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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, 1994
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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 _______________________
1-9518
Commission file number_____________________________________________________
THE PROGRESSIVE CORPORATION
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(Exact name of registrant a 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 28, 1995: $2,366,844,235.38
The number of the registrant's Common Shares, $1.00 par value, outstanding as
of February 28, 1995: 71,358,294
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Annual Report to Shareholders for the year ended
December 31, 1994 are incorporated by reference in Parts I, II and IV hereof.
Portions of the registrant's Proxy Statement dated March 24, 1995, for the
Annual Meeting of Shareholders to be held on April 28, 1995, are incorporated
by reference in Part III hereof.
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INTRODUCTION
The Progressive Corporation and subsidiaries' (collectively, the "Company")
1994 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 24, 1995, for the Annual Meeting of Shareholders to be
held on April 28, 1995 (the "Proxy Statement"), have also been incorporated by
reference herein and are identified under the appropriate items in this Form
10-K.
PART I
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ITEM 1. BUSINESS
(a) General Development of Business
The Progressive Corporation, an insurance holding company formed in 1965, has
60 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.
Of the approximately 250 United States insurance company groups writing private
passenger auto insurance, the Company estimates that Progressive ranks seventh
in size for 1994. Except as otherwise noted, all industry data and
Progressive's market share or ranking in the industry were derived either
directly from data reported by A.M. Best Company Inc. ("A.M. Best") or were
estimated using A.M. Best data as the primary source. For 1994, 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
$119 billion, and Progressive's share of this market was approximately 2.0%.
(b) Financial Information About Industry Segments
Incorporated by reference from Note 12, SEGMENT INFORMATION, on page 47 of
the Company's Annual Report.
(c) Narrative Description of Business
INSURANCE SEGMENT
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The Insurance Group underwrites a number of personal and commercial
property-casualty insurance products primarily related to the use and operation
of motor vehicles. Net premiums written were $2,457.2 million in 1994,
compared to $1,819.2 million and $1,451.2 million in 1993 and 1992,
respectively. The underwriting profit was 8.3% (11.5% including the
elimination of the supplemental reserve; see MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS beginning on
page 12 for further discussion) in 1994, compared to 10.7% in 1993 and
3.5% in 1992, 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 95% of the Company's
1994 total net premiums written.
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The bulk of the Insurance Group's core business consists of nonstandard
automobile insurance products for people cancelled or rejected by other
insurers. The size of the nonstandard automobile insurance market changes with
the insurance environment. Volume potential is influenced by the actions of
direct competitors, writers of standard and preferred automobile insurance and
state-mandated involuntary plans. The total 1994 nonstandard automobile
insurance market was about $20 billion, compared to $18 billion in 1993 and $17
billion in 1992. Approximately 330 companies, many of which belong to the same
insurance group, wrote an estimated $15 billion of nonstandard auto premiums in
1994. In this market, the Insurance Group ranked fourth in 1993 in direct
premiums written and near the top in underwriting performance. Although final
data has not been published, the Company estimates that its 1994 ranking and
underwriting performance will be consistent with 1993.
The core business is continuing its experiment of writing standard and
preferred automobile risks in many states. These experiments accounted for
between five and ten percent of the Company's total private passenger auto
premiums in 1994. 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 80% of the
personal automobile insurance market.
The Insurance Group's specialty personal lines' principal product is motorcycle
insurance. Other products offered include recreational vehicle, mobile home
and boat insurance. The Insurance Group's competitors are specialty companies
and large multi-line insurance carriers. Although industry figures are not
available, based on the Company's analysis of this market, the Company believes
that it is a significant participant in 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 1994, over 90% 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
by direct mail, television and radio advertising throughout Florida and in Ohio
and Texas.
The Insurance Group's diversified businesses - the United Financial Casualty
Company (UFCC), Professional Liabilities Group (PLG) and Motor Carrier division
- - accounted for 5% of total volume in 1994. These businesses, 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 such intermediaries and the
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Company and are tailored to the specific needs of the customer group and the
nature of the related financial or purchase transactions. The diversified
businesses also market their products directly to their customers through
company-employed sales forces.
UFCC provides physical damage insurance and related tracking services to
protect the commercial or retail lender's interest in collateral which is not
otherwise insured against these risks. The principal product is collateral
protection for automobile lenders, which is sold to financial institutions
and/or their customers. Commercial banks are UFCC's largest customer group for
these services. This business also serves savings and loans, finance companies
and credit unions. Based on the Company's analysis of this market, numerous
companies offer these products, and none of them has a dominant market share.
PLG's principal customers are community banks. Its principal products are
liability insurance for directors and officers and employee dishonesty
insurance. Progressive shares the risk and premium on these coverages with a
small mutual reinsurer controlled by its bank customers. The program is
sponsored by the American Bankers Association. This program represented less
than 1% of total 1994 net premiums written.
The Motor Carrier division primarily manages involuntary Commercial Auto
Insurance Plans. See SERVICE OPERATIONS on page 6 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 the
Company's competitive strategy.
LICENSES
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The Insurance Group operates under licenses issued by various state or
provincial insurance authorities. Such licenses may be of perpetual duration
or renewable periodically, provided the holder continues to meet applicable
regulatory requirements. The licenses govern the kind of insurance coverages
which may be written in the issuing state. Such licenses are normally issued
only after the filing of an appropriate application and the satisfaction of
prescribed criteria. All licenses which are material to the Company's business
are in good standing.
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, Missouri, 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, between regulated
insurers and their affiliates. See the "Dividends" discussion in Item 5(c) for
further information on such dividend limitations.
Under state insolvency and guaranty laws, regulated insurers can be assessed
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 (NAIC) and state insurance regulators
are re-examining existing laws and regulations, specifically focusing on
insurance company investments, issues relating to the solvency of insurance
companies and further limitations on the ability of regulated insurers to pay
dividends. The NAIC also developed a risk-based capital (RBC) program to
enable regulators to take appropriate and timely regulatory actions relating to
insurers that show signs of weak or deteriorating financial conditions. RBC is
a series of dynamic surplus-related formulas which contain a variety of factors
that are applied to financial balances based on a degree of certain risks, such
as asset, credit and underwriting risks. In addition, the United States
Congress and certain federal agencies are investigating the current condition
of the insurance industry to determine whether federal regulation is necessary.
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,
television and radio expenses, are capitalized and amortized over the
estimated period of the benefits, rather than expensed as incurred, as
required by SAP.
3. 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.
4. Amounts related to ceded reinsurance are shown gross as prepaid reinsurance
premiums and reinsurance recoverables, rather than netted against unearned
premium reserves and loss and loss adjustment expense reserves,
respectively, as required by SAP.
