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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 [Fee Required]
For the fiscal year ended December 31, 1993
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or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 [No Fee Required]
For the transition period from _____________________ to _____________________
Commission file number 1-9518
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THE PROGRESSIVE CORPORATION
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(Exact name of registrant as specified in its charter)
Ohio 34-0963169
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6300 Wilson Mills Road, Mayfield Village, Ohio 44143
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(Address of principal executive offices) (Zip Code)
(216) 461-5000
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange on
Title of each class which registered
Common Shares, $1.00 Par Value New York Stock Exchange
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9 3/8% Serial Preferred Shares, Series A (Cumulative,
Liquidation Preference $25.00 per share) 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 February 24, 1994: $2,067,055,541.87.
The number of the registrant's Common Shares, $1.00 par value, outstanding as
of February 24, 1994: 72,160,372
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Annual Report to Shareholders for the year ended
December 31, 1993 are incorporated by reference in Parts I, II and IV hereof.
Portions of the registrant's Proxy Statement dated March 18, 1994, for the
Annual Meeting of Shareholders to be held on April 22, 1994, are incorporated
by reference in Part III hereof.
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INTRODUCTION
The Progressive Corporation and subsidiaries' (collectively, the "Company")
1993 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 18, 1994, for the Annual Meeting of Shareholders to be
held on April 22, 1994 (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 Corporation, an insurance holding company formed in 1965, has
52 operating subsidiaries and one mutual insurance company affiliate. The
Progressive Corporation's insurance subsidiaries (collectively, the "Insurance
Group") provide personal automobile insurance and other specialty
property-casualty insurance and related services throughout the United States
and in Canada. The Company's property-casualty insurance products protect its
customers against collision and physical damage to their motor vehicles and
liability to others for personal injury or property damage they caused.
Of the approximately 250 United States insurance company groups writing private
passenger auto, the Company estimates that Progressive ranks ninth in size.
Except as otherwise noted, all industry data and Progressive's market share or
ranking in the industry were derived either directly from data published or
reported by A.M. Best Company Inc. ("A.M. Best") or were estimated using A.M.
Best data as the primary source. For 1993, the estimated industry premiums
written, which include personal auto insurance in the United States and
Ontario, Canada, as well as insurance for commercial vehicles, were $115
billion, and Progressive's share of this market was approximately 1.5%.
(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
INSURANCE SEGMENT
The Insurance Group underwrites a number of personal and commercial
property-casualty insurance products. Net premiums written were $1,819.2
million in 1993, compared to $1,451.2 million and $1,324.6 million in 1992 and
1991, respectively. The underwriting profit (loss) was 10.7% in 1993, compared
to 3.5% and (3.7)% in 1992 and 1991, respectively.
The Insurance Group's core business writes insurance for private passenger
automobiles and small commercial and recreational vehicles. This business
frequently has more than one program in a single state, with each targeted to a
specific market segment. The core business accounted for 93% of the Company's
1993 total net written premiums.
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The bulk of the Insurance Group's Core business consists of nonstandard
insurance products for people cancelled and rejected by other insurers. The
size of the nonstandard automobile insurance market changes with the insurance
environment. Volume potential is influenced by the actions of direct
competitors, writers of standard and preferred automobile insurance and
state-mandated involuntary plans. The total 1993 nonstandard automobile
insurance market was about $18 billion, compared to $17 billion in 1992 and $16
billion in 1991. Approximately 125 independent specialty companies and more
than 25 subsidiaries of large insurance companies wrote nonstandard auto
premiums in 1993. In this market, the Insurance Group ranked fourth in 1992 in
direct premiums written and near the top in underwriting performance. It is
estimated that the 1993 ranking and underwriting performance will be consistent
with 1992.
The core business is continuing its experiment of writing standard and
preferred automobile risks in several states. These experiments accounted for
4.5% of the Company's total private passenger auto premiums in 1993. The
strategy is to build towards becoming a low-cost provider of a full line of
auto insurance and related services, distributed through whichever channel the
customer prefers. The Insurance Group's goal is to compete in the standard and
preferred market, which comprises 81% of the personal automobile insurance
market.
The Insurance Group's specialty personal lines products are dominated by
motorcycle insurance. Other products offered include recreational vehicle,
mobile home and boat insurance. The Insurance Group's competitors are
specialty companies and standard 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 this market.
Nonstandard commercial vehicle insurance covers commercial vehicle risks that
are rejected or cancelled by other insurance companies. Based on the Company's
analysis of this market, approximately 40 companies compete for this business
on a nationwide basis. State assigned risk plans also provide this coverage.
The core business insurance products are marketed by thirteen divisions
headquartered in or near the markets served: the Florida and Southeast
divisions in Tampa, Florida; the North East, New York, Central States, Ohio,
Commercial Vehicle and National Accounts divisions in Cleveland, Ohio; the
South Central division in Austin, Texas; the Mountain division in Colorado
Springs, Colorado; the Mid-Atlantic division in Richmond, Virginia; the Canada
division in Ontario, Canada; and the West division in Sacramento, California.
Each division is responsible for its own marketing, sales, processing and
claims.
In 1993, over 80% of the core business' net premiums were written through a
network of more than 30,000 independent insurance agents located throughout the
United States and in Canada. Subject to compliance with certain
Company-mandated procedures, these independent insurance agents have the
authority to bind the Company to specified insurance coverages within
prescribed underwriting guidelines. These guidelines prescribe the kinds and
amounts of coverage that may be written and the premium rates that may be
charged for specified categories of risk. The agents do not have authority on
behalf of the Company to settle or adjust claims, establish underwriting
guidelines, develop rates or enter into other transactions or commitments. The
Company also markets its products through intermediaries such as employers,
other insurance companies and national brokerage agencies, and direct to
customers through employed sales people and owned insurance agencies. The core
business currently markets personal automobile insurance directly to the public
through its Miami and Tampa, Florida operations. It is anticipated that this
activity may be expanded to other selected markets in Florida, Texas and Ohio.
The Insurance Group's diversified businesses - the Financial Services, Risk
Management Services and Motor Carrier divisions, as well as the run-off of the
former Transportation division - accounted for 7% of total volume in 1993.
These divisions, which are organized by customer group, are headquartered in
Cleveland, Ohio. The choice of distribution channel is driven by each customer
group's buying preference and service needs. Distribution channels include
financial institutions, equipment lessors and vehicle dealers. Distribution
arrangements are individually negotiated between
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such intermediaries and the Company and are tailored to the specific needs of
the customer group and the nature of the related financial or purchase
transactions. The diversified businesses also market their products directly
to their customers through company-employed sales forces.
The Financial Services division provides physical damage, property and flood
insurance and related tracking services to protect the commercial or retail
lender's interest in collateral which is not otherwise insured against these
risks. The principal product is collateral protection for automobile lenders,
which is sold to financial institutions and/or their customers. Commercial
banks are Financial Services' largest customer group for these services. This
division also serves savings and loans, finance companies and credit unions.
Based on the Company's analysis of this market, numerous companies offer these
products, and none of them has a dominant market share.
Risk Management Services' principal customers are community banks. Its
principal products are liability insurance for directors and officers and
employee dishonesty insurance. Progressive shares the risk and premium on
these coverages with a small mutual insurer controlled by its bank customers.
The program is sponsored by the American Bankers Association. This program
represented less than 1% of total 1993 net premiums written.
The Motor Carrier division provides insurance and related services, on a
heavily reinsured basis, to a few excellent regional customers retained from
the defunct Transportation business, as well as a growing number of
intermediate-size trucking companies. The Motor Carrier division also manages
involuntary Commercial Auto Insurance Plans. See SERVICE OPERATIONS on page 5
for further discussion.
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 costs. The Company has remained competitive by closely managing
expenses and achieving operating efficiencies, and by refining its risk
measurement and price segmentation skills. In addition, the Company offers
prices for a wide spectrum of risks and seeks to offer a wider array of payment
plans, limits of liability and deductibles than its competitors. Superior
customer service and claim adjustment are also important factors in its
competitive strategy.
LICENSES
The insurance group operates under licenses issued by various state or
provincial insurance authorities. Such licenses may be of perpetual duration
or renewable periodically, provided the holder continues to meet applicable
regulatory requirements. The licenses govern the kind of insurance coverages
which may be written or the nature of the insurance-related services which may
be provided 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.
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. One or more of the subsidiaries are licensed
and subject to regulation in each of the 50 states, in each Canadian province
and by Canadian federal authorities. The nature and extent of such regulation
and
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supervision varies from jurisdiction to jurisdiction. Generally, an insurance
company is subject to a higher degree of regulation and supervision in its
state of domicile. The Company's principal insurance subsidiaries are
domiciled in the states of Florida, Mississippi, New York, Ohio, Pennsylvania,
Texas, Washington and Wisconsin. State insurance departments have broad
administrative power relating to licensing insurers and agents, regulating
premium rates and policy forms, establishing reserve requirements, prescribing
accounting methods and the form and content of statutory financial reports and
regulating the type and amount of investments permitted. Rate regulation
varies from "file and use" to prior approval to mandated rates. Most
jurisdictions prohibit rates that are "excessive, inadequate or unfairly
discriminatory."
Insurance departments are charged with the responsibility to ensure that
insurance companies maintain adequate capital and surplus and comply with a
variety of operational standards. Insurance companies are generally required
to file detailed annual and other reports with the insurance department of each
jurisdiction in which they conduct business. Insurance departments are
authorized to make periodic and other examinations of regulated insurers'
financial condition, adherence to statutory accounting principles and
compliance with state insurance laws and regulations.
Insurance holding company laws enacted in many jurisdictions grant to insurance
authorities the power to regulate acquisitions 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, from regulated insurers
to their affiliates. See the "Dividends" discussion in Item 5(c) for further
information on such dividend limitations.
