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1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1996
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or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to
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Commission file number 1-9518
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THE PROGRESSIVE CORPORATION
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(Exact name of registrant as specified in its charter)
Ohio 34-0963169
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6300 Wilson Mills Road, Mayfield Village, Ohio 44143
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(Address of principal executive offices) (Zip Code)
(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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Securities registered pursuant to Section 12(g) of the Act:
None
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(Title of class)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the
registrant at January 31, 1997: $4,004,326,091.25
The number of the registrant's Common Shares, $1.00 par value, outstanding as of
February 28, 1997: 71,806,063
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Annual Report to Shareholders for the year ended
December 31, 1996 are incorporated by reference in Parts I, II and IV hereof.
Portions of the registrant's Proxy Statement dated March 14, 1997, for the
Annual Meeting of Shareholders to be held on April 25, 1997, are incorporated by
reference in Part III hereof.
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INTRODUCTION
The Progressive Corporation and subsidiaries' (collectively, the "Company") 1996
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 14, 1997, for the Annual Meeting of Shareholders to be
held on April 25, 1997 (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 85
subsidiaries and one mutual insurance company affiliate. The Progressive
Corporation's insurance subsidiaries and its affiliate (collectively, the
"Insurance Group") provide personal automobile insurance and other specialty
property-casualty insurance and related services throughout the United States
and in Canada. The Company's property-casualty insurance products protect its
customers against collision and physical damage to their motor vehicles and
liability to others for personal injury or property damage arising out of the
use of those vehicles.
Of the approximately 260 United States insurance company groups writing private
passenger auto insurance, the Company estimates that it ranks sixth in size for
1996. 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 1996, 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 $129.4 billion, and
Progressive's share of this market was approximately 2.6%.
(b) Financial Information About Industry Segments
Incorporated by reference from Note 11, Segment Information,
on page 46 of the Company's Annual Report.
(c) Narrative Description of Business
INSURANCE SEGMENT
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The Insurance Group offers a number of personal and commercial property-casualty
insurance products primarily related to motor vehicles. Net premiums written
were $3,441.7 million in 1996, compared to $2,912.8 million in 1995 and $2,457.2
million in 1994. The underwriting profit margin was 8.5% in 1996, compared to
5.7% in 1995 and 8.3% in 1994 (excluding the elimination of the "supplemental
reserve." See MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS beginning on page 14 for further discussion.)
The Insurance Group's core business writes insurance for private passenger
automobiles, recreational vehicles and small fleets of commercial vehicles. This
business frequently has more than one program in a single state, with each
targeted to a specific market segment. The core business accounted for 98% of
the Company's 1996 total net premiums written.
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3
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 direct premiums written in the
nonstandard automobile insurance market, including the involuntary market plans,
were about $23 billion in 1996, $22 billion in 1995 and $20 billion in 1994.
Approximately 320 nonstandard insurance companies, many of which are part of an
affiliated group, wrote an estimated $19 billion of nonstandard auto premiums in
1996, excluding premiums written through involuntary market plans. In 1995,
the Insurance Group ranked second in direct premiums written in this market and
near the top in underwriting performance. Although final data has not been
published, the Company estimates that its 1996 ranking and underwriting
performance will be consistent with 1995.
The core business also writes standard and preferred automobile risks in many
states. These products accounted for between 10% and 15% of the Company's total
private passenger auto premiums in 1996. The Company's strategy is to build
towards becoming a low-cost provider of a full line of auto insurance and
related services, distributed through whichever channel the customer prefers.
The Insurance Group's goal is to compete successfully in the standard and
preferred market, which comprises 80% of the United States' personal
automobile insurance market.
The Insurance Group's specialty personal lines products include motorcycle,
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 the
specialty personal lines 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.
In 1996, over 90% of the net premiums written by the core business were written
through a network of more than 30,000 independent insurance agents located
throughout the United States and in Canada. Subject to compliance with certain
Company-mandated procedures, these independent insurance agents have the
authority to bind the Company to specified insurance coverages within prescribed
underwriting guidelines. These guidelines prescribe the kinds and amounts of
coverage that may be written and the premium rates that may be charged for
specified categories of risk. The agents do not have authority on behalf of the
Company to settle or adjust claims, establish underwriting guidelines, develop
rates or enter into other transactions or commitments. The Company also markets
its products through intermediaries such as employers, other insurance companies
and national brokerage agencies, and directly to customers through employed
sales people and owned insurance agencies. The core business currently markets
personal automobile insurance directly to the public by direct mail, television
and radio advertising in Colorado, Connecticut, Florida, Indiana, Michigan,
Ohio, Pennsylvania and Texas.