5. Fixed maturities securities, which are classified as available for sale,
are reported at market values, rather than at amortized cost, or the lower
of amortized cost or market depending on the specific type of security as
required by SAP. Equity securities are reported at quoted market values
which may differ from the NAIC market values as required by SAP.
The differing treatment of income and expense items results in a corresponding
difference in Federal income tax expense.
During 1994, the insurance subsidiaries began to reduce loss reserves for
anticipated salvage and subrogation recoveries in accordance with statutory
accounting principles. Previously, salvage and subrogation was not reflected
in the statutory financial statements until actually recovered.
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SERVICE OPERATIONS
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The Motor Carrier division currently processes business for the Commercial Auto
Insurance Plans (CAIP) in 28 states and the Florida Joint Underwriters
Association (FAJUA), which are part of the involuntary residual market. As a
CAIP servicing carrier, the division processes about one-third of the premiums
in the involuntary residual market, without assuming the indemnity risk. It
competes with approximately 17 other providers nationwide. In 1995, the
division began processing business for the FAJUA and competes with
approximately five other carriers in the state. 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 $41.9 million in 1994, compared to
$43.7 million in 1993 and $53.3 million in 1992. Pretax operating profits were
$10.0 million and $6.8 million in 1994 and 1993, respectively, compared to a
pretax operating loss of $4.3 million in 1992.
INVESTMENTS
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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 $3,186.3 million at December 31, 1994, compared to
$2,805.2 million at December 31, 1993. 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 $182.3 million in 1994, compared
to $242.4 million in 1993 and $153.5 million in 1992. See MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS,
beginning on page 12 herein for additional discussion.
EMPLOYEES
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The number of employees, excluding temporaries, at December 31, 1994, was
7,544.
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. Total loss reserves are established at a level that
is intended to represent the midpoint of the reasonable range of loss reserves.
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.
During 1994, based on a review of the adequacy of its total loss reserves, the
Company eliminated its $71.0 million "supplemental reserve." See MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
beginning on page 12 for further discussion. The elimination of the
supplemental reserve is reflected in the Reconciliation of Net Reserves for
Losses and Loss Adjustment Expenses table on page 7 and the Analysis of Loss
and Loss Adjustment Expenses Development table on page 8.
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 1994, 1993 and 1992, 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) 1994 1993 1992
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Balance, January 1 $1,012.4 $ 956.4 $ 861.5
Incurred losses and LAE:
Current accident year 1,539.8 1,126.7 981.7
Prior accident years (142.5) (98.5) (51.5)
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1,397.3 1,028.2 930.2
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Paid losses and LAE:
Current accident year 894.0 605.4 481.9
Prior accident years 417.0 366.8 353.4
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1,311.0 972.2 835.3
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Balance, December 31 1,098.7 1,012.4 956.4
Add: Reinsurance recoverable on
unpaid losses and LAE1 334.2 334.8 --
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Balance, December 31, GAAP 1,432.9 1,347.2 956.4
Adjust: Reinsurance recoverable on
unpaid losses and LAE1 (334.2) (334.8) --
Net salvage and subrogation2 -- 39.9 37.2
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Balance, December 31, SAP $1,098.7 $1,052.3 $993.6
===================================================
1In 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.
2During 1994, the Company changed its method of accounting for salvage and
subrogation. See STATUTORY ACCOUNTING PRINCIPLES on page 5 for further
discussion.
The reconciliation above shows a $142.5 million redundancy, which emerged
during 1994, in the 1994 liability and a $98.5 million redundancy in the 1993
liability, based on information known as of December 31, 1994 and December 31,
1993, respectively.
The anticipated effect of inflation is explicitly considered when estimating
liabilities for losses and LAE. While anticipated increases due to inflation
are considered in estimating the ultimate claim costs, the increase in average
severities of claims is caused by a number of factors that vary with the
individual type of policy written. Future average severities are projected
based on historical trends adjusted for anticipated changes in underwriting
standards, inflation, policy provisions and general economic trends. These
anticipated trends are monitored based on actual development and are modified
if necessary.
The Company has not entered into any loss reserve transfers or similar
transactions having a material effect on earnings or reserves.
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ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSES DEVELOPMENT
(millions)
YEAR ENDED 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1994
LIABILITY FOR UNPAID
- ---------------------
LOSSES AND LAE $146.5 $215.3 $323.8 $471.0 $651.0 $748.6 $791.6 $861.5 $956.4 $1,012.4 $1,098.7
- --------------
PAID (CUMULATIVE) AS OF:
- -----------------------
One year later 68.6 104.7 142.7 195.0 283.1 293.1 322.4 353.4 366.8 417.0
Two years later 101.4 151.9 204.4 294.9 393.7 446.8 490.8 518.8 520.0 --
Three years later 121.3 175.4 238.9 339.5 465.0 539.8 570.4 583.2 -- --
Four years later 128.8 187.2 255.7 369.9 514.0 588.2 600.0 -- -- --
Five years later 132.8 194.1 264.3 383.5 540.7 603.1 -- -- -- --
Six years later 135.8 197.7 268.7 389.1 545.1 -- -- -- -- --
Seven years later 136.8 200.7 270.1 381.9 -- -- -- -- -- --
Eight years later 138.9 201.3 261.3 -- -- -- -- -- -- --
Nine years later 139.1 191.6 -- -- -- -- -- -- -- --
Ten years later 129.4 -- -- -- -- -- -- -- -- --
LIABILITY RE-ESTIMATED
- -----------------------
AS OF:
- -----
One year later 146.9 218.7 300.6 446.6 610.3 685.4 748.8 810.0 857.9 869.9
Two years later 150.2 213.6 293.6 422.2 573.4 677.9 726.5 771.9 765.5 --
Three years later 144.0 205.3 282.8 402.4 581.3 668.6 712.7 718.7 -- --
Four years later 140.4 203.4 274.1 403.9 575.1 667.1 683.7 -- -- --
Five years later 139.0 200.9 275.6 399.6 578.4 654.7 -- -- -- --
Six years later 139.3 204.4 275.8 400.2 582.2 -- -- -- -- --
Seven years later 142.0 205.2 277.5 408.5 -- -- -- -- -- --
Eight years later 142.9 206.7 285.7 -- -- -- -- -- -- --
Nine years later 144.5 215.3 -- -- -- -- -- -- -- --
Ten years later 153.0 -- -- -- -- -- -- -- -- --
CUMULATIVE REDUNDANCY
- ---------------------
(DEFICIENCY) $ (6.5) $ -- $ 38.1 $ 62.5 $ 68.8 $ 93.9 $107.9 $142.8 $190.9 $142.5
- ------------ ------ ------ ------ ------ ------ ------ ------ ------ ------ ------
PERCENTAGE1 (4.4) -- 11.8 13.3 10.6 12.5 13.6 16.6 20.0 14.1
1Cumulative redundancy/(deficiency) [divided by] liability for unpaid losses and LAE.