Under state insolvency and guaranty laws, regulated insurers can be assessed
for, or be required to contribute to state guaranty funds to cover policyholder
losses resulting from insurer insolvencies. Insurers are also required by many
states to provide coverage to certain risks as a condition of doing business in
the state. Such programs 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 have laws and regulations that limit a company'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 ability of insurers to
cancel or renew insurance policies, reflecting concerns about availability,
prices and alleged discriminatory pricing.
In some states, such as California and Georgia, the automobile insurance
industry has been under pressure in recent years from regulators, legislators
or special interest groups to reduce, freeze or set rates at levels that are
not necessarily related to underlying costs, including initiatives to roll back
automobile and other personal lines rates. This 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.
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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 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,
risk-based capital guidelines and further limitations on the ability of
regulated insurers to pay dividends. In addition, the United States Congress
and certain federal agencies are investigating the current condition of the
insurance industry to determine whether federal regulation is necessary, and
the Clinton administration is in the process of considering changes to the
nation's health care system. Changes in the health care system may have an
effect on the medical coverage included in auto insurance policies. It is
currently not possible to predict the outcome of any of these matters, or their
potential impact on the Company.
STATUTORY ACCOUNTING PRINCIPLES
The Insurance Group's results are reported in accordance with generally
accepted accounting principles (GAAP), which differ from amounts reported under
statutory accounting principles (SAP) prescribed by insurance regulatory
authorities. Specifically, under GAAP:
1. Commissions, premium taxes and other costs incurred in connection with
writing new and renewal business are deferred and amortized over the period
in which the related premiums are earned, rather than expensed as incurred,
as required by SAP.
2. Direct response advertising costs, which consist primarily of direct mail
expenses, are capitalized and amortized over the estimated period of the
benefits, rather than expensed as incurred, as required by SAP.
3. Estimated salvage and net subrogation recoverables are reflected in the
financial statements at the time the related loss reserves are established,
rather than when actually recovered, as permitted by SAP. Salvage is the
amount recovered when the property against which a claim is made is
recovered and sold by the insurance company. Subrogation is the amount of
claim cost recovered from the party at fault.
4. Certain assets are included in the consolidated balance sheets, rather than
charged against retained earnings, as required by SAP. These assets
consist primarily of premium receivables over 90 days old and furniture and
fixtures.
5. 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, as required
by SAP.
The differing treatment of income and expense items results in a corresponding
difference in Federal income tax expense.
SERVICE OPERATIONS
The Motor Carrier division currently manages involuntary commercial auto
insurance plans (CAIP) in 29 states. As a CAIP servicing carrier, the division
processes about one third of the premiums in the involuntary commercial market,
without assuming the indemnity risk. It competes with approximately 14 other
providers nationwide. The Company's subsidiaries also provide claim services
to fleet owners and other insurance companies. Revenues from all service
businesses are derived primarily from fees and commissions. Total service
revenues were $43.7 million in 1993, compared to $53.3 million and $54.0
million in 1992 and 1991, respectively.
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INVESTMENTS
The Company's approach to investing is consistent with its need to maintain
capital adequate to support the insurance premiums 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 $2,805.2 million at December 31, 1993, compared to
$2,407.4 million at December 31, 1992. 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 (losses) on
security sales, before expenses and taxes was $242.4 million in 1993, compared
to $153.5 million in 1992 and $152.2 million in 1991. See MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS,
beginning on page 12 herein for additional discussion.
EMPLOYEES
The number of employees, excluding temporaries, at December 31, 1993, was 6,101.
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
property-casualty and life insurance subsidiaries. The life insurance
operations are in run-off. In order to assure safety of capital and
conservatism of the balance sheet, total loss reserves are set at a level that
is intended to provide confidence that they are adequate. 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: (1) provides a reconciliation of beginning and
ending estimated liability balances for 1993, 1992 and 1991, and (2) shows the
difference between the estimated liability in accordance with GAAP and that
reported in accordance with SAP.
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RECONCILIATION OF NET RESERVES FOR LOSSES AND LOSS ADJUSTMENT EXPENSES
(millions) 1993 1992 1991
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Balance, January 1 $ 956.4 $ 861.5 $ 791.6
Incurred losses and LAE:
Current accident year 1,126.7 981.7 903.2
Prior accident years (98.5) (51.5) (42.8)
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1,028.2 930.2 860.4
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Paid losses and LAE:
Current accident year 605.4 481.9 468.1
Prior accident years 366.8 353.4 322.4
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972.2 835.3 790.5
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Balance, December 31 1,012.4 956.4 861.5
Add: Reinsurance recoverable on
unpaid losses and LAE1 334.8 -- --
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Balance, December 31, GAAP 1,347.2 956.4 861.5
Adjust: Reinsurance recoverable on
unpaid losses and LAE1 (334.8) -- --
Net salvage and subrogation 39.9 37.2 38.3
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Balance, December 31, SAP $1,052.3 $993.6 $899.8
====================================================
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1 In 1993, the Company adopted Statement of Financial Accounting Standards
(SFAS) 113, "Accounting and Reporting for Reinsurance of Short- Duration and
Long-Duration Contracts"; prior years were not restated.
The reconciliation above shows a $98.5 million redundancy, which emerged during
1993, in the 1993 liability and a $51.5 million redundancy in the 1992
liability, based on information known as of December 31, 1993 and December 31,
1992, respectively. Current reserves reflect conservatism of the liability
established for potential adverse development.
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 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993
LIABILITY FOR UNPAID
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LOSSES AND LAE $121.8 $146.5 $215.3 $323.8 $471.0 $651.0 $748.6 $791.6 $861.5 $956.4 $1,012.4
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PAID (CUMULATIVE) AS OF:
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One year later 60.0 68.6 104.7 142.7 195.0 283.1 293.1 322.4 353.4 366.8
Two years later 85.9 101.4 151.9 204.4 294.9 393.7 446.8 490.8 518.8 --
Three years later 102.3 121.3 175.4 238.9 339.5 465.0 539.8 570.4 -- --
Four years later 111.6 128.8 187.2 255.7 369.9 514.0 588.2 -- -- --
Five years later 115.2 132.8 194.1 264.3 383.5 540.7 -- -- -- --
Six years later 116.5 135.8 197.7 268.7 389.1 -- -- -- -- --
Seven years later 117.6 136.8 200.7 270.1 -- -- -- -- -- --
Eight years later 118.3 138.9 201.3 -- -- -- -- -- -- --
Nine years later 119.1 139.1 -- -- -- -- -- -- -- --
Ten years later 119.3 -- -- -- -- -- -- -- -- --
LIABILITY RE-ESTIMATED
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AS OF:
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One year later 124.5 146.9 218.7 300.6 446.6 610.3 684.5 748.8 810.0 857.9
Two years later 127.9 150.2 213.6 293.6 422.2 573.4 677.9 726.5 771.9 --
Three years later 128.6 144.0 205.3 282.8 402.4 581.3 668.6 712.7 -- --
Four years later 123.2 140.4 203.4 274.1 403.9 575.1 667.1 -- -- --
Five years later 120.2 139.0 200.9 275.6 399.6 578.4 -- -- -- --
Six years later 119.3 139.3 204.4 275.8 400.2 -- -- -- -- --
Seven years later 120.1 142.0 205.2 277.5 -- -- -- -- -- --
Eight years later 122.6 142.9 206.7 -- -- -- -- -- -- --
Nine years later 123.0 144.5 -- -- -- -- -- -- -- --
Ten years later 124.7 -- -- -- -- -- -- -- -- --
CUMULATIVE REDUNDANCY
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(DEFICIENCY) $ (2.9) $ 2.0 $ 8.6 $ 46.3 $ 70.8 $ 72.6 $ 81.5 $ 78.9 $ 89.6 $ 98.5
- - - ------------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
PERCENTAGE1 (2.4) 1.4 4.0 14.3 15.0 11.2 10.9 10.0 10.4 10.3
- - - -----------------
1 Cumulative redundancy/(deficiency) divided by liability for unpaid losses
and LAE.
The above table presents the development of balance sheet liabilities for 1983
through 1992. The top line of the table shows the estimated liability for
unpaid losses and LAE recorded at the balance sheet date for each of the
indicated years for the property-casualty insurance subsidiaries only. Similar
reserves for the life insurance subsidiary, which are immaterial, are excluded.
This liability represents the estimated amount of losses and LAE for claims
arising in all prior years that are unpaid at the balance sheet date, including
losses that had been incurred but not reported.
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 becomes known about
the frequency and severity of claims for individual years. For example, as of
December 31, 1993, the companies had paid $139.1 million of the currently
estimated $144.5 million of losses and LAE that had been incurred through the
end of 1984; thus an estimated $5.4 million of losses incurred through 1984
remain unpaid as of the current financial statement date.
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The "Cumulative Redundancy (Deficiency)" represents the aggregate change in the
estimates over all prior years. For example, the 1983 liability has developed
a $2.9 million deficiency 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 7 as the "prior years" provision for incurred
losses and LAE.
In evaluating this information, note that each cumulative redundancy
(deficiency) 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 1986, but incurred in 1983, will be included in
the cumulative deficiency or redundancy amount for years 1983, 1984 and 1985.
Conditions and trends that have affected development of the liability in the
past may not necessarily occur in the future. Accordingly, it may not be
appropriate to extrapolate future redundancies or deficiencies based on this
table.
The data in the Analysis of Loss and Loss Adjustment Expenses Development table
on page 8 are constructed slightly differently than the data in the Current
Estimate of Total Redundancy column in the chart on page 54 of the Company's
Annual Report. The data in the former table are based on Schedule P from the
1993, 1992, 1991 and 1990 Consolidated Annual Statement, as filed with state
insurance departments, and Schedules O and P filed for years prior to 1989.
