other internal production systems), hardware and software
products, and third-party data exchanges and business relationships, and is in
the process of evaluating its end user computing activities and facilities
implications (including public utility services), and has established a
dedicated, tenured project team responsible for overseeing progress on the
Company's compliance program and periodically reporting to management.
The Company began converting its applications software to be year 2000 compliant
in July 1995 and, as a result, has been able to avoid redeploying significant
resources or deferring other important projects to specifically address the year
2000 issues. During the first quarter 1998, the Company retained independent
consultants to determine its state of readiness. Although some additional areas
of focus were identified, the consultants noted that the Company was adequately
addressing its critical internal systems and issues. As of December 31, 1998,
the Company has completed approximately 94% of its efforts to bring its
applications software in compliance. Testing of critical applications is being
accomplished through the use of a special systems environment known as a "Time
Warp Lab," which mimics the Company's production environment. As a final test of
year 2000 readiness, after conversion and year 2000 certification, critical
applications are run in the Time Warp Lab while systems clocks turn over from
1999 to 2000 and beyond. The total cost to modify these existing production
systems, which includes both internal and external costs of programming, coding
and testing, is estimated to be $8.0 million, of which $7.1 million had been
expensed through December 31, 1998. The Company also replaced some of its
systems during 1998. In addition to being year 2000 compliant, these new systems
added 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 majority of the projects were completed in 1998, with remaining parallel
testing scheduled during the first quarter 1999. As of December 31, 1998, $4.7
million had been paid for these systems. All costs are being funded through
operating cash flows. In addition, the Company has identified approximately 330
third parties with which data is exchanged. All critical data exchanges are
being tested for compliance. Although dependent on business partners' testing
schedules, testing of critical data exchanges is expected to be completed by the
end of the second quarter 1999.
The Company continually evaluates computer hardware and software upgrades for
enhancements and, therefore, many of the costs to replace these items to be year
2000 compliant are not likely to be incremental costs to the Company. The
Company's remediation of its mainframe hardware and operating software is 94%
complete and the remediation of its servers and client server operating software
is 30% complete. The Company estimates that all mainframe and client server
hardware and operating software will be year 2000 compliant by the first half of
1999. In addition, during 1998, the Company secured software which will assist
in the discovery of noncompliant desktop hardware and software. It is estimated
that the assessment and remediation process will be completed by the first half
of 1999.
The Company is currently unable to determine the impact that year 2000
noncompliance may have on its financial condition, cash flows and results of
operations. The Company believes that it is taking the necessary measures to
address issues that may arise relating to the year 2000 and that its production
systems will be compliant. The Company realizes, however, that noncompliance by
third parties could impact its business. The possibility exists that a portion
of the Company's distribution channel may not be compliant, that communication
with agents could be disrupted, that underwriting data, such as motor vehicle
reports, could be unobtainable, that the claim settling process could be delayed
or that frequency and severity of losses may increase due to external factors.
The Company is contacting its key independent insurance agents, vendors and
suppliers (e.g. 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 is working closely with all
critical business relationships to minimize its exposure to year 2000 issues,
including on-site visits to identify their state of readiness.
The Company's process teams and business groups are identifying potential year
2000 scenarios. For those scenarios deemed to be both probable and with a
potentially significant business impact, the Company is developing contingency
plans. The majority of the contingency plans are drafted and were reviewed by
the Company's chief financial and
19
20
technology officers during 1998. Contingency plans may include such items as
hardening facilities with back-up generators, prioritizing resources, securing
alternative vendors, developing alternative processes, pre-ordering policyholder
information, and other measures. The contingency plans were substantially
completed for all material relationships during the first quarter 1999 and the
Company will continue to review them throughout 1999.