The above table presents the development of balance sheet liabilities for 1984
through 1993. 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, 1994, the companies had paid $191.6 million of the currently
estimated $215.3 million of losses and LAE that had been incurred through the
end of 1985; thus an estimated $23.7 million of losses incurred through 1985
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 1984 liability has developed
a $6.5 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 1987, but incurred in 1984, will be included in
the cumulative deficiency or redundancy amount for years 1984, 1985 and 1986.
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 48 of the Company's
Annual Report. The data in the former table are based on Schedule P from the
1990 through 1994 Consolidated Annual Statements, 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 previously sold by the Company's life insurance
subsidiary. Life insurance reserves are less than 1% of total reserves. Given
the uncertainty inherent in establishing life insurance loss reserves, the
Company's life insurance reserves have proven to be quite accurate.
In addition, the development table on page 8 differs from the development
displayed in Schedule P, Part-2. Schedule P, Part-2, excludes unallocated loss
adjustment expenses and reflects the change in the method of accounting for
salvage and subrogation.
(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.
9
11
ITEM 2. PROPERTIES
OWNED PROPERTIES
- ----------------
In 1994, the Company completed its new corporate office complex on a 42-acre
parcel in Mayfield Village, Ohio, owned by a subsidiary. The new facility
consists of 517,800 square feet of space and replaces office space held under
leases in a number of locations in the Cleveland, Ohio area. The cost of the
project is $75.5 million and is being funded through operating cash flows. As
of December 31, 1994, $71.7 million of the project's costs had been paid. The
Company's central data processing facility occupies a modern, three-story brick
building containing approximately 107,000 square feet of office space on this
same parcel.
The Company owns two adjacent two-story brick buildings in Highland Heights,
Ohio, which contain an aggregate of 233,000 square feet of office and warehouse
space. The property was purchased in August 1994 for approximately $6.7
million. The buildings are currently being leased to a third party until late
1995, at which time the buildings will be renovated to accommodate the
Company's operations.
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 1995 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 660,000 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 261 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 SECURITY HOLDERS
None.
EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated by reference from information with respect to executive officers
of The Progressive Corporation and its subsidiaries set forth in Item 10 of
this Annual Report on Form 10-K.
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PART II
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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.
Dividends
Year Quarter High Low Per Share
- --------------------------------------------------------------------------------------------------------------
1994 1 $40 1/2 $27 3/4 $.050
2 35 5/8 28 1/2 .050
3 38 7/8 33 1/4 .055
4 38 3/8 32 1/4 .055
------------------------------------------------------------
$40 1/2 $27 3/4 $.210
============================================================
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
============================================================
The closing price of the Company's Common Shares on February 28, 1995 was
$38 7/8.
(b) Holders
There were 4,871 shareholders of record on February 28, 1995.
(c) Dividends
Statutory policyholders' surplus was $949.2 million and $701.9 million at
December 31, 1994 and 1993, 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, 1994, $102.1 million of statutory policyholders' surplus
represents net admitted assets of the insurance subsidiaries that are required
to meet minimum statutory surplus requirements in the subsidiaries' states of
domicile. Furthermore, state insurance laws limit the amount that can be paid
as a dividend or other distribution in any given year without prior regulatory
approval and adequate policyholders' surplus must be maintained to support
premiums written. Based on the dividend laws currently in effect, the
insurance subsidiaries may pay aggregate dividends of $177.0 million in 1995
out of statutory policyholders' surplus, without prior approval by regulatory
authorities.
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ITEM 6. SELECTED FINANCIAL DATA
(millions - except per share amounts)
For the years ended December 31,
1994 1993 1992 1991 1990
------------------------------------------------------------------------------------------
Total revenues1 $2,415.3 $1,954.8 $1,738.9 $1,493.1 $1,376.2
Operating income 212.7 197.3 129.8 85.1 137.8
Net income2,3 274.3 267.3 153.8 32.9 93.4
Per share:
Operating income4 2.76 2.61 1.72 1.19 1.73
Net income2,3,4 3.59 3.58 2.05 .41 1.19
Dividends .210 .200 .191 .172 .160
Total assets3,5 4,675.1 4,011.3 3,440.9 3,317.2 2,912.4
Funded debt
outstanding 675.6 477.1 568.5 644.0 644.4
All per share amounts have been adjusted for the December 8, 1992 3-for-1 stock
split.
1Total 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.
2During 1994, based on a review of the adequacy of its total loss reserves, the
Company eliminated its $71.0 million "supplemental reserve" ($46.2 million
after tax), resulting in a one-time increase in earnings of $.62 per share.
See MANAGEMENT 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.
3Effective January 1, 1992, the Company adopted SFAS 109 and is able to
demonstrate that the benefit of deferred tax assets is 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.
4Presented on a fully diluted basis.
5Pursuant 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 1994, the
Company sold $200.0 million of its 6.60% Notes due 2004. During 1994, the
Company repurchased .1 million of its Serial Preferred Shares, Series A, at a
cost of $2.3 million and 1.1 million of its Common Shares at a cost of $34.0
million.
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14
During the three-year period ended December 31, 1994, the Company sold
4,950,000 Common Shares for net proceeds of $177.0 million and repurchased 3.1
million Common Shares at a total cost of $142.3 million (average cost of $24.21
per share, split adjusted) and .5 million Serial Preferred Shares at a total
cost of $12.1 million (average cost $27.37 per share). The Company also sold
$350 million of notes, repaid $170.0 million borrowed under its credit
facilities, and redeemed the entire $70.0 million of its 8 3/4% Debentures.
During the same period, The Progressive Corporation received $299.8 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) on page 11 herein.
The Company has substantial capital resources and is unaware of any trends,
events or circumstances that are reasonably likely to affect its capital
resources in a material way. The Company also has available a $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 from new and renewal business in advance of paying claims. For the
three years ended December 31, 1994, operations generated a positive cash flow
of $925.4 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.
Capital expenditures for the three years ended December 31, 1994, aggregated
$130.3 million. In 1994, the Company completed its new corporate office
complex in Mayfield Village, Ohio. The new facility consists of 517,800 square
feet of space and replaces office space held under expiring leases in a number
of locations in the Cleveland area. The cost of the project was $75.5 million
and is being funded through operating cash flows. As of December 31, 1994,
$71.7 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 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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15
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 ($2,319.4 million, or 72.9%, in 1994 and $2,135.1
million, or 76.6%, in 1993) of the portfolio was in short-term and
intermediate-term, investment-grade fixed-income securities. A relatively
small portion ($476.3 million, or 15.0%, in 1994 and $453.9 million, or 16.3%,
in 1993) 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 ($245.0 million, or 7.7%, in 1994 and $77.6 million, or
2.8%, in 1993) and non-investment-grade fixed-income securities ($139.3
million, or 4.4%, in 1994 and $119.8 million, or 4.3%, in 1993). 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. Financial instruments with
off-balance-sheet risk are used to manage the risks and enhance the yields of
the available-for-sale portfolio. This is accomplished by modifying the basis,
duration or interest rate characteristics of the portfolio, or hedging
securities. Net cash requirements are limited to changes in market values
which may vary based upon changes in interest rates and other factors.