The reserve accuracy percentages reported in this table differ from the
percentages reported in the Annual Report. The primary reason for the
difference is the method of apportioning loss adjustment expenses to accident
years. The Consolidated Annual Statement, Schedule P, Part-1, specifies how
to distribute unallocated loss adjustment expenses to accident years. The
Company disagrees with this arbitrary approach and, therefore, uses a different
approach for the Annual Report. It believes that both apportionment methods
give the same result when viewed over several years.
A second reason is that the data reported in the Annual Report includes results
for life insurance products sold by the Company's life insurance subsidiary.
Life insurance reserves are less than 1% of total reserves. Given the
uncertainty inherent in establishing insurance loss reserves, its reserves have
proven to be quite accurate.
The Company's Consolidated Annual Statement Schedule P for 1993, 1992 and 1991
includes $14.5 million, $27.2 million, and $17.2 million, respectively, of paid
LAE for non-indemnity business which is excluded for GAAP and, therefore, not
included in the reconciliation shown on page 7.
There are two significant differences between the development table on page 8
and The Company's Consolidated Annual Statement, Schedule P. Schedule P
includes cumulative payments from a company purchased in September 1990 and an
affiliate consolidated in March 1991, which are not included for GAAP reporting
for periods prior to the dates of acquisition. Also, the development displayed
in Schedule P, Part-2, excludes unallocated loss adjustment expenses which are
included in the preceding development table.
(d) Financial Information about Foreign and Domestic Operations
The Company operates throughout the United States and in Canada. The amount of
Canadian revenues and assets are approximately two percent 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 (loss).
9
11
ITEM 2. PROPERTIES
OWNED PROPERTIES
The Company's central data processing facility occupies a modern, three-story
brick building containing approximately 107,000 square feet of office space, on
an approximately 40-acre parcel in Mayfield Village, Ohio, owned by a
subsidiary. In spring 1992, construction began on the Company's new corporate
office complex on this parcel, and in December 1993, the Company began
occupying a portion of this complex. Construction is expected to be completed
in 1994. The new facility will consist of approximately 520,000 square feet of
space and will replace office space held under leases in a number of locations
in the Cleveland, Ohio area. The cost of the project is currently estimated at
$74.8 million and is being funded through operating cashflows. As of December
31, 1993, $50.5 million of the project's costs had been paid.
The Company owns a modern three-story building containing approximately 96,700
square feet of office space in Mayfield Heights, Ohio. The property was
purchased in December 1993, for approximately $6.5 million, and is occupied by
the Company's Northeast Division.
The Company's Florida Division is headquartered in a modern, two-story building
containing approximately 60,000 square feet of office space in Tampa, Florida.
The property was financed with, and is held subject to a mortgage granted in
connection with, industrial development revenue bonds bearing interest equal to
79.45% of a specified prime commercial lending rate. The remaining annual
principal amounts payable are $368,000 in each of 1994 through 1997 and $92,000
in 1998.
The Company owns a modern, two-story building containing approximately 39,000
square feet of office space in Tampa, Florida; this building is leased to a
non-affiliated tenant.
The Company also owns a one-story brick building containing approximately
92,000 square feet of training facilities, office and warehouse space in
Mayfield Village, Ohio.
LEASED PROPERTIES
The Company leases approximately 681,000 square feet of modern office space at
various locations throughout the United States for its other business units and
staff functions. In addition, the Company leases approximately 225 processing
and claim offices 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.
ITEM 3. LEGAL PROCEEDINGS
Incorporated by reference from Note 6, LITIGATION, on page 43 of the Company's
Annual Report.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF
SHAREHOLDERS
None.
EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated by reference from information with respect to executive officers
of The Progressive Corporation and its subsidiaries set forth in Item 10 of
this Annual Report on Form 10-K.
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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 New
York Stock Exchange. All stock prices and dividends per share have been
adjusted to reflect the December 8, 1992 3-for-1 stock split.
Dividends
Year Quarter High Low Per Share
- - - ------------------------------------------------------------------------------------------
1993 1 $ 36 1/8 $ 26 5/8 $ .050
2 36 1/4 27 1/2 .050
3 44 1/4 31 3/4 .050
4 46 1/8 38 3/8 .050
-------------------------------------------------------------
$ 46 1/8 $ 26 5/8 $ .200
=============================================================
1992 1 $ 18 7/8 $ 14 3/4 $ .047
2 19 15 5/8 .047
3 22 18 7/8 .047
4 29 3/8 21 3/8 .050
-------------------------------------------------------------
$ 29 3/8 $ 14 3/4 $ .191
=============================================================
The closing price of the Company's Common Shares on February 24, 1994 was
$34 5/8.
(b) Holders
There were 4,849 shareholders of record on February 24, 1994.
(c) Dividends
Statutory policyholders' surplus was $703.6 million and $658.3 million at
December 31, 1993 and 1992, 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, 1993, $91.5 million of statutory policyholders' surplus
represents net admitted assets of the insurance subsidiaries that are not
transferable in the form of dividends, loans or advances to the parent.
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. Under current regulations, subsidiary dividends of $117.1
million in the aggregate may be paid in 1994 out of statutory policyholders'
surplus, without such approval by regulatory authorities. The regulations may
change during 1994, which could affect the dividends permitted to be paid by a
regulated subsidiary without prior approval.
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ITEM 6. SELECTED FINANCIAL DATA
(millions - except per share amounts)
For the years ended December 31,
1993 1992 1991 1990 1989
Total revenues 1 $1,954.8 $1,738.9 $1,493.1 $1,376.2 $1,392.7
Net income 2 267.3 153.8 32.9 93.4 78.0
Per share:
Net income 2,3 3.58 2.05 .41 1.19 .94
Dividends .200 .191 .172 .160 .147
Total assets 2,4 4,011.3 3,440.9 3,317.2 2,912.4 2,643.7
Funded debt
outstanding 477.1 568.5 644.0 644.4 645.9
All per share amounts have been adjusted for the December 8, 1992 3-for-1 stock
split.
1 Total revenues for 1992 include $106.0 million ($70.0 million after taxes), or
$.97 per share, for the Company's California Proposition 103 reserve reduction.
See MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS set forth in Item 7 of this Annual Report on Form 10-K for further
discussion.
2 Effective January 1, 1992, the Company adopted SFAS 109 and was able to
demonstrate that the benefit of deferred tax assets was fully realizable. The
cumulative effect of adopting SFAS 109 increased net income $14.2 million, or
$.20 per share. In 1991, the deferred tax asset writedown, as required under
SFAS 96, was included in the Federal income tax provision.
3 Presented on a fully diluted basis.
4 Pursuant to SFAS 113, amounts for 1990 through 1992 were restated.
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 redeem debt, and for other business purposes. In 1993, the
Company sold 4,950,000 Common Shares for net proceeds of $177.0 million, $150.0
million of its 7% Notes due 2013 and filed a shelf registration for $200.0
million of its debt securities (in January 1994, the Company sold $200.0
million of its 6.60% Notes due 2004 under the shelf registration statement).
During 1993, the Company repurchased .4 million of its Serial Preferred Shares,
Series A, at a cost of $9.8 million, repaid $170.0 million borrowed under its
credit facilities and redeemed the entire $70.0 million of its 8 3/4%
Debentures.
During the three-year period ended December 31, 1993, the Company also sold
4,000,000 Serial Preferred Shares, Series A, for net proceeds of $96.4 million,
of which .4 million were repurchased as discussed above, repurchased 4.0
million Common Shares (not adjusted for the December 1992 three-for-one stock
split) at a total cost of $215.6 million, and decreased its aggregate
borrowings $167.3 million. During the same period, The Progressive Corporation
received $393.3 million from its insurance subsidiaries, net of capital
contributions made to these subsidiaries. The regulatory restrictions on
subsidiary dividends are described in Item 5(c) DIVIDENDS, on page 11.
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The Company has substantial capital resources and is unaware of any trends,
events or circumstances that are reasonably likely to affect its capital
resources in a material way. The Company also has available a $20.0 million
revolving credit agreement. The Company believes it has sufficient borrowing
capacity and other capital resources to support current and anticipated growth.
The Company's insurance operations create liquidity by collecting and investing
premiums written from new and renewal business in advance of paying claims.
For the three years ended December 31, 1993, operations generated a positive
cash flow of $664.7 million, and cash flow is expected to be positive in both
the short-term and reasonably foreseeable future. The Company's substantial
investment portfolio is highly liquid, consisting almost entirely of readily
marketable securities. The Company does not expect any material changes in its
cash requirements and is not aware of any trends, events or uncertainties that
are reasonably likely to have a material effect on its liquidity.
Total capital expenditures for the three years ended December 31, 1993,
aggregated $122.6 million. In spring 1992, construction began on the Company's
new corporate office complex in Mayfield Village, Ohio, and in December 1993,
the Company began occupying a portion of this complex. Construction is
expected to be completed in 1994. The new facility will consist of
approximately 520,000 square feet of space and will replace office space held
under leases in a number of locations in the Cleveland, Ohio area. The cost of
the project is currently estimated at $74.8 million, and is being funded
through operating cash flows. As of December 31, 1993, $50.5 million of the
project's cost had been paid.
In June 1992, the Company reached an agreement with the California Department
of Insurance to refund approximately $50 million of premiums (including
interest) on business written between November 8, 1988 and November 7, 1989 to
approximately 260,000 policyholders, thereby settling all rollback and refund
exposure since Proposition 103 was adopted in November 1988. As a result, the
Proposition 103 premium refund and rollback reserve was reduced by $106.0
million.