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. THESE RISKS AND UNCERTAINTIES INCLUDE, WITHOUT LIMITATION,
PRICING COMPETITION AND OTHER INITIATIVES BY COMPETITORS, LEGISLATIVE AND
REGULATORY DEVELOPMENTS, WEATHER CONDITIONS (INCLUDING THE SEVERITY AND
FREQUENCY OF STORMS, HURRICANES, SNOWFALLS, HAIL AND WINTER CONDITIONS), DRIVING
PATTERNS, COURT DECISIONS AND TRENDS IN LITIGATION, INTEREST RATE LEVELS AND
OTHER CONDITIONS IN THE FINANCIAL AND SECURITIES MARKETS, UNFORESEEN
TECHNOLOGICAL ISSUES ASSOCIATED WITH THE YEAR 2000 COMPLIANCE EFFORTS AND THE
EXTENT TO WHICH VENDORS, PUBLIC UTILITIES, GOVERNMENTAL ENTITIES AND OTHER THIRD
PARTIES THAT INTERFACE WITH THE COMPANY MAY FAIL TO ACHIEVE YEAR 2000
COMPLIANCE, AND OTHER 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.
20
21
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The quantitative and qualitative disclosures about market risk are incorporated
by reference from the "Investments" section of Management's Discussion and
Analysis of Financial Condition and Results of Operations set forth in Item 7 of
the Company's Annual Report on Form 10-K for the year ended December 31, 1998,
and pages 56 and 57 of the Company's 1998 Annual Report to Shareholders, which
is included as Exhibit 13 to such Annual Report on Form 10-K.
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 1998 Annual Report, pages 34
through 47 and pages 52 through 59.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
21
22
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
A description of all of the directors and the individuals who have been
nominated for election as directors at the 1999 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 6.
A description of the executive officers of the Registrant and its subsidiaries
follows. 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 65 President and Chairman of the Board; Chief Executive Officer - Insurance
Operations since January 1999; Chief Executive Officer prior to January 1999;
President, Chairman of the Board and Chief Executive Officer of Progressive
Casualty Insurance Company, the principal subsidiary of the Registrant
Alan R. Bauer 46 Internet Distribution Leader since January 1999; International/Internet Officer
from December 1996 to December 1998; Independent Agent Marketing Process Leader
from March 1996 to December 1996; West Division President prior to March 1996
Charles B. Chokel 45 Chief Executive Officer - Investments and Capital Management since January 1999;
Treasurer from December 1994 to December 1998; Chief Financial Officer
prior to January 1999
W. Thomas Forrester 50 Chief Financial Officer and Treasurer since January 1999; Ownership Process Leader
from March 1996 to December 1998; Central States Division President from January 1995
to March 1996; Diversified Division President in 1994
Moira A. Lardakis 47 Chief Communications Officer since January 1999; Community Manager Support Process Leader
from January 1998 to December 1998; General Manager of Ohio Business Unit from March 1996
to December 1997; Ohio Division President prior to March 1996
Daniel R. Lewis 52 Independent Agent Distribution Leader since January 1999; Independent Agent Marketing
Process Leader from December 1996 to December 1998; General Manager of South Florida
Community from November 1994 to December 1996; Treasurer and Central Division President
prior to December 1994
Robert J. McMillan 47 Direct Distribution Leader since January 1999; Consumer Marketing Process Leader from
January 1998 to December 1998; Product Process Leader from March 1996 to December 1997;
Florida Division President prior to March 1996
Brian J. Passell 42 Chief Claim Officer since January 1999; General Manager of Pennsylvania from March 1996 to
December 1998; Division Claim Manager prior to March 1996
Glenn M. Renwick 43 Chief Information Officer since January 1998; Consumer Marketing Process Leader from
March 1996 to December 1997; Director of Consumer Marketing prior to March 1996
David L. Roush 45 Strategic Alliance Distribution Leader
22
23
David M. Schneider 61 Chief Legal Officer and Secretary
Tiona M. Thompson 48 Chief Human Resources Officer
Robert T. Williams 42 Chief Pricing/Product Officer since January 1999; Product Process Leader from January 1998 to
December 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. A Form 4 reporting the
writing of 150 covered call option contracts by Robert J. McMillan during April
1998 was filed 26 days late. The September 29, 1997 purchase of 409 shares in
the Executive Deferred Compensation Plan by Daniel R. Lewis was reported in a
Form 4 filed in January 1999. The December 18, 1997 purchase of 839 shares in
the Executive Deferred Compensation Plan by Moira A. Lardakis was reported in a
Form 4 filed in January 1999. The January 1, 1997 distribution of 8,376 shares
from the Directors Deferral Plan to Donald B. Shackelford was reported in a
Form 4 filed in January 1999.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference from the section of the Proxy Statement entitled
"Executive Compensation," pages 10 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 7
through 9.