In an effort to manage growth and improve customer service, the Company moved
profit and growth responsibility in its core business from 13 divisions to 41
business units. The Company subdivides business units as growth produces enough
customers to warrant more local focus. Each business unit is headed by a general
manager and is headquartered in or near the market served. The individual
business units are responsible for reducing claim costs, improving agent service
and relationships, direct marketing and deciding price levels for their
territory. Processing is done at seven regional sites located in Austin,
Cleveland, Colorado Springs, Ontario, Richmond, Sacramento and Tampa.
In addition, the Company organized process teams made up of people from both
staff and line functions to support the business units. The process teams are
respectively responsible for product, independent agent marketing, direct
marketing, ownership (customer service) and claims. The process teams
concentrate on improving the processes fast enough for the Company to meet its
high standards for customer service, profit and growth.
3
4
The Insurance Group's diversified businesses - the United Financial Casualty
Company (UFCC), Professional Liability Group (PLG) and Motor Carrier business
units - accounted for 2% of total volume in 1996. 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 and vehicle
dealers. Distribution arrangements are individually negotiated between such
intermediaries and the Company and are tailored to the specific needs of the
customer group and the nature of the related financial or purchase transactions.
The diversified businesses also market their products directly to their
customers through company-employed sales forces.
UFCC provides physical damage insurance and related tracking services to protect
the commercial or retail lender's interest in collateral which is not otherwise
insured against these risks. The principal product is collateral protection for
automobile lenders, which is sold to financial institutions and/or their
customers. Commercial banks are UFCC's largest customer group for these
services. This business also serves savings and loans, finance companies and
credit unions. According to the Company's analysis of this market, numerous
companies offer these products and none of them has a dominant market share.
PLG's principal customers are community banks. Its principal products are
liability insurance for directors and officers and employee dishonesty
insurance. Progressive shares the risk and premium on these coverages with a
small mutual reinsurer controlled by its bank customers. The program is
sponsored by the American Bankers Association. This program represented less
than one-half percent of the Company's total 1996 net premiums written.
The Motor Carrier business unit primarily manages involuntary Commercial Auto
Insurance Procedures. See SERVICE OPERATIONS on page 7 for further discussion.
COMPETITIVE FACTORS
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The automobile insurance and other property-casualty markets in which the
Company operates are highly competitive. Property-casualty insurers generally
compete on the basis of price, consumer recognition, coverages offered, claim
handling, financial stability, customer service and geographic coverage.
Vigorous competition is provided by large, well-capitalized national companies,
some of which have broad distribution networks of employed or captive agents,
and by smaller regional insurers. While the Company relies heavily on technology
and extensive data gathering and analysis to segment and price markets according
to risk potential, some competitors merely price their coverage at rates set
lower than the Company's published rates. By avoiding extensive data gathering
and analysis, these competitors incur lower underwriting costs. The Company has
remained competitive by closely managing expenses and achieving operating
efficiencies, and by refining its risk measurement and price segmentation
skills. In addition, the Company offers prices for a wide spectrum of risks and
seeks to offer a wider array of payment plans, limits of liability and
deductibles than its competitors. Superior customer service and claim adjustment
are also important factors in the Company's competitive strategy.
LICENSES
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The Insurance Group operates under licenses issued by various state or
provincial insurance authorities. Such licenses may be of perpetual duration or
renewable periodically, provided the holder continues to meet applicable
regulatory requirements. The licenses govern the kind of insurance coverages
which may be written in the issuing state. Such licenses are normally issued
only after the filing of an appropriate application and the satisfaction of
prescribed criteria. All licenses which are material to the Company's business
are in good standing.
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5
INSURANCE REGULATION
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The insurance subsidiaries are generally subject to regulation and supervision
by insurance departments of the jurisdictions in which they are domiciled or
licensed to transact business. At least one of the subsidiaries is licensed and
subject to regulation in each of the 50 states and certain U.S. possessions, in
one Canadian province and by Canadian federal authorities. The nature and extent
of such regulation and supervision varies from jurisdiction to jurisdiction.