During the second quarter 1992, the Company changed its financial arrangement
with Progressive Partners Limited Partnership (Progressive Partners), its
investment manager, as part of its strategy to compete more effectively for
private passenger auto insurance by lowering costs. Under the new arrangement,
Progressive Partners' people, now employed by a wholly-owned Progressive
subsidiary, continue to provide the Company with investment and capital
management. The transaction involved paying Progressive Partners a one-time
fee for terminating the investment management contract, and an additional
incentive fee for the period ended June 30, 1992, in the aggregate amount of
$54.6 million. This transaction reduced the Company's costs for investment and
capital management.
In December 1992, Mr. Alfred Lerner, then Chairman of the Company, converted
his $75.0 million Floating Rate Convertible Subordinated Debenture due 2008
into 9,000,000 Common Shares and sold 5,175,000 of those Common Shares in an
underwritten public offering. The public offering was completed pursuant to
the registration rights provisions of the convertible debenture, under which
the Company paid $5.1 million in underwriting and other expenses of the
offering. These expenses were charged directly to shareholders' equity in
accordance with generally accepted accounting principles. On the same date,
Mr. Lerner agreed to a termination of his employment agreement with the
Company, and, in connection with these transactions, the Company paid Mr.
Lerner $10.0 million.
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RESULTS OF OPERATIONS
Direct premiums written increased 20 percent to $1,966.4 million in 1993,
compared to $1,636.8 million in 1992 and $1,536.8 million in 1991. These
amounts include premiums written under state-mandated involuntary Commercial
Auto Insurance Plans (CAIP), for which the Company retains no indemnity risk,
of $98.0 million in 1993, $142.2 million in 1992 and $180.0 million in 1991.
In 1993, the Company provided policy and claim processing services to 28 state
CAIPs, compared to 26 in 1992 and 25 in 1991; the size of the CAIP market
continues to decrease. Net premiums written increased 25 percent to $1,819.2
million, compared to $1,451.2 million in 1992 and $1,324.6 million in 1991.
Premiums earned, which are a function of the amount of premiums written in the
current and prior periods, increased 17 percent in 1993, compared to 11 percent
in 1992 and 8 percent in 1991. In 1989, the Company established a reserve for
potential premium rollbacks and refunds under provisions of California
Proposition 103 and added to the reserve in subsequent years; the reserve
reduced premiums written and earned $10.2 million and $49.7 million in 1992 and
1991, respectively. In 1992, the Company settled its financial responsibility
under Proposition 103 and reduced its reserve as described above.
In 1993, the Company's Core business' net premiums written grew 25 percent,
driven by an increase in unit sales. The Company anticipates continued growth
in its Core business in 1994; however, the Company prices business to achieve a
four percent underwriting margin. As a result, in the short run, operating
earnings may not increase in proportion to volume growth.
Claim costs, the Company's most significant expense, represent actual payments
made and changes in estimated future payments to be made to or on behalf of its
policyholders, including expenses required to settle claims and losses. These
costs include a loss estimate for future assignments and assessments, based on
current business, under state-mandated involuntary automobile programs. Claims
costs are influenced by inflation and loss severity and frequency, the impact
of which is mitigated by adequate pricing. Increases in the rate of inflation
increase loss payments, which are made after premiums are collected.
Accordingly, anticipated rates of inflation are taken into account when the
Company establishes premium rates and loss reserves. Claim costs, expressed as
a percentage of premiums earned, were 62 percent in 1993, compared to 65
percent in 1992 and 67 percent in 1991. The personnel reductions in late 1991
and early 1992, along with other cost-cutting measures and the favorable
run-off of the Transportation business, reduced the Company's losses and loss
adjustment expenses.
Policy acquisition and other underwriting expenses as a percentage of premiums
earned were 28 percent in 1993, compared to 31 percent in 1992 and 37 percent
in 1991. The decrease reflects the cost-cutting measures discussed above, as
well as process improvements, changed workflows and lower commission programs.
Service revenues were $43.7 million in 1993, compared to $53.3 million in 1992
and $54.0 million in 1991; the decrease in revenues reflects the decrease in
CAIP premiums written. Service businesses generated a pretax operating profit
of $6.8 million in 1993, compared to a pretax loss of $4.3 million in 1992 and
a pretax loss of $2.1 million in 1991. During 1992, loss adjustment expense
reserves were increased $6.2 million.
Recurring investment income (interest and dividends) decreased 3 percent to
$134.5 million in 1993, 4 percent to $139.0 million in 1992 and 5 percent to
$144.8 million in 1991, primarily due to lower prevailing interest rates. Net
realized gains on security sales were $107.9 million in 1993, $14.5 million in
1992 and $7.4 million in 1991. A significant portion of the 1993 realized
gains resulted from the sale of certain equity securities held in the Company's
investment portfolio.
President Clinton signed the Omnibus Budget Reconciliation Act of 1993, which,
among other items, increased the statutory tax rate to 35 percent. Effective
January 1, 1992, the Company adopted SFAS 109 and was able to demonstrate that
the benefit of deferred tax assets was fully realizable. The cumulative effect
of adopting SFAS 109 increased net income $14.2 million, or $.20 per share. In
1991, the deferred tax asset write-down, as required under SFAS 96, was
included in the Federal income tax provision.
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INVESTMENTS
The Company invests in fixed maturity, short-term and equity securities. The
Company's investment strategy recognizes its need to maintain capital adequate
to support its insurance operations. Therefore, the Company evaluates the
risk/reward trade-offs of investment opportunities, measuring their effects on
stability, diversity, overall quality and liquidity of the investment
portfolio. The majority ($2,135.1 million, or 76.6%, in 1993 and $1,779.4
million, or 74.6%, in 1992) of the portfolio at December 31, 1993 and 1992, was
in short-term and intermediate- term, investment-grade fixed-income securities.
A relatively small portion ($453.9 million, or 16.3% in 1993 and $398.6
million, or 16.7% in 1992) of the investment portfolio was invested in
preferred and common equity securities providing risk/reward balance and
diversification. The remainder of the portfolio was invested in long-term
investment-grade fixed-income securities ($77.6 million, or 2.8% in 1993 and
$122.7 million, or 5.1% in 1992) and non-investment-grade fixed-income
securities ($119.8 million, or 4.3% in 1993 and $85.4 million, or 3.6% in
1992). The non-investment-grade fixed-income securities, although constituting
only a small portion of the portfolio, offer the Company high returns and added
diversification without a significant adverse effect on the stability and
quality of the investment portfolio as a whole. These securities may involve
greater risks often related to creditworthiness, solvency and relative
liquidity of the secondary trading market. The weighted average fully taxable
equivalent yield of the portfolio was 8.7%, 8.6% and 9.4% as of December 31,
1993, 1992 and 1991, respectively.
As of December 31, 1993, the Company elected to early adopt Statement of
Financial Accounting Standards (SFAS) 115 "Accounting for Certain Investments
in Debt and Equity Securities." For 1993, the adoption of SFAS 115 did not
have any effect on the Company's results of operations or financial position.
Fixed maturity securities which are held-to-maturity and short-term securities
are reported at amortized cost; amortized cost of short-term securities
approximates market. Available-for-sale securities are held for indefinite
periods of time and include fixed maturities and equity securities. The
available-for-sale securities are reported at market value with the changes in
market value, net of deferred income taxes, reported directly in shareholders'
equity as unrealized appreciation or depreciation.
The quality distribution of the fixed-income portfolio is as follows:
Standard & Poor's Percentage at Percentage at
Rating December 31, 1993 December 31, 1992
------ ----------------- -----------------
AAA 61.8% 77.2%
AA 23.6 10.1
A 8.4 6.3
BBB 0.6 0.6
Non Rated/Other 5.6 5.8
----- -----
100.0 % 100.0%
===== =====
As of December 31, 1993, the Company held $122.5 million of Collateralized
Mortgage Obligations ("CMOs"), which represented 4.4% of the total investment
portfolio. There are four types of securities held in the CMO Portfolio. As
of December 31, 1993, sequential bonds represented 51.0% of the portfolio
($62.5 million) and had an average life of 1.5 years. Planned Amortization
Class ("P.A.C.") bonds represented 25.9% of the portfolio ($31.7 million) and
had an average life of 1.6 years. P.A.C. Principal Only and Interest Only
bonds represented the remaining 23.1% of the portfolio ($28.3 million) and had
an average life of 1.8 years. The portfolio contains no residual interests.
CMOs held by the Company are highly liquid with readily available quotes and,
at December 31, 1993, had an average life of 1.6 years. Eighty- nine percent
of the CMOs held by the Company are rated AAA by Moody's or Standard & Poor's.
As of December 31, 1993, the Company's total CMO portfolio had an unrealized
loss of $3.7 million. The single largest unrealized loss in any CMO security
was $1.3 million, or only 1.1% of such position.
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Investments in the Company's portfolio have varying degrees of risk. Equity
securities generally have greater risks than the non-equity portion of the
portfolio since these securities are subordinate to rights of debt holders and
other creditors of the issuer. As of December 31, 1993, the mark-to-market net
gains in the Company's equity portfolio were $20.7 million ($13.5 million, net
of taxes), as compared to $88.3 million ($58.3 million, net of taxes) in 1992.
As of December 31, 1993 and 1992, the marketable equity portfolio of the
Company was $453.9 million, or 16.3% and $398.6 million, or 16.7%,
respectively, of the total investment portfolio. The 1993 marketable equity
portfolio consisted of three principal components: (i) $73.0 million, or
16.1%, of standard adjustable rate preferreds (ARPS), (ii) $283.4 million, or
62.4%, of perpetual preferreds with mechanisms that may provide an opportunity
to liquidate at par, and (iii) $97.5 million, or 21.5%, of common stocks. The
1992 marketable equity portfolio consisted of three principal components; (i)
$138.9 million, or 34.8%, of standard adjustable rate preferred (ARPS), (ii)
$64.1 million, or 16.1% of perpetual preferreds with mechanisms that may
provide an opportunity to liquidate at par, and (iii) $195.6 million, or 49.1%,
of common stocks.