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 5 and 6.
23
24
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 - For the Years Ended
December 31, 1998, 1997 and 1996
Consolidated Balance Sheets - December 31, 1998 and 1997
Consolidated Statements of Changes in Shareholders' Equity -
For the Years Ended December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows - For the Years Ended
December 31, 1998, 1997 and 1996
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
24
25
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 40 through 44.
Management contracts and compensatory plans and
arrangements are identified in the Exhibit Index as Exhibit
Nos. (10)(C) through (10)(S).
(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
31 through 39.
25
26
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 26, 1999 BY: /s/ Peter B. Lewis
-----------------------------
Peter B. Lewis
Chairman, President and Chief
Executive Officer - Insurance Operations
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 26, 1999
- ------------------------ Officer - Insurance Operations and a
Peter B. Lewis Director
/s/ Charles B. Chokel Chief Executive Officer - Investments March 26, 1999
- ------------------------ and Capital Management
Charles B. Chokel
/s/ W. Thomas Forrester Treasurer and Chief Financial Officer March 26, 1999
- ------------------------
W. Thomas Forrester
/s/ Jeffrey W. Basch Chief Accounting Officer March 26, 1999
- ------------------------
Jeffrey W. Basch
* Director March 26, 1999
- ------------------------
Milton N. Allen
* Director March 26, 1999
- ------------------------
B. Charles Ames
* Director March 26, 1999
- ------------------------
James E. Bennett III
* Director March 26, 1999
- ------------------------
Charles A. Davis
26
27
* Director March 26, 1999
- ------------------------
Stephen R. Hardis
* Director March 26, 1999
- ------------------------
Janet M. Hill
* Director March 26, 1999
- ------------------------
Norman S. Matthews
* Director March 26, 1999
- ------------------------
Donald B. Shackelford
* Director March 26, 1999
- ------------------------
Paul B. Sigler
* DANE A. SHRALLOW, 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/ Dane A. Shrallow March 26, 1999
------------------------
Dane A. Shrallow
Attorney-in-fact
27
28
ANNUAL REPORT ON FORM 10-K
ITEM 14(d)
FINANCIAL STATEMENT SCHEDULES
YEAR ENDED DECEMBER 31, 1998
THE PROGRESSIVE CORPORATION
MAYFIELD VILLAGE, OHIO
28
29
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 47 of the 1998 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 24 and 25 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.
PRICEWATERHOUSECOOPERS LLP
Cleveland, Ohio
January 25, 1999 (March 1, 1999 as to Note 14 of the 1998 Annual Report to
Shareholders of The Progressive Corporation)
29
30
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. 333-51613) filed May 1, 1998,
the Registration Statement 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 25, 1999, (March 1, 1999 as to Note 14 of the 1998
Annual Report to Shareholders of The Progressive Corporation) on our audits of
the consolidated financial statements and financial statement schedules of The
Progressive Corporation and subsidiaries as of December 31, 1998 and 1997, and
for each of the three years in the period ended December 31, 1998, which reports
are included in this Annual Report on Form 10-K.
PRICEWATERHOUSECOOPERS LLP
Cleveland, Ohio
March 26, 1999
30
31
SCHEDULE I -- SUMMARY OF INVESTMENTS -- OTHER
THAN INVESTMENTS IN RELATED PARTIES
THE PROGRESSIVE CORPORATION AND SUBSIDIARIES
- --------------------------------------------
(millions)
December 31, 1998
-----------------------------------------------
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 $ 665.4 $ 668.9 $ 668.9
States, municipalities and political
subdivisions 1,649.0 1,693.6 1,693.6
Asset-backed securities 1,491.4 1,486.9 1,486.9
Foreign government obligations 52.9 53.3 53.3
Corporate and other debt securities 280.1 282.7 282.7
Redeemable preferred stock 32.8 33.6 33.6
-----------------------------------------------
Total fixed maturities 4,171.6 4,219.0 4,219.0
-----------------------------------------------
Equity securities:
Common stocks 512.2 636.9 636.9
Preferred stocks 374.3 376.5 376.5
-----------------------------------------------
Total equity securities 886.5 1,013.4 1,013.4
-----------------------------------------------
Short-term investments 441.9 441.9 441.9
-----------------------------------------------
Total investments $5,500.0 $5,674.3 $5,674.3
===============================================
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, 1998.