Generally, an insurance company is subject to a higher degree of regulation and
supervision in its state of domicile. The Company's principal insurance
subsidiaries are domiciled in the states of California, Florida, Louisiana,
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 of ensuring that
insurance companies maintain adequate capital and surplus and comply with a
variety of operational standards. Insurance companies are generally required to
file detailed annual and other reports with the insurance department of each
jurisdiction in which they conduct business. Insurance departments are
authorized to make periodic and other examinations of regulated insurers'
financial condition, adherence to statutory accounting principles and compliance
with state insurance laws and regulations.
Insurance holding company laws enacted in many jurisdictions grant to insurance
authorities the power to regulate acquisitions of insurers and certain other
transactions involving insurers and to require periodic disclosure of certain
information. These laws impose prior approval requirements for certain
transactions between regulated insurers and their affiliates and generally
regulate dividend and other distributions, including loans and cash advances,
between regulated insurers and their affiliates. See the "Dividends" discussion
in Item 5(c) for further information on such dividend limitations.
Under state insolvency and guaranty laws, regulated insurers can be assessed, or
required to contribute to state guaranty funds to cover policyholder losses
resulting from insurer insolvencies. Insurers are also required by many states,
as a condition of doing business in the state, to provide coverage to certain
risks. These so-called "assigned risk" plans generally specify the types of
insurance and the level of coverage which must be offered to such involuntary
risks, as well as the allowable premium. Many states also have involuntary
market plans which hire a limited number of servicing carriers to provide
insurance to involuntary risks. These plans, through assessments, pass
underwriting and administrative expenses on to insurers that write voluntary
coverages.
Insurance companies are generally required by insurance regulators to maintain
sufficient surplus to support their writings. Although the ratio of writings to
surplus that the regulators will allow is a function of a number of factors,
including the type of business being written, the adequacy of the insurer's
reserves, the quality of the insurer's assets, and the identity of the
regulator, as a general rule, the regulators prefer that annual net written
premium be not more than three times the insurer's total policyholders' surplus.
Thus, the amount of an insurer's surplus may, in certain cases, limit its
ability to grow its business.
Many states have laws and regulations that limit an insurer's ability to exit a
market. For example, certain states limit an automobile insurer's ability to
cancel and non-renew policies. Furthermore, certain states prohibit an insurer
from withdrawing one or more lines of business from the state, except pursuant
to a plan that is approved by the state insurance department. The state
insurance department may disapprove a plan that may lead to market disruption.
Laws and regulations that limit cancellation and non-renewal and that subject
program withdrawals to prior approval requirements may restrict an insurer's
ability to exit unprofitable markets.
Regulation of insurance constantly changes as real or perceived issues and
developments arise. Some changes may be due to technical factors, such as
changes in investment laws made to recognize new investment vehicles; other
changes result from such general pressures as consumer resistance to price
increases and concerns relating to insurer solvency. In recent years,
legislation and voter initiatives have been introduced which deal with insurance
rate development, rate determination
5
6
and the ability of insurers to cancel or renew insurance policies, reflecting
concerns about availability, prices and alleged discriminatory pricing.
In some states, the automobile insurance industry has been under pressure in
recent years from regulators, legislators or special interest groups to reduce,
freeze or set rates to or at levels that are not necessarily related to
underlying costs, including initiatives to roll back automobile and other
personal lines rates. This kind of activity has adversely affected, and may in
the future adversely affect, the profitability and growth of the subsidiaries'
automobile insurance business in those jurisdictions, and may limit the
subsidiaries' ability to increase rates to compensate for increases in costs.
Adverse legislative and regulatory activity limiting the subsidiaries' ability
to adequately price automobile insurance may occur in the future. The impact of
these regulatory changes on the subsidiaries' businesses cannot be predicted.