The Company continually evaluates the creditworthiness of each issuer for all
securities held in its portfolio. Changes in market value are evaluated to
determine the extent to which such changes are attributable to: (i) interest
rates, (ii) market-related factors other than interest rates and (iii)
financial conditions, business prospects and other fundamental factors specific
to the issuer.
Declines attributable to issuer fundamentals are reviewed in further detail.
Available evidence is considered to estimate the realizable value of the
investment. Evidence reviewed may include the recent operating results and
financial position of the issuer, information about its industry, recent
announcements and other information. The Company retains a staff of
experienced security analysts to compile, review and evaluate such information.
When a security in the Company's investment portfolio has a decline in market
value which is other than temporary, the Company is required by GAAP to reduce
the carrying value of such security to its net realizable value. It is the
Company's general policy to dispose of securities when the Company
determines that the issuer is unable to reverse its deteriorating financial
condition and the prospects for its business within a reasonable period of
time. In less severe circumstances, the Company may decide to dispose of a
portion of its holdings in a specific issuer when the risk profile of the
investment becomes greater than its tolerance for such risk.
ENVIRONMENTAL AND PRODUCT LIABILITY EXPOSURES
Because the Company has been primarily an insurer of motor vehicles, it has
limited exposure for environmental, product and general liability claims. The
Company has established reserves for these exposures, in amounts which it
believes to be adequate based on information currently known by it and, in
addition, has a supplemental reserve that is in an amount substantially in
excess of the potential exposure for such claims. The Company does not believe
that these claims will have a material impact on the Company's liquidity,
results of operations or financial condition.
However, the ultimate costs of the environmental and product liability claims
are inherently difficult to project due to numerous uncertainties, including
causation and policy coverage issues, the possible uncollectability of related
reinsurance and third-party indemnity arrangements, unsettled and sometimes
conflicting case law, difficulties in determining the scope of any
contamination or injury and the nature and cost of the appropriate remedial
action and the number and financial condition of responsible parties and their
insurers, among other factors.
Most of the Company's exposure for such claims results from Progressive's
acquisition in 1985 of American Star Insurance Company, since renamed National
Continental Insurance Company. When American Star was acquired, the seller
agreed to administer all claims asserted under policies previously written by
American Star and to pay all losses incurred under such policies, including
those covered by reinsurance then in place on some of the policies. The seller
encountered major financial difficulties as a result of losses in Hurricane
Andrew and, despite having paid all losses and
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adjusted all claims on the old business since 1985, has contested its
obligation to administer these claims and to pay the losses not being paid by
some of the reinsurers. The dispute has been submitted to arbitration and is
scheduled to be heard by an arbitration panel during the second quarter. If it
is determined that the seller is responsible for all of these losses, the
amounts could be material to it. According to a recent study by independent
actuaries for the seller, aggregate reserves on this business are about $19.2
million. Of that amount, about $6.3 million is being contested in the
arbitration, $7.8 million is the admitted obligation of the seller and the
balance is the responsibility of reinsurance sources that are paying their
obligations.
The Company will continue to monitor these exposures, adjust the related
reserves appropriately as additional information becomes known and disclose any
material developments.
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 1993 Annual Report, pages 33
through 46 and pages 50 through 55.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
A description of the directors, including those nominated for election as
directors at the 1994 Annual Meeting of Shareholders of the Registrant, is
incorporated herein by reference from the section entitled "Election of
Directors" in the Proxy Statement, pages 1 through 3.
A description of the executive officers of the Registrant and its subsidiaries
follows. These descriptions reflect the Company's termination of its
officership program and consequent elimination of many officer positions,
effective December 31, 1993.
Offices Held and
Name Age Last Five Years Business Experience
---- --- -----------------------------------
Peter B. Lewis 60 Chairman since April 1993; President, Chief Executive Officer and a director of the
Registrant and Progressive Casualty Insurance Company ("Progressive Casualty"), the
principal subsidiary of the Registrant.
Charles B. Chokel 40 Chief Financial Officer of the Registrant since April 1991; Senior Vice President -
Finance of Progressive Casualty from April 1991 to December 1993; President of the
California Division and Vice President of Progressive Casualty prior to April 1991.
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Allan W. Ditchfield 56 Chief Information Officer of the Registrant since March 1991; Senior Vice President -
Information Services of Progressive Casualty from March 1991 to December 1993; Senior
Vice President of Systems Engineering at MCI Telecommunications Corporation, Washington,
D.C. (telecommunications) from July 1988 to March 1991.
Daniel R. Lewis 47 President of the Central States Division since November 1989; President of the Consumer
Finance Division prior to September 1989; Treasurer of the Registrant; Senior Vice
President of Progressive Casualty prior to December 1993.
Bruce W. Marlow 45 Chief Operating Officer of the Registrant; Executive Vice President of Progressive
Casualty prior to December 1993.
Michael C. Murr 42 Chief Investment and Capital Officer of the Registrant since February 1993; President of
Progressive Partners, Inc., a subsidiary of the Registrant since July 1992; President of
Progressive Partners Limited Partnership prior to July 1992.
David M. Schneider 56 Chief Legal Officer and Secretary of the Registrant since May 1989; Senior Vice President
of Progressive Casualty from May 1989 to December 1993; Partner and Area Chair of
National Business Practice, Baker & Hostetler, Cleveland, Ohio (attorneys) prior to
May 1989.
Tiona M. Thompson 43 Chief Human Resources Officer of the Registrant since December 1993; Vice President -
Human Resources of Progressive Casualty from September 1991 to December 1993; Vice
President of Progressive Casualty prior to September 1991.
SECTION 16(A) REPORTING
Under the Federal securities laws, the directors and certain officers of the
Company, and holders of 10% or more of the Company's Common Shares, are
required to report their ownership of the Company's Common Shares, and any
changes in such ownership, to the Securities and Exchange Commission and New
York Stock Exchange within specified time frames. The Company is required to
report in this Form 10-K any failure on the part of any such individual to
timely file any such report. The Form 5 filed for Daniel R. Lewis for 1992
inadvertently omitted to disclose two gifts totalling 100 of the Company's
Common Shares received by his two minor children in January 1992. A
supplemental filing was made with the Securities and Exchange Commission and
the New York Stock Exchange promptly after this oversight was discovered.
Norman S. Matthews' Form 5 for 1993, reporting charitable gifts totalling 250
Common Shares, was filed 29 days late. The total of all charitable gifts
reported for David M. Schneider on his December 1993 Form 4 inadvertently
omitted 4 Common Shares. An amended Form 4 was filed promptly after this
omission was discovered.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference from the section of the Proxy Statement entitled
"Executive Compensation," pages 7 through 15.
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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 4
through 6.
ITEM 13. CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS
Incorporated by reference from the section of the Proxy Statement entitled
"Election of Directors - Certain Related Transactions," page 3.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES,
AND REPORTS ON FORM 8-K.
(a)(1) Listing of Financial Statements
The following consolidated financial statements
of the Registrant and its subsidiaries, included
in the Registrant's Annual Report, are
incorporated by reference in Item 8:
Report of Independent Accountants
Consolidated Statements of Income -
December 31, 1993, 1992 and 1991
Consolidated Balance Sheets - December 31, 1993
and 1992
Consolidated Statements of Changes in Shareholders'
Equity - December 31, 1993, 1992 and 1991
Consolidated Statements of Cash Flows -
December 31, 1993, 1992 and 1991
Notes to Consolidated Financial Statements
Supplemental Information*
*Not covered by Report of Independent Accountants.
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(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 - Amounts Receivable from Related
Parties and Underwriters, Promoters, and Employees
other than Related Parties
Schedule III - Condensed Financial
Information of Registrant
Schedule V - Supplementary Insurance
Information
Schedule VI - Reinsurance
Schedule X - 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 37 through 40.
Management contracts and compensatory plans and arrangements
are identified in the Exhibit Index as Exhibit Nos. (10)(B)
through (10)(K).
(b) Reports on Form 8-K
On November 12, 1993, the Company filed a Form 8-K to report
the call for redemption on December 17, 1993, of the entire
$70 million aggregate principal amount of its outstanding 8
3/4% Debentures due 2017. The redemption was made at 105.425%
of the principal amount, plus accrued interest to the date
fixed for redemption. These debentures were issued pursuant
to an Indenture dated October 15, 1986 between the Company and
Morgan Guaranty Trust Company of New York, as trustee.
(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 23
through 36.
20
22
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 29, 1994 BY: /s/ Peter B. Lewis
-------------------------
Peter B. Lewis
Chairman, President and Chief
Executive Officer of the
Registrant
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 and Chief Executive March 29, 1994
- - - --------------------------------- Officer of the Registrant and a Director
Peter B. Lewis
/s/ Charles B. Chokel Chief Financial Officer March 29, 1994
- - - --------------------------------- of the Registrant
Charles B. Chokel
/s/ Jeffrey W. Basch Chief Accounting Officer March 29, 1994
- - - --------------------------------- of the Registrant
Jeffrey W. Basch
Milton N. Allen* Director March 29, 1994
- - - ---------------------------
Milton N. Allen
B. Charles Ames* Director March 29, 1994
- - - --------------------------
B. Charles Ames
Stephen R. Hardis* Director March 29, 1994
- - - ---------------------------
Stephen R. Hardis
Norman S. Matthews* Director March 29, 1994
- - - ------------------------
Norman S. Matthews
Donald B. Shackelford* Director March 29, 1994
- - - -------------------------
Donald B. Shackelford
21
23
Paul B. Sigler* Director March 29, 1994
- - - -----------------------------
Paul B. Sigler
* DAVID M. SCHNEIDER, by signing his name hereto, does sign this document on
behalf of the persons indicated above pursuant to a power of attorney duly
executed by such persons.