31
32
SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF INCOME
THE PROGRESSIVE CORPORATION (PARENT COMPANY)
- --------------------------------------------
(millions)
Years Ended December 31,
1998 1997 1996
--------------------------------------------
Revenues
Dividends from subsidiaries* $151.0 $108.1 $125.0
Intercompany investment income* 25.9 35.3 36.5
--------------------------------------------
176.9 143.4 161.5
--------------------------------------------
Expenses
Interest expense 64.5 64.5 61.4
Other operating costs and expenses 5.2 6.2 4.1
--------------------------------------------
69.7 70.7 65.5
--------------------------------------------
Operating income and income before income
taxes and other items below 107.2 72.7 96.0
Income tax benefit (16.2) (12.7) (10.2)
--------------------------------------------
Income before equity in undistributed earnings
of subsidiaries 123.4 85.4 106.2
Equity in undistributed net income of
consolidated subsidiaries* 333.3 314.6 207.5
--------------------------------------------
Net income $456.7 $400.0 313.7
============================================
*Eliminated in consolidation.
See notes to condensed financial statements.
32
33
SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
CONDENSED BALANCE SHEETS
THE PROGRESSIVE CORPORATION (PARENT COMPANY)
- --------------------------------------------
(millions)
December 31,
1998 1997
-------- --------
ASSETS
Investment in non-consolidated affiliates $ .4 $ .4
Investment in subsidiaries* 2,882.9 2,437.8
Receivable from subsidiary* 441.1 489.4
Intercompany receivable* 9.9 --
Income taxes 19.7 28.9
Other assets 12.6 6.7
-------- --------
TOTAL ASSETS $3,366.6 $2,963.2
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued expenses $ 32.9 $ 23.5
Intercompany payable* -- 27.9
Debt 776.6 775.9
-------- --------
Total liabilities 809.5 827.3
-------- --------
Shareholders' equity:
Common Shares, $1.00 par value, authorized 300.0
shares, issued 83.1, including treasury
shares of 10.6 and 10.8 72.5 72.3
Paid-in capital 448.3 412.8
Accumulated other comprehensive income:
Net unrealized appreciation of investment
in equity securities of consolidated subsidiaries 113.3 122.3
Other (9.6) (6.3)
Retained earnings 1,932.6 1,534.8
-------- --------
Total shareholders' equity 2,557.1 2,135.9
-------- --------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $3,366.6 $2,963.2
======== ========
*Eliminated in consolidation.
See notes to condensed financial statements.
33
34
SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
CONDENSED STATEMENTS OF CASH FLOWS
THE PROGRESSIVE CORPORATION (PARENT COMPANY)
- --------------------------------------------
(millions)
Years Ended December 31,
1998 1997 1996
------- ------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 456.7 $ 400.0 $ 313.7
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Equity in income of consolidated subsidiaries (484.3) (422.7) (332.5)
Changes in:
Intercompany receivable or payable (37.8) 34.5 19.0
Accounts payable and accrued expenses 9.3 1.4 1.8
Income taxes 9.2 (15.9) 13.1
Other, net (4.7) (3.5) (.9)
------- -------- --------
Net cash provided by (used in) operating (51.6) (6.2) 14.2
activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Additional investments in equity securities of
consolidated subsidiaries (124.1) (219.3) (42.2)
Return of capital from consolidated subsidiary -- -- .5
Purchase of consolidated subsidiaries -- (100.5) (26.6)
Dividends received from consolidated subsidiaries 151.0 108.1 125.0
------- -------- --------
Net cash provided by (used in) investing 26.9 (211.7) 56.7
activities
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 11.5 14.1 6.9
Tax benefits from exercise of stock options 25.6 17.6 5.9
Redemption of Preferred Shares -- -- (80.8)
Proceeds from Debt -- -- 99.6
Receivable from subsidiary 48.3 206.4 (35.0)
Dividends paid to shareholders (18.1) (17.3) (19.6)
Acquisition of treasury shares (42.6) (2.9) (47.9)
------- ------- -------
Net cash provided by (used in) financing
activities 24.7 217.9 (70.9)
------- ------- -------
Change in cash -- -- --
Cash, beginning of year -- -- --
------- ------- -------
Cash, end of year $ -- $ -- $ --
======= ======= =======
See notes to condensed financial statements.