The state insurance regulatory framework has come under increased federal
scrutiny, and certain state legislatures have considered or enacted laws that
alter and, in many cases, expand state authority to regulate insurance companies
and insurance holding company systems. Further, the National Association of
Insurance Commissioners (NAIC) and state insurance regulators are re-examining
existing laws and regulations, specifically focusing on insurance company
investments, issues relating to the solvency of insurance companies and further
limitations on the ability of regulated insurers to pay dividends. The NAIC also
developed a risk-based capital (RBC) program to enable regulators to take
appropriate and timely regulatory actions relating to insurers that show signs
of weak or deteriorating financial conditions. RBC is a series of dynamic
surplus-related formulas which contain a variety of factors that are applied to
financial balances based on a degree of certain risks, such as asset, credit and
underwriting risks. In addition, from time to time, the United States Congress
and certain federal agencies investigate the current condition of the insurance
industry to determine whether federal regulation is necessary.
STATUTORY ACCOUNTING PRINCIPLES
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The Insurance Group's results are reported in accordance with generally accepted
accounting principles (GAAP), which differ from amounts reported under statutory
accounting principles (SAP) prescribed by insurance regulatory authorities.
Specifically, under GAAP:
1. Commissions, premium taxes and other costs incurred in connection with
writing new and renewal business are capitalized and amortized on a pro
rata basis over the period in which the related premiums are earned,
rather than expensed as incurred, as required by SAP.
2. Certain assets are included in the consolidated balance sheets, which
for SAP are charged directly against statutory surplus. These assets
consist primarily of premium receivables over 90 days, furniture and
equipment and prepaid expenses.
3. Amounts related to ceded reinsurance are shown gross as prepaid
reinsurance premiums and reinsurance recoverables, rather than netted
against unearned premium reserves and loss and loss adjustment expense
reserves, respectively, as required by SAP.
4. Fixed maturities securities, which are classified as
available-for-sale, are reported at market values, rather than at
amortized cost, or the lower of amortized cost or market depending on
the specific type of security as required by SAP. Equity securities are
reported at quoted market values which may differ from the NAIC market
values as required by SAP.
The differing treatment of income and expense items results in a corresponding
difference in Federal income tax expense.
During 1994, the insurance subsidiaries began to reduce loss reserves for
anticipated salvage and subrogation recoveries. Previously, salvage and
subrogation was not reflected in the statutory financial statements until
actually recovered.
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7
SERVICE OPERATIONS
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The service operations of the diversified business units consist primarily of
processing business for involuntary plans and providing claim services to fleet
owners and other insurance companies. Total service revenues were $46.2 million
in 1996, compared to $38.9 million in 1995 and $41.9 million in 1994. Pretax
operating profits for all service businesses were $4.3 million in 1996,
compared to $8.7 million and $10.0 million in 1995 and 1994, respectively.
The Motor Carrier business unit currently processes business for the Commercial
Auto Insurance Procedures (CAIP) in 27 states, the Florida Joint Underwriters
Association (FAJUA) and the New York Public Automobile Pool (NYPAP), which are
all part of the involuntary market. As a CAIP servicing carrier, the business
unit processes over 40% of the premiums in the CAIP market, without assuming
the indemnity risk. It competes with approximately nine other providers
nationwide. In 1995, the business unit began processing business for the FAJUA
and competes with six other carriers in the state. Beginning in March 1996,
the Company began processing business for the NYPAP and was granted a one-third
share of new business with a three-year phase-in period.
INVESTMENTS
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The Company employs a conservative approach to investment and capital management
intended to ensure that there is sufficient capital to support all the insurance
premium that can be profitably written. The Company's portfolio is invested
primarily in short-term and intermediate-term, investment-grade fixed-income
securities. The Company's investment portfolio, at market value, was $4,450.6
million at December 31, 1996, compared to $3,768.0 million at December 31, 1995.
Investment income is affected by shifts in the types of investments in the
portfolio, changes in interest rates and other factors. Investment income,
including net realized gains on security sales, before expenses and taxes, was
$232.9 million in 1996, compared to $245.8 million in 1995 and $182.3 million in
1994. See MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS, beginning on page 14 herein for additional discussion.
EMPLOYEES
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The number of employees, excluding temporary employees, at December 31, 1996,
was 9,557.
LIABILITY FOR PROPERTY-CASUALTY LOSSES AND LOSS ADJUSTMENT EXPENSES
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The consolidated financial statements include the estimated liability for unpaid
losses and loss adjustment expenses (LAE) of the Company's insurance
subsidiaries. Total loss reserves are established at a level that is intended to
represent the midpoint of the reasonable range of loss reserve estimates. The
liabilities for losses and LAE are determined using actuarial and statistical
procedures and represent undiscounted estimates of the ultimate net cost of all
unpaid losses and LAE incurred through December 31 of each year. These
estimates are subject to the effect of future trends on claim settlement. These
estimates are continually reviewed and adjusted as experience develops and new
information becomes known. Such adjustments, if any, are reflected in the
current results of operations.