By /s/ David M. Schneider March 29, 1994
------------------------
David M. Schneider
Attorney-in-fact
22
24
ANNUAL REPORT ON FORM 10-K
ITEM 14(D)
FINANCIAL STATEMENT SCHEDULES
YEAR ENDED DECEMBER 31, 1993
THE PROGRESSIVE CORPORATION
MAYFIELD VILLAGE, OHIO
23
25
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 33 of the 1993 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 page 20 of this Form 10-K.
In our opinion, the financial statement schedules referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information required to be
included therein.
COOPERS & LYBRAND
Cleveland, Ohio
January 26, 1994
24
26
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. 33-64210) filed June 10,
1993, the Registration Statement of The Progressive Corporation 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. 33-38464) filed December 28, 1990, 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, the Registration Statement on Form S-8 (File No. 33-23203) filed August
3, 1988 and the Registration Statement on Form S-8 (File No. 33-16509) filed
August 14, 1987 of our report dated January 26, 1994, on our audits of the
consolidated financial statements and financial statement schedules of The
Progressive Corporation and subsidiaries as of December 31, 1993 and 1992, and
for each of the three years in the period ended December 31, 1993, which report
is included in this Annual Report on Form 10-K.
COOPERS & LYBRAND
Cleveland, Ohio
March 29, 1994
25
27
SCHEDULE I -- SUMMARY OF INVESTMENTS -- OTHER
THAN INVESTMENTS IN RELATED PARTIES
THE PROGRESSIVE CORPORATION AND SUBSIDIARIES
(millions)
December 31, 1993
-----------------------------------------------------------
Amount At Which
Shown In The
Type of Investment Cost Market Value Balance Sheet
-----------------------------------------------------------
Fixed Maturities:
Held-to-maturity:
State, municipalities and political
subdivisions $ 309.1 $ 327.4 $ 309.1
-----------------------------------------------------------
Available-for-sale:
United States Government and
government agencies and
authorities 20.5 20.8 20.8
States, municipalities and political
subdivisions 819.8 835.7 835.7
Asset-backed securities 732.8 736.2 736.2
Foreign government obligations 31.8 33.8 33.8
Corporate and other debt securities 109.9 118.3 118.3
Redeemable preferred stock 47.1 47.8 47.8
-----------------------------------------------------------
1,761.9 1,792.6 1,792.6
-----------------------------------------------------------
Total fixed maturities 2,071.0 2,120.0 2,101.7
-----------------------------------------------------------
Equity securities:
Common Stocks 83.0 97.5 97.5
Preferred Stocks 350.2 356.4 356.4
-----------------------------------------------------------
Total equity securities 433.2 453.9 453.9
-----------------------------------------------------------
Short-term investments 230.8 231.3 230.8
-----------------------------------------------------------
Total investments $2,735.0 $2,805.2 $2,786.4
===========================================================
- - - ----------------
The Company did not have any securities of one issuer with an aggregate cost or
market value exceeding 10% of total shareholders' equity at December 31, 1993.
26
28
SCHEDULE II -- AMOUNTS RECEIVABLE FROM RELATED PARTIES AND UNDERWRITERS,
PROMOTERS, AND EMPLOYEES OTHER THAN RELATED PARTIES
Balance at Balance
Beginning Amounts at End
of Period Additions1 Collected of Period
-------------------------------------------------------------------------
Year ended December 31, 1991:
William Cadden $ 0 $ 188,452 $ 188,276 $ 176
Charles Chokel 0 245,327 245,327 0
Thomas Corlett 105,000 0 105,000 0
Allan Ditchfield 0 261,008 0 261,008
James Gordon 0 231,619 0 231,619
Geoffrey Halverson 0 133,951 131,026 2,925
Keith Phillips 0 158,098 158,098 0
Glenn Renwick 0 122,720 122,720 0
David Ryczko 0 112,559 0 112,559
-------------------------------------------------------------------------
$105,000 $1,453,734 $ 950,447 $ 608,287
=========================================================================
Year ended December 31, 1992:
David Adams $ 0 $ 114,982 $ 0 $ 114,982
Alan Bauer 0 218,668 218,668 0
William Cadden 176 0 176 0
Allan Ditchfield 261,008 0 261,008 0
John Gibson 0 137,443 0 137,443
James Gordon 231,619 0 231,619 0
Geoffrey Halverson 2,925 0 2,925 0
Evan Kiesz 0 124,574 0 124,574
Chris Newman(2) 10,224 161,732 135,695 36,261
Glenn Renwick 0 312,989 312,989 0
David Ryczko 112,559 0 112,559 0
Tom Seedle(2) 55,995 96,610 152,605 0
-------------------------------------------------------------------------
$674,506 $1,166,998 $1,428,244 $ 413,260
=========================================================================
Year ended December 31, 1993:
David Adams $114,982 $ 0 $ 114,982 $ 0
Travis Black (2) 12,351 96,451 108,802 0
John Gibson 137,443 0 137,443 0
Evan Kiesz 124,574 0 124,574 0
Chris Newman 36,261 0 36,261 0
-------------------------------------------------------------------------
$425,611 $ 96,451 $ 522,062 $ 0
=========================================================================
- - - --------------------
(1) Non-interest bearing; amounts represent an advance for relocation payable
upon the earlier of termination of employment or sale of prior residence.
(2) Balance at beginning of period was less than $100,000 and, therefore, not
disclosed previously.
27
29
SCHEDULE III -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF INCOME
THE PROGRESSIVE CORPORATION (PARENT COMPANY)
(millions)
Years Ended December 31,
1993 1992 1991
-------------------------------------------------
Revenues
Dividends from subsidiaries* $131.3 $ 158.5 $129.2
Intercompany investment income* 6.8 3.7 17.7
-------------------------------------------------
138.1 162.2 146.9
-------------------------------------------------
Expenses
Interest expense 42.3 44.8 47.7
Other operating costs and expenses 3.2 2.4 2.2
Non-recurring items (1) 4.0 10.0 --
-------------------------------------------------
49.5 57.2 49.9
-------------------------------------------------
Operating income and income before Federal income
taxes and other items below 88.6 105.0 97.0
Federal income tax provision (benefit) (20.9) (18.2) 2.4
-------------------------------------------------
Income before equity in undistributed earnings of
subsidiaries and cumulative effect of accounting
change 109.5 123.2 94.6
Equity in undistributed net income of consolidated
subsidiaries* 157.8 16.4 (61.7)
-------------------------------------------------
Income before cumulative effect of accounting change 267.3 139.6 32.9
Cumulative effect of adopting SFAS 109 -- 14.2 --
-------------------------------------------------
Net income $267.3 $ 153.8 $ 32.9
=================================================
*Eliminated in consolidation.
(1) For 1993, represents a $4.0 million charge on extinguishment of the 8 3/4%
Debentures due 2017. For 1992, represents a $10.0 million payment to Mr.
Alfred Lerner, then Chairman of the Company, and Mr. Lerner agreed to
convert his $75.0 million Floating Rate Convertible Subordinated Debenture
due 2008 into shares and to end his employment agreement with the Company.
See "Financial Condition" section of MANAGEMENTS'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS on page 13 for further
discussion.
See notes to condensed financial statements.
28
30
SCHEDULE III -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
CONDENSED BALANCE SHEETS
THE PROGRESSIVE CORPORATION (PARENT COMPANY)
(millions)
December 31,
1993 1992
----------------------------------------
ASSETS
Investment in non-consolidated affiliates $ .4 $ .4
Investment in subsidiaries* 972.0 887.7
Intercompany receivable* 484.6 301.0
Federal income taxes 54.8 57.7
Other assets 2.1 2.0
----------------------------------------
TOTAL ASSETS $1,513.9 $ 1,248.8
========================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued expenses $ 6.1 $ 11.5
Payable to subsidiaries* 34.4 41.6
Funded debt 475.5 566.7
----------------------------------------
Total liabilities 516.0 619.8
----------------------------------------
Shareholders' equity:
Preferred Shares, no par value (authorized 20.0
serial Preferred Shares and 5.0 Voting
Preference Shares)
9 3/8% Serial Preferred Shares, Series A
(cumulative, liquidation preference of $25
per share, issued and outstanding 3.6 and 4.0
shares) 87.9 96.4
Common Shares, $1.00 par value, authorized 200.0
shares, issued 82.2 and 77.1, including treasury
shares of 10.1 and 10.0 72.1 67.1
Paid-in capital 357.6 180.7
Net unrealized appreciation of investment in equity
securities of consolidated subsidiaries 33.5 77.5
Retained earnings 446.8 207.3
----------------------------------------
Total shareholders' equity 997.9 629.0
----------------------------------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $1,513.9 $ 1,248.8
========================================
*Eliminated in consolidation.
See notes to condensed financial statements.