34
35
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 1998 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
$235.9 million in 1998, and $166.9 million, and $120.4 million in 1997 and 1996,
respectively. Total interest paid was $63.8 million for 1998 and 1997 and $60.2
million for 1996.
DEBT -- Debt at December 31 consisted of:
1998 1997
------------ --------------
(millions) Market Market
Cost Value Cost Value
-------------------------------
7.30% Notes due 2006 (issued: $100.0, May 1996) $ 99.7 $109.5 $ 99.7 $105.3
6.60% Notes due 2004 (issued: $200.0, January 1994) 199.1 199.4 198.9 200.7
7% Notes due 2013 (issued: $150.0, October 1993) 148.4 157.2 148.4 154.4
8 3/4% Notes due 1999 (issued: $30.0, May 1989) 29.9 30.4 29.7 30.9
10% Notes due 2000 (issued: $150.0, December 1988) 149.8 162.7 149.6 164.6
10 1/8% Subordinated Notes due 2000 (issued:$150.0, 149.7 162.4 149.6 164.6
December 1988)
-------------------------------
$776.6 $821.6 $775.9 $820.5
===============================
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 has the right to borrow up 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,
1998 and 1997, the Registrant had no borrowings under this arrangement.
Aggregate principal payments on debt outstanding at December 31, 1998 are $30.0
for 1999, $300.0 million for 2000, $0 million for 2001, 2002 and 2003, and
$450.0 million thereafter.
On March 1, 1999, the Company issued $300 million of 6 5/8% Senior Notes due
March 1, 2029, under a shelf registration statement filed with the Securities
and Exchange Commission in 1998. The Company may redeem all or part of the Notes
at any time, subject to a "make whole" provision. There are no sinking fund
requirements. The Notes were priced at 98.768% to yield 6.721% to maturity.
Interest is payable semiannually on March 1 and September 1, beginning September
1, 1999. Net proceeds to the Company of $293.7 million are intended to be used,
together with other available funds, to retire certain of the Company's current
outstanding debt upon its maturity.
35
36
SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
NOTES TO CONDENSED FINANCIAL STATEMENTS
- ---------------------------------------
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) 1998 1997 1996
----------------------------------------------------------
Unrealized gains (losses):
Available-for-sale: fixed maturities $(7.2) $ 29.5 $ (18.3)
equity securities (6.9) 44.8 53.7
Deferred income taxes 5.1 (26.0) (12.5)
----------------------------------------------------------
$(9.0) $ 48.3 $ 22.9
==========================================================
OTHER MATTERS -- The information relating to incentive compensation plans is
incorporated by reference from Note 9, Employee Benefit Plans, "Incentive
Compensation Plans" on pages 44 and 45 of the Registrant's 1998 Annual Report.