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 14 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 8 and the Analysis of Loss and Loss Adjustment
Expenses Development table on page 9.
The accompanying tables present an analysis of property-casualty losses and LAE.
The following table provides a reconciliation of beginning and ending
estimated liability balances for 1996, 1995 and 1994 on a GAAP basis.
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8
RECONCILIATION OF NET RESERVES FOR LOSSES AND LOSS ADJUSTMENT EXPENSES
(millions) 1996 1995 1994
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Balance at January 1 $1,610.5 $1,434.4 $1,348.6
Less reinsurance recoverables on
unpaid losses 296.1 334.2 334.8
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Net balance at January 1 1,314.4 1,100.2 1,013.8
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Incurred related to:
Current year 2,341.9 2,000.4 1,539.8
Prior years (105.8) (56.6) (142.5)
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Total incurred 2,236.1 1,943.8 1,397.3
Paid related to:
Current year 1,424.7 1,204.3 893.9
Prior years 592.9 525.3 417.0
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Total paid 2,017.6 1,729.6 1,310.9
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Net balance at December 31 1,532.9 1,314.4 1,100.2
Plus reinsurance recoverables on
unpaid losses 267.7 296.1 334.2
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Balance at December 31 $1,800.6 $1,610.5 $1,434.4
=================================================================
The reconciliation above shows a $105.8 million redundancy, which emerged during
1996, in the 1996 liability and a $56.6 million redundancy in the 1995
liability, based on information known as of December 31, 1996 and December 31,
1995, 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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9
ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSES DEVELOPMENT
(millions)
YEAR ENDED 1986 1987 1988 1989 1990 1991 1992 1994 1995 1996
LIABILITY FOR UNPAID
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LOSSES AND LAE $323.8 $471.0 $651.0 $748.6 $791.6 $861.5 $956.4 $1,012.4 $1,098.7$1,314.4 $1,532.9
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PAID (CUMULATIVE) AS OF:
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One year later 142.7 195.0 283.1 293.1 322.4 353.4 366.8 417.0 525.3 593.0
Two years later 204.4 294.9 393.7 446.8 490.8 518.8 520.0 589.8 706.4
Three years later 238.9 339.5 465.0 539.8 570.4 583.2 598.2 664.1 --
Four years later 255.7 369.9 514.0 588.2 600.0 617.6 632.8 -- --
Five years later 264.3 383.5 540.7 603.1 613.6 635.8 -- -- --
Six years later 268.7 389.1 545.1 608.1 624.7 -- -- -- --
Seven years later 270.1 381.9 545.5 614.7 -- -- -- -- --
Eight years later 261.3 384.2 549.0 -- -- -- -- -- --
Nine years later 263.2 386.1 -- -- -- -- -- -- --
Ten years later 264.4 -- -- -- -- -- -- -- --
LIABILITY RE-ESTIMATED
- ----------------------
AS OF:
- ------
One year later 300.6 446.6 610.3 685.4 748.8 810.0 857.9 869.9 1,042.1 1,208.6
Two years later 293.6 422.2 573.4 677.9 726.5 771.9 765.5 837.8 991.7
Three years later 282.8 402.4 581.3 668.6 712.7 718.7 737.4 811.3 --
Four years later 274.1 403.9 575.1 667.1 683.7 700.1 725.2 -- --
Five years later 275.6 399.6 578.4 654.7 666.3 695.1 -- -- --
Six years later 275.8 400.2 582.2 647.1 664.8 -- -- -- --
Seven years later 277.5 408.5 574.3 645.7 -- -- -- -- --
Eight years later 285.7 408.1 574.4 -- -- -- -- -- --
Nine years later 286.7 407.8 -- -- -- -- -- -- --
Ten years later 285.7 -- -- -- -- -- -- --
CUMULATIVE REDUNDANCY $38.1 $63.2 $76.6 $102.9 $126.8 $166.4 $231.2 $201.1 $107.0 $105.8
- ---------------------
PERCENTAGE1 11.8 13.4 11.8 13.7 16.0 19.3 24.2 19.9 9.7 8.0
1Cumulative redundancy / liability for unpaid losses and LAE.