29
31
SCHEDULE III -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
CONDENSED STATEMENTS OF CASH FLOWS
THE PROGRESSIVE CORPORATION (PARENT COMPANY)
(millions)
Years Ended December 31,
1993 1992 1991
-------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Income before cumulative effect of accounting change $267.3 $139.6 $ 32.9
Adjustments to reconcile income to net cash
provided by (used in) operating activities:
Equity in income of consolidated subsidiaries (289.1) (174.9) (67.5)
Amortization .1 .1 .1
Changes in:
Intercompany receivable or payable (7.2) 21.9 2.2
Accounts payable and accrued expenses (5.3) (12.3) 4.4
Federal income taxes 2.8 22.4 (17.5)
Other, net 3.8 1.3 3.6
-------------------------------------------
Net cash used in operating activities (27.6) (1.9) (41.8)
CASH FLOWS FROM INVESTING ACTIVITIES:
Additional investments in equity securities of
consolidated subsidiaries (4.7) (34.2) (19.6)
Return of capital from consolidated subsidiary 32.9 -- --
Dividends received from consolidated subsidiaries 131.3 158.5 129.2
-------------------------------------------
Net cash provided by investing activities 159.5 124.3 109.6
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 1.8 4.2 --
Proceeds from issuance of stock 177.0 -- 96.4
Proceeds from funded debt 148.2 170.0 170.0
Payments on funded debt (240.0) (170.0) (170.0)
Paid to subsidiaries (183.6) -- (40.0)
Dividends paid to shareholders (23.1) (20.8) (17.0)
Acquisition of treasury shares (12.2) (105.9) (107.3)
-------------------------------------------
Net cash used in financing activities (131.9) (122.5) (67.9)
-------------------------------------------
Decrease in cash -- (.1) (.1)
Cash, beginning of year -- .1 .2
-------------------------------------------
Cash, end of year $ -- $ -- $ .1
===========================================
See notes to condensed financial statements.
30
32
SCHEDULE III -- 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 1993 Annual Report.
STATEMENTS OF CASH FLOWS -- For the purpose of the Statements of Cash Flows,
cash includes only bank demand deposits. The Registrant paid Federal income
taxes of $91.0 million, $4.0 million and $30.4 million in 1993, 1992 and 1991,
respectively. Total interest paid was $40.9 million for 1993, $44.3 million
for 1992 and $47.0 million for 1991. During 1992, the $75.0 million Floating
Rate Convertible Subordinated Debenture due 2008 was converted into 9.0 million
Common Shares.
The Registrant effected a 3-for-1 stock split in the form of a dividend to
shareholders on December 8, 1992. The Registrant issued its Common Shares by
transferring $38.5 million from retained earnings to the common stock account.
All per share and share amounts and stock prices were adjusted to give effect
to the split. Treasury shares were not split.
DEBT -- Funded debt at December 31 consisted of:
(millions) 1993 1992
----------------------------
Revolving bank credit
agreements $ -- $ 50.0
Credit facilities -- 120.0
7% Notes 148.2 --
8 3/4% Debentures -- 69.7
8 3/4% Notes 28.8 28.6
10% Notes 149.3 149.3
10 1/8% Subordinated Notes 149.2 149.1
----------------------------
$475.5 $566.7
============================
Funded debt is the amount the Registrant has borrowed and contributed to the
capital of its insurance subsidiaries or borrowed for other long- term
purposes.
In May 1990, the Registrant entered into a revolving credit arrangement with
National City Bank, which is reviewed by the bank annually. Under this
agreement, the Registrant had the right to borrow up to $50.0 million. In
February 1994, the Registrant reduced this revolving credit arrangement to
$20.0 million. See Note 12, SUBSEQUENT EVENTS, on page 46 of the Registrant's
1993 Annual Report. 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, 1993, the Registrant had no borrowings under this
arrangement; at December 31, 1992, $50.0 million was outstanding.
In May 1990, the Registrant also entered into a four-year credit facility with
Morgan Guaranty Trust Company of New York under which the Registrant had the
right to borrow up to $75.0 million. By selecting from available credit
options, the Registrant could have elected to pay interest at rates related to
the London interbank offered rate, the bank's CD rate, a base lending rate or a
quoted rate. A commitment fee was payable on any unused portion of the
committed facility at the rate of .15% per annum. At December 31, 1993 and
1992, the Registrant had no borrowings under this agreement. In February 1994,
the Registrant terminated this credit facility. See Note 12, SUBSEQUENT
EVENTS, on page 46 of the Registrant's 1993 Annual Report.
31
33
SCHEDULE III -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
NOTES TO CONDENSED FINANCIAL STATEMENTS
In October 1989, the Registrant entered into a five-year credit facility
agreement with a group of banks under which the Registrant secured the right to
borrow up to $235.0 million and request an additional $235.0 million. By
selecting from available credit options, the Registrant could have elected to
pay interest at rates related to the London interbank offered rate or the
greater of the agent bank's base lending rate or a rate based on the Federal
funds' rate. A commitment fee was payable on any unused portion of the
committed facility at the rate of .125% per annum. The agreement provides for
a utilization fee not to exceed .10% on the average amount of outstanding
borrowings. At December 31, 1993, no borrowings were outstanding under this
arrangement; at December 31, 1992, $120.0 million was outstanding. In February
1994, the Registrant terminated this agreement. See Note 12, SUBSEQUENT
EVENTS, on page 46 of the Registrant's 1993 Annual Report.
In October 1993, the Registrant sold $150.0 million of noncallable 7% Notes due
2013 with interest payable semiannually. The fair value of these Notes was
$145.3 million at December 31, 1993.
In February 1987, the Registrant sold $100.0 million, ($70.0 million after a
May 1989 debt exchange), of 8 3/4% Debentures due 2017 with interest payable
semiannually. In December 1993, the Registrant redeemed the entire $70.0
million principal amount of these Debentures. The Registrant redeemed the
Debentures at 105.425% of the principal amount, plus accrued interest, with the
proceeds of the sale of certain securities in its investment portfolio. A $4.0
million charge on debt extinguishment was recorded as a "non-recurring item."
The fair value of this debt was $69.2 million at December 31, 1992.
In May 1989, the Registrant issued $30.0 million of 8 3/4% Notes due 1999 in
exchange for $30.0 million of the 8 3/4% Debentures due 2017. These Notes are
noncallable, and interest is payable semiannually. The fair value of these
Notes was $33.7 million and $31.8 million at December 31, 1993 and 1992,
respectively.
In December 1988, the Registrant sold $150.0 million of 10% Notes due 2000, and
$150.0 million of 10 1/8% Subordinated Notes due 2000. All the Notes are
noncallable. Interest is payable semiannually on both issues. The fair value
of the 10% Notes and 10 1/8% Subordinated Notes were $180.6 million and $181.2
million, respectively, at December 31, 1993, and $170.4 million and $169.1
million, respectively, at December 31, 1992.
As of December 31, 1993, the Registrant is in compliance with its financial
debt covenants. The most restrictive covenant, which appeared under the
recently terminated credit facilities, provided that senior indebtedness could
not exceed 200% of long-term capital.
In January 1994, the Registrant sold $200.0 million of its 6.60% Notes due
2004. See Note 12, SUBSEQUENT EVENTS, on page 46 of this Registrant's 1993
Annual Report.
Aggregate principal payments on funded debt outstanding at December 31, 1993
are $0 for 1994 through 1998 and $480.0 million thereafter.
FEDERAL INCOME TAXES -- The Registrant files a consolidated Federal income tax
return with all 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 Payable to
Subsidiaries in the accompanying Condensed Balance Sheets.
32
34
SCHEDULE III -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
NOTES TO CONDENSED FINANCIAL STATEMENTS
Effective January 1, 1992, the Registrant adopted Statement of Financial
Accounting Standards (SFAS 109) "Accounting for Income Taxes", which changes
the method of accounting for income taxes. Under SFAS 109, the Registrant was
able to demonstrate that the benefit of deferred tax assets were fully
realizable. The cumulative effect of adopting SFAS 109 was to restore the
deferred tax assets and increase net income $14.2 million, or $.20 per share,
in 1992.
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) 1993 1992 1991
-------------------------------------------------
Unrealized gains (losses):
Available-for-sale: fixed maturities $ 1.6 $29.1 $ --
equity securities (67.6) 56.9 74.2
Deferred income taxes 22.0 (29.2) (25.2)
-------------------------------------------------
$(44.0) $56.8 $49.0
=================================================
OTHER MATTERS -- The information relating to incentive compensation plans and
related party transactions is incorporated by reference from Note 9, Employee
Benefit Plans, "Incentive Compensation Plans" and Note 10, RELATED PARTIES, on
pages 44 and 45 of the Registrant's 1993 Annual Report.
33
35
SCHEDULE V -- SUPPLEMENTARY INSURANCE INFORMATION
THE PROGRESSIVE CORPORATION AND SUBSIDIARIES
(millions)
Future
policy Other
benefits, policy
Deferred losses, claims
policy claims and and
acquisition loss Unearned benefits Premium Investment
Segment costs expenses(1) premiums(1) payable revenue Income(2)
---------------------------------------------------------------------------------------
Year ended December 31, 1993:
Insurance Lines $124.6 $1,348.6 $772.0 $ -- $1,668.7 $242.4
=======================================================================================
Year ended December 31, 1992:
Insurance Lines $101.3 $1,274.2 $614.8 $ -- $1,426.1 $153.5
=======================================================================================
Year ended December 31, 1991:
Insurance Lines $110.2 $1,077.1 $595.0 $ -- $1,286.9 $152.2
=======================================================================================
Benefits, Amortization
claims, of deferred
losses and policy Other Net
settlement acquisition operating premiums
Segment expenses costs expenses written
---------------------------------------------------------------------------------------
Year ended December 31, 1993:
Insurance Lines $1,028.0 $311.6 $151.3 $1,819.2
=======================================================================================
Year ended December 31, 1992:
Insurance Lines $930.9 $304.1 $141.5 $1,451.2
=======================================================================================
Year ended December 31, 1991:
Insurance Lines $858.0 $313.7 $162.1 $1,324.6
=======================================================================================
(1) Pursuant to SFAS 113, amounts for 1992 and 1991 were restated.