36
37
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 Other Net
acquisition loss Unearned benefits Premium Investment settlement acquisition operating premiums
Segment costs(1) expenses(1) premiums(1) payable(1) revenue income(1)(2) expenses costs(3) expenses written
-----------------------------------------------------------------------------------------------------------------------
Year ended
December 31,
1998:
Personal
Lines $4,580.7 $3,164.4 $610.9 $444.1 $4,922.3
Other 367.3 211.9 49.0 51.7 377.4
-----------------------------------------------------------------------------------------------------------------------
Total $299.1 $2,188.6 $2,329.7 $ -- $4,948.0 $294.8 $3,376.3 $659.9 $495.8 $5,299.7
=======================================================================================================================
Year ended
December 31,
1997:
Personal
Lines $3,832.7 $2,743.3 $556.0 $290.4 $4,288.8
Other 356.8 224.2 51.8 45.6 376.3
-----------------------------------------------------------------------------------------------------------------------
Total $259.6 $2,146.6 $1,980.1 $ -- $4,189.5 $274.9 $2,967.5 $607.8 $336.0 $4,665.1
=======================================================================================================================
Year ended
December 31,
1996:
Personal
Lines $2,916.0 $2,069.2 $439.9 $176.1 $3,149.3
Other 283.3 166.9 42.7 32.4 292.4
-----------------------------------------------------------------------------------------------------------------------
Total $200.1 $1,800.6 $1,467.3 $ -- $3,199.3 $225.8 $2,236.1 $482.6 $208.5 $3,441.7
=======================================================================================================================
(1) The Company does not allocate assets or investment income to operating
segments.
(2) Excluding investment expenses of $7.4 million in 1998, $9.9 million in 1997
and $6.1 million in 1996.
(3) Since the Company does not allocate deferred policy acquisition costs to
operating segments, amounts were allocated based on premium revenue.
37
38
SCHEDULE IV -- REINSURANCE
THE PROGRESSIVE CORPORATION AND SUBSIDIARIES
- --------------------------------------------
(millions)
Year Ended Assumed Percentage
- ---------- Ceded to From of Amount
Gross Other Other Assumed
December 31, 1998 Amount Companies Companies Net Amount to Net
- ----------------- --------------------------------------------------------------------------------------------
Life Insurance in force $ -- $ -- $ -- $ -- --
============================================================================================
Premiums earned:
Property and liability $5,100.5 $152.5 $ -- $4,948.0 --
============================================================================================
December 31, 1997
- -----------------
Life Insurance in force $ -- $ -- $ -- $ -- --
============================================================================================
Premiums earned:
Property and liability $4,382.9 $193.4 $ -- $4,189.5 --
============================================================================================
December 31, 1996
- -----------------
Life Insurance in force $ .1 $ .1 $ -- $ -- --
=============================================================================================
Premiums earned:
Property and liability $3,380.7 $185.2 $3.8 $3,199.3 .1%
=============================================================================================
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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, 1998 $3,560.5 $(184.2) $3,298.0
=============== ================ ===============
December 31, 1997 $3,070.8 $(103.3) $2,715.1
=============== ================ ===============
December 31, 1996 $2,341.9 $(105.8) $2,017.6
=============== ================ ===============
Pursuant to Rule 12-18 of Regulation S-X. See Schedule III, page 35, for the
additional information required in Schedule VI.
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40
EXHIBIT INDEX
Exhibit No.
Under Reg. Form 10-K If Incorporated by Reference, Documents
S-K, Item 601 Exhibit No. Description of Exhibit with Which Exhibit was Previously Filed with SEC
(3)(i) 3(A) Amended Articles of Incorporation, as Registration Statement No. 333-51613 (Filed with
amended, of The Progressive Corporation SEC on May 1, 1998; see Exhibit 4(C) 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 15, 1988 Annual Report on Form 10-K (Filed with SEC
between Progressive and State Street Bank on March 29, 1994; see Exhibit 4(B) therein)
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 due 2000 Annual Report on Form 10-K (Filed with SEC
issued in the aggregate principal amount of on March 29, 1994; see Exhibit 4(C) therein)
$150,000,000 under the Subordinated Indenture
(4) 4(C) Indenture dated as of November 15, 1988 Annual Report on Form 10-K (Filed with SEC
between Progressive and State Street Bank on March 29, 1994; see Exhibit 4(D) therein)
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 the Annual Report on Form 10-K (Filed with SEC
aggregate principal amount of $150,000,000 on March 29, 1994; see Exhibit 4(E) therein)
under the 1988 Senior Indenture
(4) 4(E) Form of 8 3/4% Notes due 1999 issued in the Annual Report on Form 10-K (Filed with SEC
aggregate principal amount of $30,000,000 on March 28, 1995; see Exhibit 4(F) therein)
under the 1988 Senior Indenture
40
41
EXHIBIT INDEX
Exhibit No.