The above table presents the development of balance sheet liabilities for 1986
through 1995. The top line of the table shows the estimated liability for unpaid
losses and LAE recorded at the balance sheet date for each of the indicated
years for the property-casualty insurance subsidiaries only. Similar reserves
for the life insurance subsidiary, which are immaterial, are excluded. This
liability represents the estimated amount of losses and LAE for claims arising
in all prior years that are unpaid at the balance sheet date, including losses
that had been incurred but not reported.
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10
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 claim for individual years. For example, as of December 31, 1996 the
companies had paid $386.1 million of the currently estimated $407.8 million of
losses and LAE that had been incurred through the end of 1987; thus an
estimated $21.7 million of losses incurred through 1987 remain unpaid as of
the current financial statement date.
The "Cumulative Redundancy" represents the aggregate change in the estimates
over all prior years. For example, the 1986 liability has developed redundant
by $38.1 million over ten years. That amount has been reflected in income
over the ten years and did not have a significant effect on the income of any
one year. The effects on income during the past three years due to changes in
estimates of the liabilities for losses and LAE is shown in the reconciliation
table on page 8 as the "prior accident years"contribution to incurred losses
and LAE.
In evaluating this information, note that each cumulative redundancy amount
includes the effects of all changes in amounts during the current year for prior
periods. For example, the amount of the redundancy related to losses settled in
1989, but incurred in 1986, will be included in the cumulative deficiency or
redundancy amount for years 1986, 1987 and 1988. Conditions and trends that have
affected development of the liability in the past may not necessarily occur in
the future. Accordingly, it generally is not appropriate to extrapolate future
redundancies or deficiencies based on this table.
The Analysis of Loss and Loss Adjustment Expenses Development table on page 9 is
constructed from Schedule P, Part-1, from the 1991 through 1996 Consolidated
Annual Statements, as filed with the state insurance departments, and Schedules
O and P filed for years prior to 1991. This development table differs from the
development displayed in Schedule P, Part-2 due to the fact Schedule P, Part-2
excludes unallocated loss adjustment expenses and reflects the change in the
method of accounting for salvage and subrogation for 1994 and prior.
(d) Financial Information about Foreign and Domestic Operations
The Company operates throughout the United States and in Canada. The amount of
Canadian revenues and assets are approximately 2 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.
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ITEM 2. 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 replaced office space held under
leases in a number of locations in the Cleveland, Ohio area. The project's cost
of $75.5 million was funded through operating cash flows. 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 also owns six other buildings in suburbs adjoining the corporate
office complex and two buildings in Tampa, Florida. In total, these buildings
contained approximately 629,100 square feet of office, warehouse and training
facility space and are owned by subsidiaries of the Company. These locations are
occupied by the Company's business units or other operations.
The Company leases approximately 320,000 square feet of modern office and
warehouse space at various locations throughout the United States for its other
business units and staff functions. In addition, the Company leases
approximately 340 processing and claim offices, or 1,082,000 square feet, at
various locations throughout the United States. Two offices are leased in
Canada. These leases are generally short-term to medium-term leases of standard
commercial office space.
As the Company continues to grow, it expects the need for additional space and
is actively engaged in seeking out additional locations to meet its current and
anticipated needs.
ITEM 3. LEGAL PROCEEDINGS
Incorporated by reference from Note 4, LITIGATION, on page 41 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
consolidated transaction reporting system.
Dividends
Year Quarter High Low Close Per Share
- --------------------------------------------------------------------------------------------------------------------------
1996 1 $51 1/4 $43 1/2 $44 5/8 $.055
2 48 7/8 40 3/8 46 1/4 .055
3 58 1/2 43 1/8 57 1/4 .060
4 72 1/4 55 3/8 67 3/8 .060
-------------------------------------------------------------------------------------------
$72 1/4 $40 3/8 $67 3/8 $.230
===========================================================================================
1995 1 $42 1/8 $34 3/4 $40 5/8 $.055
2 41 7/8 37 1/8 38 3/8 .055
3 48 37 3/4 44 3/4 .055
4 49 1/2 41 1/2 48 7/8 .055
-------------------------------------------------------------------------------------------
$49 1/2 $34 3/4 $48 7/8 $.220
===========================================================================================
The closing price of the Company's Common Shares on February 28, 1997 was $66
1/8.