Exposure to credit risk is limited to the carrying value; unless otherwise
noted, collateral is not required to support the credit risk. The weighted
average fully taxable equivalent book yield of the portfolio was 6.7%, 6.8%,
and 7.9% for the years ended December 31, 1994, 1993 and 1992, respectively.
The quality distribution of the fixed-income portfolio is as follows:
Percentage at Percentage at
Rating December 31, 1994 December 31, 1993
------ ----------------- -----------------
AAA 58.4% 61.8%
AA 20.9 23.6
A 11.8 8.4
BBB 3.7 0.6
Non Rated/Other 5.2 5.6
------ ------
100.0% 100.0%
====== ======
As of December 31, 1994, the Company's portfolio had $41.1 million in
unrealized losses, compared to $70.2 million in unrealized gains in 1993. This
decrease was due largely to the adverse impact on the Company's fixed-income
portfolio of rapidly rising interest rates throughout 1994.
As of December 31, 1994, the Company held $154.6 million of Collateralized
Mortgage Obligations ("CMOs"), which represented 4.9% of the total investment
portfolio. There are two types of securities held in the CMO Portfolio. As of
December 31, 1994, sequential bonds represented 61.3% of the portfolio ($94.8
million) and had an average life of 2.1 years. Planned Amortization Class
bonds represented 38.7% of the portfolio ($59.8 million) and had an average
life of 2.0 years. The portfolio contains no residual interests.
CMOs held by the Company are highly liquid with readily available quotes and,
at December 31, 1994, had an average life of 2.0 years. Eighty- five percent
of the CMOs held by the Company are rated AAA by Moody's or Standard & Poor's.
As of December 31, 1994, the Company's total CMO portfolio had an unrealized
loss of $6.6 million. The single largest unrealized loss in any CMO security
was $.9 million, or only 9.2% of such position.
14
16
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, 1994, the mark-to-market net
losses in the Company's equity portfolio were $4.7 million ($3.1 million, net
of taxes), as compared to net gains of $20.7 million ($13.5 million, net of
taxes) in 1993.
The 1994 marketable equity portfolio consisted of three principal components:
(i) $15.6 million, or 3.3%, of standard adjustable rate preferreds, (ii) $338.0
million, or 71.0%, of perpetual preferreds with mechanisms that may provide an
opportunity to liquidate at par, and (iii) $122.7 million, or 25.7%, of common
stocks. The 1993 marketable equity portfolio consisted of three principal
components; (i) $73.0 million, or 16.1%, of standard adjustable rate
preferreds, (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 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.
RESULTS OF OPERATIONS
Operating income, which excludes realized gains and losses and one-time items,
was $212.7 million, or $2.76 per share, in 1994, $197.3 million, or $2.61 per
share, in 1993 and $129.8 million, or $1.72 per share, in 1992. The GAAP
combined ratio was 91.7 (88.5 including the elimination of the supplemental
reserve discussed below) in 1994, 89.3 in 1993 and 96.5 in 1992.
Direct premiums written increased 35% to $2,645.1 million in 1994, compared to
$1,966.4 million in 1993 and $1,636.8 million in 1992. Net premiums written
increased 35% to $2,457.2 million, compared to $1,819.2 million in 1993 and
$1,451.2 million in 1992. The difference between direct and net premiums
written is largely attributable to premiums written under state-mandated
involuntary Commercial Auto Insurance Plans (CAIP), for which the Company
retains no indemnity risk, of $115.4 million in 1994, $98.0 million in 1993 and
$142.2 million in 1992. The Company provided policy and claim processing
services to 28 state CAIPs in 1994 and 1993, compared to 26 in 1992. Premiums
earned, which are a function of the amount of premiums written in the current
and prior periods, increased 31% in 1994, compared to 17% in 1993 and 11% in
1992.
15
17
The Company's core divisions' net premiums written grew 38%, 25% and 18% for
1994, 1993 and 1992, respectively, driven by an increase in unit sales,
resulting from the Company's ability to keep rates relatively flat over the
last three years. The Company continues to experiment with writing standard
and preferred auto risks which represented between five and ten percent of
total core business volume in 1994. The Company anticipates continued growth
in its core business in 1995, which could result from an increase in the number
of states where the Company seeks to insure all auto risks, from working with
independent agents dedicated to regaining market share and from integrating
other buying options. The core divisions generated underwriting profits of 7%
in 1994, 10% in 1993 and 8% in 1992. The Company's strategy is to achieve a
four percent underwriting margin; the Company cannot predict the timing and
pace of the decrease in underwriting margins, nor the rate of growth, but
monitors each program to ensure that rates are adjusted promptly and
adequately.
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 64% in 1994, compared to 62% in 1993 and
65% in 1992.
During 1994, based on a review of the adequacy of its total loss reserves, the
Company eliminated its $71.0 million "supplemental reserve," resulting in a
one-time increase in earnings of $.62 per share, a 3.2 percentage point
increase in the underwriting profit margin and a $46.2 million increase in
capital. The Company historically established case and IBNR reserves by
product with the objective of being accurate to within plus or minus 2%.
Pricing has been based on these estimates of reserves by product. Because the
Company desired a very high degree of comfort that aggregate reserves were
adequate, aggregate reserves were established near the upper end of the
reasonable range of reserves, and the difference between such aggregate
reserves and the midpoint of the reasonable range of case and IBNR reserves was
called the "supplemental reserve." The Company concluded, after examining its
historical aggregate reserves, that the practice of setting aggregate reserves
at the upper end of the range of reasonable reserves provided an unnecessarily
high level of comfort. Even without the high level of comfort provided by the
"supplemental reserve," the Company's reserves have historically been redundant
by approximately 2% to 4% over the most recent 5 years. The Company believes
that this change in the estimate of its reserves will place it more in line
with the practices of other companies in the industry.
Because the Company is primarily an insurer of motor vehicles, it has limited
exposure for environmental, product and general liability claims. The Company
has established reserves for these exposures, in amounts which it believes to
be adequate based on information currently known by it. The Company does not
believe that these claims will have a material impact on the Company's
liquidity, results of operations or financial condition.