Under Reg. Form 10-K If Incorporated by Reference, Documents with
S-K, Item 601 Exhibit No. Description of Exhibit Which Exhibit was Previously Filed with SEC
(4) 4(F) $10,000,000 Unsecured Line of Credit with National Annual Report on Form 10-K (Filed with SEC
City Bank (dated May 23, 1990; renewed May 20, 1992; on March 27, 1998; see Exhibit 4(F) therein)
amended February 1, 1994 and May 1, 1997)
(4) 4(G) Indenture dated as of September 15, 1993 between Registration Statement No. 333-48935 (Filed
Progressive and State Street Bank and Trust with SEC on March 31, 1998; see Exhibit 4.1
Company (successor in interest to The First therein)
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 Contained in Exhibit Binder
aggregate principal amount of $150,000,000
under the 1993 Senior Indenture
(4) 4(I) Form of 6.60% Notes due 2004 issued in the aggregate Annual Report on Form 10-K (Filed with SEC
principal amount of $200,000,000 under the 1993 on March 29, 1994; see Exhibit 4(L) therein)
Senior Indenture
(4) 4(J) First Supplemental Indenture dated March 15, 1996 Registration Statement No. 333-0175 (Filed
between Progressive and State Street Bank and Trust with SEC on March 15, 1996; see Exhibit 4.2
Company, evidencing the designation of State Street therein)
Bank and Trust Company as successor Trustee under
the 1993 Senior Indenture
(4) 4(K) Form of 7.30% Notes due 2006, issued in the Quarterly Report on Form 10-Q (Filed with
aggregate principal amount of $100,000,000 under SEC on July 31, 1996; see Exhibit 4 therein)
the 1993 Senior Indenture, as amended and
supplemented
(4) 4(L) Second Supplemental Indenture dated February 26, Current Report on Form 8-K (Filed with SEC
1999 between Progressive and State Street Bank and on February 26, 1999; see Exhibit 4.4
Trust Company, as Trustee, supplementing and therein)
amending the 1993 Senior Indenture
41
42
EXHIBIT INDEX
Exhibit No.
Under Reg. Form 10-K If Incorporated by Reference, Documents with
S-K, Item 601 Exhibit No. Description of Exhibit Which Exhibit was Previously Filed with SEC
(4) 4(M) Form of 6 5/8% Senior Notes due 2029, issued in the Current Report on Form 8-K (Filed with SEC
aggregate principal amount of $300,000,000 under the on February 26, 1999; see Exhibit 4.5 therein)
1993 Senior Indenture, as amended and supplemented
(10)(i) 10(A) Construction Agreements dated November 3, 1997 Annual Report on Form 10-K (Filed with SEC on
between Progressive Casualty Insurance Company March 27, 1998; see Exhibit 10(A) therein)
and HCB Contractors
(10)(i) 10(B) Construction Agreement dated April 6, 1998 Quarterly Report on Form 10-Q (Filed with SEC
between Progressive Casualty Insurance Company on August 14, 1998; see Exhibit 10 therein)
and the Whiting-Turner Construction Company for the
Corporate Office Complex in Mayfield Village, Ohio
(10)(iii) 10(C) The Progressive Corporation 1997 Gainsharing Plan Annual Report on Form 10-K (Filed with SEC
on March 31, 1997; see Exhibit 10(B) therein)
(10)(iii) 10(D) The Progressive Corporation 1999 Gainsharing Plan Contained in Exhibit Binder
(10)(iii) 10(E) The Progressive Corporation 1997 Executive Bonus Plan Annual Report on Form 10-K (Filed with SEC
on March 31, 1997; see Exhibit 10(D) therein)
(10)(iii) 10(F) The Progressive Corporation 1999 Executive Bonus Plan Contained in Exhibit Binder
(10)(iii) 10(G) The Progressive Corporation Directors Deferral Plan Quarterly Report on Form 10-Q (Filed with SEC