(b) Holders
There were 4,156 shareholders of record on February 28, 1997.
(c) Dividends
Statutory policyholders' surplus was $1,292.4 million and $1,055.1 million at
December 31, 1996 and 1995, 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, 1996, $167.3 million of consolidated statutory policyholders'
surplus represents net admitted assets of the insurance subsidiaries that are
required to meet minimum statutory surplus requirements in the subsidiaries'
states of domicile. Furthermore, state insurance laws limit the amount that can
be paid as a dividend or other distribution in any given year without prior
regulatory approval and adequate policyholders' surplus must be maintained to
support premiums written. Based on the dividend laws currently in effect, the
insurance subsidiaries may pay aggregate dividends of $216.4 million in 1997 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,
1996 1995 1994 1993 1992
--------------------------------------------------------------------------------------------------
Total revenues(1) $3,478.4 $3,011.9 $2,415.3 $1,954.8 $1,738.9
Operating income 309.1 220.1 212.7 197.3 129.8
Net income(1,2,3) 313.7 250.5 274.3 267.3 153.8
Per share:
Operating income(4) 4.08 2.84 2.76 2.61 1.72
Net income(1,2,3,4) 4.11 3.24 3.59 3.58 2.05
Dividends .230 .220 .210 .200 .191
Total assets(3,5) 6,183.9 5,352.5 4,675.1 4,011.3 3,440.9
Funded debt
outstanding 775.7 675.9 675.6 477.1 568.5
(1)Total revenues for 1992 include $106.0 million ($70.0 million after taxes),
or $.97 per share, for the Company's California Proposition 103 reserve
reduction.
(2)During 1994, based on a review of the adequacy of its total loss reserves,
the Company eliminated its $71.0 million "supplemental reserve" ($46.2 million
after tax), resulting in a one-time increase in earnings of $.62 per share. 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.
(3)Effective 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.
(4)Presented on a fully diluted basis.
(5)Pursuant to SFAS 113, amounts for 1992 were restated.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
The Progressive Corporation is a holding company and does not have any revenue
producing operations of its own. It receives cash through borrowings, equity
sales, subsidiary dividends and other transactions, and may use the proceeds to
contribute to the capital of its insurance subsidiaries in order to support
premium growth, to repurchase its Common Shares and other outstanding
securities, to redeem its outstanding securities and for other business
purposes. During 1996, the Company repurchased 1.0 million of its Common Shares
at a total cost of $41.9 million (average cost of $41.73 per share), .2 million
of its 9 3/8% Serial Preferred Shares, Series A, at a total cost of $6.0 million
(average cost of $25.60 per share) and redeemed the remaining Preferred Shares
at a total cost of $82.1 million, including accrued and unpaid dividends through
the redemption date.
During the three-year period ended December 31, 1996, the Company repurchased
2.1 million Common Shares at a total cost of $75.9 million (average cost of
$36.42 per share) and .4 million of its 9 3/8% Serial Preferred Shares, Series
A, at a total cost of $10.6 million (average cost $25.69 per share). The Company
also sold $300.0 million of Notes. During the same period, The Progressive
Corporation received $178.2 million from its insurance subsidiaries, net of
capital contributions made to these subsidiaries. The regulatory restrictions on
subsidiary dividends are described in Item 5(c) on page 12 herein.
The Company has substantial capital resources and is unaware of any trends,
events or circumstances that are reasonably likely to affect its capital
resources in a material way. The Company also has available a $20.0 million
revolving credit agreement. Given its 32% debt to equity ratio, the Company
believes it has sufficient borrowing capacity and other capital resources to
support current and anticipated growth.
The Company's insurance operations create liquidity by collecting and investing
premiums from new and renewal business in advance of paying claims. For the
three years ended December 31, 1996, operations generated a positive cash flow
of $1,634.1 million, and cash flow is expected to be positive in both the
short-term and reasonably foreseeable future. The Company's substantial
investment portfolio is highly liquid, consisting almost entirely of readily
marketable securities.