During 1994, the Company settled the dispute, arising out of its 1985
acquisition of American Star Insurance Company (since renamed National
Continental Insurance Company), over the seller's refusal to pay certain losses
on pre-sale business written by American Star. Under the settlement, National
Continental received $10.1 million from the seller and agreed to be solely
responsible for the next $20 million of gross losses. The seller will
thereafter be responsible for half the losses, net of reinsurance, if it
achieves certain minimum net worth requirements. In addition to the $10.1
million, National Continental will be entitled to the proceeds of various
treaty and facultative reinsurance policies that had been purchased by American
Star. National Continental has established reserves for these exposures, which
are mainly for product liability and environmental claims, in amounts it
believes to be adequate based on information currently available to it,
including a recent study by independent actuaries. Total reserves on this
business are $29.7 million, of which $9.9 million is
16
18
recoverable from reinsurers. The Company will continue to monitor these
exposures, adjust the related reserves appropriately as additional information
becomes known and disclose any material developments.
Policy acquisition and other underwriting expenses as a percentage of premiums
earned were 25% in 1994, compared to 28% in 1993 and 31% in 1992. The decrease
reflects cost-cutting measures, as well as process improvements, changed
workflows and lower commission programs.
Service businesses generated a pretax operating profit of $10.0 million in
1994, compared to a pretax profit of $6.8 million in 1993 and a pretax loss of
$4.3 million in 1992.
Recurring investment income (interest and dividends) increased 18% to $158.5
million in 1994, compared to $134.5 million in 1993 and $139.0 million in 1992,
primarily due to an increase in the average investment portfolio. Net realized
gains on security sales were $23.8 million in 1994, $107.9 million in 1993 and
$14.5 million in 1992. 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%. Effective January
1, 1992, the Company adopted SFAS 109. The cumulative effect of adopting SFAS
109 increased net income $14.2 million, or $.20 per share. The Company is able
to demonstrate that the benefit of deferred tax assets is fully realizable.
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 1994 Annual Report, pages 33
through 53.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
17
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PART III
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ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
A description of the directors, including those nominated for election as
directors at the 1995 Annual Meeting of Shareholders of the Registrant, is
incorporated herein by reference from the section entitled "Election of
Directors" in the Proxy Statement, pages 2 through 4.
A description of the executive officers of the Registrant and its subsidiaries
follows. These descriptions reflect the Company's termination of its
officership program and consequent elimination of many officer positions,
effective December 31, 1993. Unless otherwise indicated, the executive officer
has held the position(s) indicated for the last five years.
Offices Held and
Name Age Last Five Years Business Experience
---- --- -----------------------------------
Peter B. Lewis 61 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 41 Treasurer of the Registrant since December 15, 1994; 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.
Allan W. Ditchfield 57 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) prior to
March 1991.
Bruce W. Marlow 46 Chief Operating Officer of the Registrant; Executive Vice
President of Progressive Casualty prior to December 1993.
Michael C. Murr 43 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 57 Chief Legal Officer and Secretary of the Registrant; Senior
Vice President of Progressive Casualty prior to December 1993;
Tiona M. Thompson 44 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.
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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 ("SEC") and
New York Stock Exchange ("NYSE") within specified timeframes. David M.
Schneider inadvertently omitted to include in his Section 16(a) reports 8,697
Common Shares that were transferred in March 1990 from his father's estate to a
trust of which he is a co- trustee, and 1,500 Common Shares with respect to
which he had a beneficial interest that were sold by that trust in April 1990.
Corrective filings were made with the SEC and NYSE, on behalf of both Mr.
Schneider and the trust, promptly after this oversight was discovered. The
plan administrator of the Company's Long-Term Savings Plan furnished erroneous
information to Charles B. Chokel and Jeffrey W. Basch concerning allocations of
shares to their plan accounts during 1993. As a result, the allocations
reported in their Form 5s for 1993 were overstated by approximately 69 shares
and 224 shares, respectively. Both individuals filed amended Form 5s promptly
after receiving revised information from the plan administrator. Also, Mr.
Basch's wife acquired 40 shares in an intraplan transfer to her Long-Term
Savings Plan account which Mr. Basch inadvertently failed to report on Form 4.
This transaction was later reported on Mr. Basch's Form 5 for 1994. Tiona M.
Thompson inadvertently underreported by 13,000 shares the number of shares
subject to stock options granted to her on April 14, 1994 under the Company's
1989 Incentive Plan. She filed an amended Form 4 for April 1994 promptly after
this oversight was discovered.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference from the section of the Proxy Statement entitled
"Executive Compensation," pages 8 through 17.
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 5
through 7.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None
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PART IV
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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, 1994, 1993 and 1992
Consolidated Balance Sheets - December 31, 1994
and 1993
Consolidated Statements of Changes in Shareholders'
Equity - December 31, 1994, 1993 and 1992
Consolidated Statements of Cash Flows -
December 31, 1994, 1993 and 1992
Notes to Consolidated Financial Statements
Supplemental Information*
*Not covered by Report of Independent Accountants.
(a)(2) Listing of Financial Statement Schedules
The following financial statement schedules of the
Registrant and its subsidiaries, Report of Independent
Accountants and Consent of Independent Accountants are
included in Item 14(d):
Schedules
---------
Report of Independent Accountants
Consent of Independent Accountants
Schedule I - Summary of Investments -
Other than Investments in Related Parties
Schedule III - Condensed Financial
Information of Registrant
Schedule V - Supplementary Insurance
Information
Schedule VI - Reinsurance
20
22
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)(A)
through (10)(M).
(b) Reports on Form 8-K
On January 3, 1995, the Company filed a Form 8-K to report the
elimination of its "supplemental reserve" during the fourth
quarter 1994, resulting in a one-time increase in earnings of
approximately $71 million, or $.63 per share for the quarter
and $.62 per share for the year. The Company's combined ratio
was reduced by 11.8 points for the quarter and 3.2 points for
the year.
(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 27
through 36.
21
23
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 28, 1995 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 28, 1995
- --------------------------------- Officer of the Registrant and a Director
Peter B. Lewis
/s/ Charles B. Chokel Treasurer and Chief Financial Officer
- --------------------------------- of the Registrant March 28, 1995
Charles B. Chokel
/s/ Jeffrey W. Basch Chief Accounting Officer
- --------------------------------- of the Registrant March 28, 1995
Jeffrey W. Basch
Milton N. Allen* Director March 28, 1995
- ---------------------------------
Milton N. Allen
B. Charles Ames* Director March 28, 1995
- ---------------------------------
B. Charles Ames
Stephen R. Hardis* Director March 28, 1995
- ---------------------------------
Stephen R. Hardis
Norman S. Matthews* Director March 28, 1995
- ---------------------------------
Norman S. Matthews
Donald B. Shackelford* Director March 28, 1995
- ---------------------------------
Donald B. Shackelford
22
24
Paul B. Sigler* Director March 28, 1995
- ---------------------------------
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 28, 1995
------------------------------
David M. Schneider
Attorney-in-fact
23
25
ANNUAL REPORT ON FORM 10-K
ITEM 14(D)
FINANCIAL STATEMENT SCHEDULES
YEAR ENDED DECEMBER 31, 1994
THE PROGRESSIVE CORPORATION
MAYFIELD VILLAGE, OHIO
24
26
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 1994 Annual Report to Shareholders of The Progressive
Corporation. In connection with our audits of such financial statements, we
have also audited the related financial statement schedules listed in the index
on pages 20 and 21 of this Form 10-K.