(Amendment and Restatement), as further amended on November 13, 1996; see Exhibit 10 therein)
on October 25, 1996
(10)(iii) 10(H) The Progressive Corporation 1989 Incentive Plan Contained in Exhibit Binder
(amended and restated as of April 24, 1992, as
further amended on July 1, 1992 and February 5, 1993)
42
43
EXHIBIT INDEX
Exhibit No. Form 10-K
Under Reg. Exhibit If Incorporated by Reference, Documents with
S-K, Item 601 No. Description of Exhibit Which Exhibit was Previously Filed with SEC
(10)(iii) 10(I) The Progressive Corporation 1998 Directors' Annual Report on Form 10-K/A-No. 1 (Filed with SEC
Stock Option Plan on March 30, 1998; see Exhibit 10(H) therein)
(10)(iii) 10(J) The Progressive Corporation 1990 Directors' Annual Report on Form 10-K (Filed with SEC on
Stock Option Plan (Amended and Restated March 27, 1998; see Exhibit 10(I) therein)
as of April 24, 1992 and as further amended on
July 1, 1992)
(10)(iii) 10(K) Agreement dated March 11, 1996 with Bruce W. Marlow Annual Report on Form 10-K (Filed with SEC
on March 15, 1996; see Exhibit 10(H) therein)
(10)(iii) 10(L) Amending Agreement dated April 1, 1996 between the Quarterly Report on Form 10-Q (Filed with SEC
Company and Bruce W. Marlow relating to certain on July 31, 1996; see Exhibit 10 therein)
outstanding stock options previously granted to
Mr. Marlow
(10)(iii) 10(M) The Progressive Corporation 1995 Incentive Plan Annual Report on Form 10-K (Filed with SEC on
March 28, 1995; see Exhibit 10(L) therein)
(10)(iii) 10(N) The Progressive Corporation Executive Deferred Annual Report on Form 10-K (Filed with SEC
Compensation Plan (Amended and Restated as of on March 27, 1998; see Exhibit 10(M) therein)
January 1, 1997), as further amended
December 1, 1997
(10)(iii) 10(O) Third Amendment to The Progressive Corporation Contained in Exhibit Binder
Executive Deferred Compensation Plan dated
December 1, 1998
(10)(iii) 10(P) The Progressive Corporation Executive Deferred Contained in Exhibit Binder
Compensation Trust (December 1, 1998 Amendment
and Restatement)
43
44
EXHIBIT INDEX
Exhibit No.
Under Reg. Form 10-K If Incorporated by Reference, Documents with
S-K, Item 601 Exhibit No. Description of Exhibit Which Exhibit was Previously Filed with SEC
(10)(iii) 10(Q) Form of Non-Qualified Stock Option Agreement Quarterly Report on Form 10-Q (Filed with SEC
under The Progressive Corporation 1989 Incentive on May 1, 1996; see Exhibit 10(B) therein)
Plan (single award)
(10)(iii) 10(R) Form of Non-Qualified Stock Option Agreement Quarterly Report on Form 10-Q (Filed with SEC on
under The Progressive Corporation 1989 Incentive May 1, 1996; see Exhibit 10(C) therein)
Plan (multiple awards)
(10)(iii) 10(S) The Progressive Corporation 1999 Information Contained in Exhibit Binder
Services Incentive Plan
(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 1998 Annual Report Contained in Exhibit Binder
(21) 21 Subsidiaries of The Progressive Corporation Contained in Exhibit Binder
(23) 23 Consent of Independent Accountants Incorporated herein by reference to page 30 of this
Annual Report on Form 10-K
(24) 24 Powers of Attorney Contained in Exhibit Binder
(27) 27 Financial Data Schedule These exhibits are contained in the EDGAR filing
of the Annual Report on Form 10-K for the year ended
December 31, 1998 only
No other exhibits are required to be filed herewith pursuant to Item 601 of
Regulation S-K.
44