(2) Excluding investment expenses of $10.2 million in 1993, $17.0 million in 1992, and $22.5 million in 1991.
34
36
SCHEDULE VI -- REINSURANCE
THE PROGRESSIVE CORPORATION AND SUBSIDIARIES
(millions)
Assumed Percentage
YEAR ENDED Ceded to From of Amount
Gross Other Other Assumed
December 31, 1993 Amount Companies Companies Net Amount to Net
- - - ----------------- -------------------------------------------------------------------------------------
Life Insurance in force $ 1.4 $ .3 $ -- $ 1.1 --
=====================================================================================
Premiums earned:
Accident and health $ -- $ -- $ -- $ -- -- %
Property and liability 1,808.8 149.8 9.7 1,668.7 .6
Life -- -- -- -- --
-----------------------------------------------------------------
Total premiums earned $1,808.8 $149.8 $ 9.7 $1,668.7
=================================================================
December 31, 1992
- - - -----------------
Life Insurance in force $ 3.3 $ 1.3 $ -- $ 2.0 --
=====================================================================================
Premiums earned:
Accident and health $ .1 $ .1 $ -- $ -- -- %
Property and liability 1,619.2 195.1 2.0 1,426.1 .1
Life -- -- -- -- --
-----------------------------------------------------------------
Total premiums earned $1,619.3 $195.2 $ 2.0 $1,426.1
=================================================================
December 31, 1991
- - - -----------------
Life Insurance in force $ 9.0 $ 4.5 $ -- $ 4.5 --
=====================================================================================
Premiums earned:
Accident and health $ .3 $ .2 $ .1 $ .2 50.0 %
Property and liability 1,485.5 199.1 .2 1,286.6 --
Life .2 .1 -- .1 --
-----------------------------------------------------------------
Total premiums earned $1,486.0 $199.4 $ .3 $1,286.9
=================================================================
35
37
SCHEDULE X - 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, 1993 $1,126.7 $(98.5) $972.2
=============== ================ ================
December 31, 1992 $981.7 $(51.5) $835.3
=============== ================ ================
December 31, 1991 $903.2 $(42.8) $790.5
=============== ================ ================
Pursuant to Rule 12-18 of Regulation S-X. See Schedule V, page 34, for the
additional information required in Schedule X.
36
38
EXHIBIT INDEX
Exhibit No. If Incorporated by Reference,
Under Reg. Form 10-K Documents with Which Exhibit
S-K, Item 601 Exhibit No. Description of Exhibit was Previously Filed with SEC
- - - ---------------------------------------------------------------------------------------------------------------------------------
(3) 3(A) Amended Articles of Incorporation of The Progressive Quarterly Report on Form 10-Q
Corporation ("Progressive"), as amended (Filed with SEC on April 23,
1993; see Exhibit 3 therein)
(3) 3(B) Code of Regulations of Progressive Quarterly Report on Form 10-Q
(Filed with SEC on May 6, 1991;
see Exhibit 3(B) therein)
(4) 4(A) $4,000,000 Hillsborough County Industrial Development Annual Report on Form 10-K
Authority Industrial Development Revenue Bonds, Series (filed with SEC on March 30, 1989;
1982 (dated December 16, 1982); Loan and Debt Obligation see Exhibit 4(B) therein)
Agreement; Indenture of Trust; Mortgage and Security
Agreement; Unconditional Guaranty
(4) 4(B) Indenture dated as of November 15, 1988 between Contained in Exhibit Binder
Progressive and Rhode Island Hospital Trust National Bank,
as Trustee ("Subordinated Indenture") (including Table of
Contents and cross-reference sheet)
(4) 4(C) Form of 10 1/8% Subordinated Notes due 2000 issued in the Contained in Exhibit Binder
aggregate principal amount of $150,000,000 under the
Subordinated Indenture
(4) 4(D) Indenture dated as of November 15, 1988 between Progressive Contained in Exhibit Binder
and The First National Bank of Boston, as Trustee ("1988 Senior
Indenture") (including Table of Contents and cross-
reference sheet)
37
39
EXHIBIT INDEX
Exhibit No. If Incorporated by Reference,
Under Reg. Form 10-K Documents with Which Exhibit
S-K, Item 601 Exhibit No. Description of Exhibit was Previously Filed with SEC
- - - ---------------------------------------------------------------------------------------------------------------------------------
(4) 4(E) Form of 10% Notes due 2000 issued in the aggregate principal Contained in Exhibit Binder
amount of $150,000,000 under the 1988 Senior Indenture
(4) 4(F) Form of 8 3/4% Notes due 1999 issued in the aggregate principal Annual Report on Form 10-K
amount of $30,000,000 under the 1988 Senior Indenture (Filed with SEC on March 30,
1990; see Exhibit 4(K) therein)
(4) 4(G) $235,000,000 Facility Agreement dated October 6, 1989 Quarterly Report on Form 10-Q
with Credit Suisse, et al; Credit Suisse as agent; terminated (Filed with SEC on November 13,
February 10, 1994 1989; see Exhibit 4 therein)
(4) 4(H) $75,000,000 Facility Agreement dated May 4, 1990 with Morgan Quarterly Report on Form 10-Q
Guaranty Trust Company of New York; terminated February 1, 1994 (Filed with SEC on August 13,
1990; see Exhibit 4(A) therein)
(4) 4(I) $20,000,000 Unsecured Line of Credit with National City Bank Contained in Exhibit Binder
(dated May 23, 1990; renewed May 20, 1992, and amended February
1, 1994)
(4) 4(J) Indenture dated as of September 15, 1993 between Progressive Quarterly Report on Form 10-Q
and The First National Bank of Boston, as trustee ("1993 Senior (Filed with SEC on November 5,
Indenture") (including Table of Contents and cross-reference 1993; see Exhibit 4(A) therein)
sheet)
(4) 4(K) Form of 7% Notes due 2013 issued in the aggregate principal Quarterly Report on Form 10-Q
amount of $150,000,000 under the 1993 Senior Indenture (Filed with SEC on November 5,
1993; see Exhibit 4(B) therein)
(4) 4(L) Form of 6.60% Notes due 2004 issued in the aggregate principal Contained in Exhibit Binder
amount of $200,000,000 under the 1993 Senior Indenture.
38
40
EXHIBIT INDEX
Exhibit No. If Incorporated by Reference,
Under Reg. Form 10-K Documents with Which Exhibit
S-K, Item 601 Exhibit No. Description of Exhibit was Previously Filed with SEC
- - - ---------------------------------------------------------------------------------------------------------------------------------
(10)(ii) 10(A) Construction Contract dated March 2, 1993 between Annual Report on Form 10-K
Progressive Casualty Insurance Company and The (Filed with SEC on March 30,
Whiting-Turner Contracting Company 1993; see Exhibit 10(A) therein)
(10)(iii) 10(B) The Progressive Corporation 1994 Gainsharing Plan Contained in Exhibit Binder
(10)(iii) 10(C) The Progressive Corporation 1994 Executive Bonus Plan Contained in Exhibit Binder
(10)(iii) 10(D) The Progressive Corporation Management Bonus Plan Quarterly Report on Form 10-Q
(terminated December 31, 1993) (filed with SEC on November 12,
1992; see Exhibit 10(B) therein)
(10)(iii) 10(E) The Progressive Corporation 1985 Restricted Stock Plan Quarterly Report on Form 10-Q
(amended and restated on April 24, 1992); expired (Filed with SEC on August 14,
December 31, 1993 1992; see Exhibit 10(C) therein)
(10)(iii) 10(F) The Progressive Corporation Directors Deferral Quarterly Report on Form 10-Q
Plan (Amendment and Restatement) (Filed with SEC on November 13,
1991; see Exhibit 10(B) therein)
(10)(iii) 10(G) The Progressive Corporation 1989 Incentive Plan (amended Annual Report on Form 10-K
and restated as of April 24, 1992, as further amended (Filed with SEC on March 30,
on July 1, 1992 and February 5, 1993) 1993; see Exhibit 10(G) therein)
(10)(iii) 10(H) Share Option Agreement dated March 17, 1989, between Annual Report on Form 10-K
Progressive and David M. Schneider (Filed with SEC on March 30,
1990; see Exhibit 10(I) therein)
(10)(iii) 10(I) The Progressive Corporation 1990 Directors' Quarterly Report on Form 10-Q
Stock Option Plan (Amended and Restated (Filed with SEC on November 12,
as of April 24, 1992 as further amended on 1992; see Exhibit 10(A) therein)
July 1, 1992)
(10)(iii) 10(J) Share Option Agreements dated August 3, 1988, January 1, Annual Report on Form 10-K
1989, May 22, 1989, and May 22, 1990 between Progressive (Filed with SEC on March 30,
and Michael C. Murr 1993; see Exhibit 10(J) therein)
39
41
EXHIBIT INDEX
Exhibit No. If Incorporated by Reference,
Under Reg. Form 10-K Documents with Which Exhibit
S-K, Item 601 Exhibit No. Description of Exhibit was Previously Filed with SEC
- - - ---------------------------------------------------------------------------------------------------------------------------------
(10)(iii) 10(K) Agreement dated February 21, 1991 with Allan W. Ditchfield Annual Report on Form 10-K
(Filed with SEC on March 30,
1992; see Exhibit 10(L) therein)
(11) 11 Computation of Earnings Per Share Contained in Exhibit Binder
(13) 13 The Progressive Corporation 1993 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 25 of this
Annual Report on form 10-K
(24) 24 Powers of Attorney Contained in Exhibit Binder
(28) 28 Schedule P as Filed with State Regulatory Contained in Exhibit Binder
Authorities
No other exhibits are required to be filed herewith pursuant to Item 601 of
Regulation S-K.
40