In our opinion, the financial statement schedules referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information required to be
included therein.
COOPERS & LYBRAND L.L.P.
Cleveland, Ohio
January 26, 1995
25
27
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. 33-57121) filed December 29,
1994, the Registration Statement on Form S-8 (File No. 33-64210) filed June 10,
1993, the Registration Statement on Form S-8 (File No. 33-51034) filed August
20, 1992, the Registration Statement on Form S-8 (File No. 33-46944) filed
April 3, 1992, the Registration Statement on Form S-8 (File No. 33-38793) filed
February 4, 1991, the Registration Statement on Form S-8 (File No. 33-38464)
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, and the Registration Statement on
Form S-8 (File No. 33-16509) filed August 14, 1987 of our report dated January
26, 1995, on our audits of the consolidated financial statements and financial
statement schedules of The Progressive Corporation and subsidiaries as of
December 31, 1994 and 1993, and for each of the three years in the period ended
December 31, 1994, which report is included in this Annual Report on Form 10-K.
COOPERS & LYBRAND L.L.P.
Cleveland, Ohio
March 27, 1995
26
28
SCHEDULE I -- SUMMARY OF INVESTMENTS -- OTHER
THAN INVESTMENTS IN RELATED PARTIES
THE PROGRESSIVE CORPORATION AND SUBSIDIARIES
- --------------------------------------------------------------------
(millions)
December 31, 1994
----------------------------------------------------------
Amount At Which
Shown In The
Type of Investment Cost Market Value Balance Sheet
----------------------------------------------------------
Fixed Maturities:
Held-to-maturity:
State, municipalities and political
subdivisions $ 337.6 $ 343.8 $ 337.6
----------------------------------------------------------
Available-for-sale:
United States Government and
government agencies and
authorities 30.1 28.8 28.8
States, municipalities and political
subdivisions 1,210.2 1,199.0 1,199.0
Asset-backed securities 634.9 616.3 616.3
Foreign government obligations 23.7 23.0 23.0
Corporate and other debt securities 180.3 170.2 170.2
Redeemable preferred stock 50.5 49.7 49.7
----------------------------------------------------------
2,129.7 2,087.0 2,087.0
----------------------------------------------------------
Total fixed maturities 2,467.3 2,430.8 2,424.6
----------------------------------------------------------
Equity securities:
Common Stocks 121.1 122.7 122.7
Preferred Stocks 359.9 353.6 353.6
----------------------------------------------------------
Total equity securities 481.0 476.3 476.3
----------------------------------------------------------
Short-term investments 279.1 279.2 279.1
----------------------------------------------------------
Total investments $3,227.4 $3,186.3 $3,180.0
==========================================================
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, 1994.
27
29
SCHEDULE III -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF INCOME
THE PROGRESSIVE CORPORATION (PARENT COMPANY)
- -------------------------------------------------------------------------------
(millions)
Years Ended December 31,
1994 1993 1992
-------------------------------------------
Revenues
Dividends from subsidiaries* $ 53.0 $131.3 $ 158.5
Intercompany investment income* 29.8 6.8 3.7
-------------------------------------------
82.8 138.1 162.2
-------------------------------------------
Expenses
Interest expense 56.7 42.3 44.8
Other operating costs and expenses 3.8 3.2 2.4
Non-recurring items (1) -- 4.0 10.0
Loss on disposition of subsidiary* 5.3 -- --
-------------------------------------------
65.8 49.5 57.2
-------------------------------------------
Operating income and income before Federal income
taxes and other items below 17.0 88.6 105.0
Federal income tax benefit (12.2) (20.9) (18.2)
-------------------------------------------
Income before equity in undistributed earnings of
subsidiaries and cumulative effect of accounting
change 29.2 109.5 123.2
Equity in undistributed net income of consolidated
subsidiaries* 245.1 157.8 16.4
-------------------------------------------
Income before cumulative effect of accounting change 274.3 267.3 139.6
Cumulative effect of adopting SFAS 109 -- -- 14.2
-------------------------------------------
Net income $274.3 $267.3 $ 153.8
===========================================
*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 beginning on page 12 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,
1994 1993
-------------------------------------
ASSETS
Investment in non-consolidated affiliates $ .4 $ .4
Investment in subsidiaries* 1,187.4 972.0
Receivable from subsidiary* 599.4 484.6
Intercompany receivable* 26.7 --
Federal income taxes 30.5 54.8
Other assets .9 2.1
-------------------------------------
TOTAL ASSETS $1,845.3 $1,513.9
=====================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued expenses $ 19.0 $ 6.1
Intercompany payable* -- 34.4
Funded debt 674.4 475.5
-------------------------------------
Total liabilities 693.4 516.0
-------------------------------------
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 3.5 and 3.6
shares) 85.8 87.9
Common Shares, $1.00 par value, authorized 200.0
shares, issued 82.4 and 82.2, including treasury
shares of 11.2 and 10.1 71.2 72.1
Paid-in capital 357.1 357.6
Net unrealized appreciation (depreciation) of investment
in equity securities of consolidated subsidiaries (30.7) 33.5
Retained earnings 668.5 446.8
-------------------------------------
Total shareholders' equity 1,151.9 997.9
-------------------------------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $1,845.3 $1,513.9
=====================================
*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,
1994 1993 1992
-------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Income before cumulative effect of accounting change $274.3 $267.3 $139.6
Adjustments to reconcile income to net cash
used in operating activities:
Equity in income of consolidated subsidiaries (298.1) (289.1) (174.9)
Amortization 1.5 .1 .1
Changes in:
Intercompany receivable or payable (61.1) (7.2) 21.9
Accounts payable and accrued expenses 12.9 (5.3) (12.3)
Federal income taxes 24.3 2.8 22.4
Other, net 1.0 3.8 1.3
-------------------------------------------------
Net cash used in operating activities (45.2) (27.6) (1.9)
CASH FLOWS FROM INVESTING ACTIVITIES:
Additional investments in equity securities of
consolidated subsidiaries (56.9) (4.7) (34.2)
Return of capital from consolidated subsidiary 20.1 32.9 --
Dividends received from consolidated subsidiaries 53.0 131.3 158.5
-------------------------------------------------
Net cash provided by investing activities 16.2 159.5 124.3
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 5.1 1.8 4.2
Proceeds from issuance of stock -- 177.0 --
Proceeds from funded debt 198.4 148.2 170.0
Payments on funded debt -- (240.0) (170.0)
Receivable from subsidiary (114.8) (183.6) --
Dividends paid to shareholders (23.4) (23.1) (20.8)
Acquisition of treasury shares (36.3) (12.2) (105.9)
-------------------------------------------------
Net cash provided by (used in) financing activities 29.0 (131.9) (122.5)
-------------------------------------------------
Decrease in cash -- -- (.1)
Cash, beginning of year -- -- .1
-------------------------------------------------
Cash, end of year $ -- $ -- $ --
=================================================
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 1994 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 $89.8 million, $91.0 million and $4.0 million in 1994, 1993 and 1992,
respectively. Total interest paid was $49.8 million for 1994, $40.9 million
for 1993 and $44.3 million for 1992. 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) 1994 1993
--------------------------------------------
6.60% Notes $198.5 ---
7% Notes 148.2 $148.2
8 3/4% Notes 29.0 28.8
10% Notes 149.4 149.3
10 1/8% Subordinated Notes 149.3 149.2
--------------------------------------------
$674.4 $475.5
============================================
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. 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, 1994 and 1993, the Registrant had no borrowings under this
arrangement.
In February 1994, the Registrant terminated a four-year credit facility with
Morgan Guaranty Trust Company of New York, originally entered into in May 1990,
under which the Registrant had the right to borrow up to $75.0 million.
In February 1994, the Registrant terminated a five-year credit facility
agreement with a group of banks, originally entered into in October 1989, under
which the Registrant secured the right to borrow up to $235.0 million and
request an additional $235.0 million.
31
33
SCHEDULE III -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
NOTES TO CONDENSED FINANCIAL STATEMENTS
- -----------------------------------------------------------------
In January 1994, the Registrant sold $200.0 million of its 6.60% Notes due
2004. The Notes are noncallable, and interest is payable semiannually. The
fair value of the Notes was $174.2 million at December 31, 1994.
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
$124.6 million and $145.3 million at December 31, 1994 and 1993, respectively.
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 $30.3 million and $33.7 million at December 31, 1994 and 1993,
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 $159.8 million and $159.7
million, respectively, at December 31, 1994, and $180.6 million and $181.2
million, respectively, at December 31, 1993.
In February 1987, the Registrant sold $100.0 million, $70.0 million after the
May 1989 debt exchange, of 8 3/4% Debentures due 2017 with interest payable
semiannually. In December 1993, the 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 portfolios. A
$4.0 million charge on debt extinguishment was recorded as a "non-recurring
item."
As of December 31, 1994, the Registrant was in compliance with its debt
covenants.
Aggregate principal payments on funded debt outstanding at December 31, 1994
are $0 for 1994 through 1998, $30.0 million for 1999 and $650.0 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 Intercompany
Receivable from/Payable to Subsidiaries in the accompanying Condensed Balance
Sheets.
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 is
able to demonstrate that the benefit of deferred tax assets is 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.
32
34
SCHEDULE III -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
NOTES TO CONDENSED FINANCIAL STATEMENTS
- ------------------------------------------------------------------
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) 1994 1993 1992
-----------------------------------------------------
Unrealized gains (losses):
Available-for-sale: fixed maturities $(73.4) $ 1.6 $29.1
equity securities (25.4) (67.6) 56.9
Deferred income taxes 34.6 22.0 (29.2)
-----------------------------------------------------
$(64.2) $(44.0) $ 56.8
=====================================================
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 11, RELATED PARTY
TRANSACTIONS, on pages 45 through 47 of the Registrant's 1994 Annual Report.
33
35
SCHEDULE V -- SUPPLEMENTARY INSURANCE INFORMATION
THE PROGRESSIVE CORPORATION AND SUBSIDIARIES
- --------------------------------------------
(millions)
Future
policy Other
benefits, policy Benefits,
Deferred losses, claims claims,
policy claims and and losses and
acquisition loss Unearned benefits Premium Investment settlement
Segment costs expenses(1),(3) premiums(1) payable revenue Income(2) expenses(3)
------------------------------------------------------------------------------------------
Years ended December 31, 1994:
Insurance Lines $161.6 $1,434.4 $1,036.7 $ -- $2,191.1 $182.3 $1,397.3
==========================================================================================
Year ended December 31, 1993:
Insurance Lines $124.6 $1,348.6 $ 772.0 $ -- $1,668.7 $242.4 $1,028.0
==========================================================================================
Year ended December 31, 1992:
Insurance Lines $101.3 $1,274.2 $ 614.8 $ -- $1,426.1 $153.5 $930.9
==========================================================================================
Amortization
of deferred
policy Other Net
acquisition operating premiums
Segment costs expenses written
-------------------------------------------
Years ended December 31, 1994:
Insurance Lines $391.5 $150.8 $2,457.2
==========================================
Year ended December 31, 1993:
Insurance Lines $311.6 $151.3 $1,819.2
==========================================
Year ended December 31, 1992:
Insurance Lines $304.1 $141.5 $1,451.2
==========================================
(1)Pursuant to SFAS 113, amounts for 1992 were restated.
(2)Excluding investment expenses of $8.7 million in 1994, $10.2 million in 1993
and $17.0 million in 1992.
(3)During 1994, based on a review of the adequacy of its total loss reserves,
the Company eliminated its $71.0 million "supplemental reserve." See
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS beginning on page 12 for further discussion.
34
36
SCHEDULE VI -- REINSURANCE
THE PROGRESSIVE CORPORATION AND SUBSIDIARIES
- -------------------------------------------------------------------------------------------------------------
(millions)
Assumed Percentage
Year Ended Ceded to From of Amount
- ---------- Gross Amount Other Other Assumed
December 31, 1994 Companies Companies Net Amount to Net
- ----------------- --------------------------------------------------------------------------------
Life Insurance in force $ .7 $ .2 $ -- $ .5 --
================================================================================
Premiums earned:
Accident and health $ -- $ -- $ -- $ -- --%
Property and liability 2,378.4 192.2 4.9 2,191.1 .2
Life -- -- -- -- --
-------------------------------------------------------------
Total premiums earned $2,378.4 $192.2 $ 4.9 $2,191.1
=============================================================
December 31, 1993
- -----------------
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 1,619.3 195.1 1.9 1,426.1 .1
Life -- -- -- -- --
-------------------------------------------------------------
Total premiums earned $1,619.4 $195.2 $ 1.9 $ 1,426.1
=============================================================
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, 1994(1) $1,539.8 $(142.5) $1,311.0
================== ==================== ==================
December 31, 1993 $1,126.7 $(98.5) $972.2
================== ==================== ==================
December 31, 1992 $981.7 $(51.5) $835.3
================== ==================== ==================
Pursuant to Rule 12-18 of Regulation S-X. See Schedule V, page 34, for the
additional information required in Schedule X.
(1)During 1994, based on a review of the adequacy of its total loss reserves,
the Company eliminated its $71.0 million "supplemental reserve." See
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS beginning on page 12 for further discussion.
36
38
EXHIBIT INDEX
-------------
Exhibit No.
Under Reg. Form 10-K If Incorporated by Reference, Documents with
S-K, Item 601 Exhibit No. Description of Exhibit Which Exhibit was Previously Filed with SEC
- -----------------------------------------------------------------------------------------------------------------------------------
(3)(i) 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)(ii) 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 Contained in Exhibit Binder
Authority Industrial Development Revenue Bonds, Series
1982 (dated December 16, 1982); Loan and Debt Obligation
Agreement; Indenture of Trust; Mortgage and Security
Agreement; Unconditional Guaranty
(4) 4(B) Indenture dated as of November 15, 1988 between Annual Report on Form 10-K (filed with SEC
Progressive and Rhode Island Hospital Trust National Bank, on March 29, 1994; see Exhibit 4(B) therein)
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 Annual Report on Form 10-K (filed with SEC
aggregate principal amount of $150,000,000 under the on March 29, 1994; see Exhibit 4(C) therein)
Subordinated Indenture
(4) 4(D) Indenture dated as of November 15, 1988 between Annual Report on Form 10-K (filed with SEC
Progressive and The First National Bank of Boston, as on March 29, 1994; see Exhibit 4(D) therein)
Trustee ("1988 Senior Indenture") (including Table of
Contents and cross-reference sheet)
(4) 4(E) Form of 10% Notes due 2000 issued in the aggregate Annual Report on Form 10-K (filed with SEC
principal amount of $150,000,000 under the 1988 Senior on March 29, 1994; see Exhibit 4(E) therein)
Indenture
37
39
EXHIBIT INDEX
-------------
Exhibit No.
Under Reg. Form 10-K If Incorporated by Reference, Documents with
S-K, Item 601 Exhibit No. Description of Exhibit Which Exhibit was Previously Filed with SEC
- -----------------------------------------------------------------------------------------------------------------------------------
(4) 4(F) Form of 8 3/4% Notes due 1999 issued in the aggregate Contained in Exhibit Binder
principal amount of $30,000,000 under the 1988 Senior
Indenture
(4) 4(G) $20,000,000 Unsecured Line of Credit with National City Annual Report on Form 10-K (filed with SEC
Bank (dated May 23, 1990; renewed May 20, 1992, and on March 29, 1994; See Exhibit 4(I) therein)
amended February 1, 1994)
(4) 4(H) Indenture dated as of September 15, 1993 between Quarterly Report on Form 10-Q (Filed with SEC
Progressive and The First National Bank of Boston, as on November 5, 1993; see Exhibit 4(A)
trustee ("1993 Senior Indenture") (including Table of therein)
Contents and cross-reference sheet)
(4) 4(I) Form of 7% Notes due 2013 issued in the aggregate Quarterly Report on Form 10-Q (filed with
principal amount of $150,000,000 under the 1993 Senior SEC on November 5, 1993; see Exhibit 4(B)
Indenture therein)
(4) 4(J) Form of 6.60% Notes due 2004 issued in the aggregate Annual Report on Form 10-K (filed with SEC
principal amount of $200,000,000 under the 1993 Senior on March 29, 1994; see Exhibit 4(L) therein)
Indenture
(10)(ii) 10(A) Construction Contract dated March 2, 1993 between Annual Report on Form 10-K (Filed with SEC
Progressive Casualty Insurance Company and The Whiting- on March 30, 1993; see Exhibit 10(A)
Turner Contracting Company therein)
(10)(iii) 10(B) The Progressive Corporation 1995 Gainsharing Plan Contained in Exhibit Binder
(10)(iii) 10(C) The Progressive Corporation 1994 Gainsharing Plan Annual Report on Form 10-K (Filed with SEC
on March 29, 1994; See Exhibit 10(B)
therein)
(10)(iii) 10(D) The Progressive Corporation 1995 Executive Bonus Plan Contained in Exhibit Binder
38
40
EXHIBIT INDEX
-------------
Exhibit No.
Under Reg. Form 10-K If Incorporated by Reference, Documents with
S-K, Item 601 Exhibit No. Description of Exhibit Which Exhibit was Previously Filed with SEC
- ----------------------------------------------------------------------------------------------------------------------------------
(10)(iii) 10(E) The Progressive 1994 Executive Bonus Plan Annual Report on Form 10-K (Filed with SEC
on March 29, 1994; See Exhibit 10(C)
therein)
(10)(iii) 10(F) The Progressive Corporation Directors Deferral Quarterly Report on Form 10-Q (Filed with
Plan (Amendment and Restatement) 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 (Filed with SEC on
and restated as of April 24, 1992, as further amended on March 30, 1993; see Exhibit 10(G) therein)
July 1, 1992 and February 5, 1993)
(10)(iii) 10(H) Share Option Agreement dated March 17, 1989, between Contained in Exhibit Binder
Progressive and David M. Schneider
(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, 1992; see
as of April 24, 1992 as further amended on Exhibit 10(A) therein)
July 1, 1992)
(10)(iii) 10(J) Share Option Agreement dated May 22, 1990 between Annual Report on Form 10-K (Filed with SEC on
Progressive and Michael C. Murr March 30, 1993; see Exhibit 10(J) therein)
(10)(iii) 10(K) Agreement dated February 21, 1991 with Allan W. Annual Report on Form 10-K (Filed with SEC on
Ditchfield (expired January 1, 1995) March 30, 1992; see Exhibit 10(L) therein)
(10)(iii) 10(L) The Progressive Corporation 1995 Incentive Plan Contained in Exhibit Binder
(10)(iii) 10(M) The Progressive Corporation Executive Deferred Contained in Exhibit Binder
Compensation Plan
(11) 11 Computation of Earnings Per Share Contained in Exhibit Binder
(13) 13 The Progressive Corporation 1994 Annual Report Contained in Exhibit Binder
39
41
EXHIBIT INDEX
-------------
Exhibit No.
Under Reg. Form 10-K If Incorporated by Reference, Documents with
S-K, Item 601 Exhibit No. Description of Exhibit Which Exhibit was Previously Filed with SEC
- -----------------------------------------------------------------------------------------------------------------------------------
(21) 21 Subsidiaries of The Progressive Corporation Contained in Exhibit Binder
(23) 23 Consent of Independent Accountants Incorporated herein by reference to page 26
of this Annual Report on Form 10-K
(24) 24 Powers of Attorney Contained in Exhibit Binder
(27) 27 Financial Data Schedule This exhibit is contained in the EDGAR
filing of the Annual Report on Form 10-K for
the year ended December 31, 1994 only.
(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