In November 1996, the Company signed a definitive agreement to acquire all of
Midland Financial Group, Inc.'s outstanding stock (approximately 5.5 million
shares) for a total cost of $49.5 million, or $9 per share, in cash. Midland
underwrites and markets nonstandard private passenger automobile insurance
through approximately 8,500 independent agents across 20 states, primarily in
the southern and western United States. During 1996, Midland wrote $116.6
million of net premiums written. The transaction was approved by Midland's
shareholders on March 7, 1997, and funded through current investments of the
Company.
In January 1997, the Company signed a letter of intent under which it was
contemplated that the Company would purchase approximately 11 million
newly-issued shares (42% of the outstanding voting stock) of Danielson Holding
Corporation for consideration having a total value of approximately $73 million,
or $6.60 per share. Danielson is engaged, through its subsidiaries, in insurance
services, primarily writing private and commercial nonstandard insurance in
California and workers' compensation insurance in California and certain other
western states. During 1996, Danielson's insurance subsidiaries wrote $36.1
million of net premiums written. In March 1997, negotiations between Danielson
and the Company were terminated by the Company for internal corporate reasons.
The Company does not expect any material changes in its cash requirements and is
not aware of any trends, events or uncertainties that are reasonably likely to
have a material effect on its liquidity.
In January 1996, the Company began converting its computer systems to be year
2000 compliant (e.g. to recognize the difference between '99 and '00 as one year
instead of negative 99 years). At December 31, 1996, approximately 40% of the
Company's systems were compliant, with all systems expected to be compliant by
the end of 1998. The total cost of the project is estimated to be $4.3 million
and is being funded through operating cash flows. The Company is expensing all
costs associated with these system changes. As of December 31, 1996, $1.6
million had been expensed.
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Total capital expenditures for property and equipment for the three years ended
December 31, 1996, aggregated $132.3 million.
INVESTMENTS
The Company invests in fixed-maturity, equity and short-term securities. The
Company's investment strategy recognizes its need to maintain capital adequate
to support its insurance operations and commitment to risk adverse investment
policies. Therefore, the Company evaluates the risk/reward trade-offs of
investment opportunities, measuring their effects on stability, diversity,
overall quality and liquidity of the investment portfolio. The majority of the
portfolio is invested in high-grade, fixed-maturity securities, of which short-
and intermediate-term securities represented $3,275.6 million, or 73.6%, in
1996, and $2,876.2 million, or 76.4%, in 1995. Long-term investment-grade
securities were $187.5 million, or 4.2%, in 1996, and $191.9 million, or 5.1%,
in 1995. Non-investment-grade fixed-maturity securities were $105.8 million, or
2.4%, in 1996, and $7.6 million, or .2%, in 1995 and offer the Company high
returns and added diversification without a significant adverse effect on the
stability and quality of the investment portfolio as a whole.
Non-investment-grade securities may involve greater risks often related to
creditworthiness, solvency and relative liquidity of the secondary trading
market. The duration of the fixed-income portfolio was 3.2 years at December 31,
1996.
A relatively small portion of the investment portfolio was invested in
marketable equity securities providing risk/reward balance and diversification.
Common stocks represented $540.1 million, or 12.1%, in 1996, and $310.0 million,
or 8.2%, in 1995. The increase in common stocks reflects the Company's objective
of increasing its position in common stock investments to approximately 15% of
the entire portfolio and to optimize value and further diversify the portfolio
through foreign equity investments. The foreign equity portfolio, which may
utilize stock index futures and foreign currency forwards, comprised $149.5
million of the common stock portfolio at December 31, 1996, and $46.4 million at
December 31, 1995. The remainder of the equity portfolio ($341.6 million, or
7.7%, in 1996, and $382.3 million, or 10.1%, in 1995) was comprised of over 94%
of fixed-rate preferred stocks with mechanisms that may provide an opportunity
to liquidate at par.
As of December 31, 1996, the Company's portfolio had $114.1 million in
unrealized gains, compared to $78.7 million in 1995, resulting from increased
stock prices as the S&P 500 index rose from 615.9 to 740.7 during the year. The
weighted average fully taxable equivalent book yield of the portfolio was 6.7%,
6.9% and 6.7% for the years ended December 31, 1996, 1995 and 1994,
respectively.
The quality distribution of the fixed-income portfolio is as follows:
Percentage at Percentage at
Rating December 31, 1996 December 31, 1995
-----------------------------------------------------------
AAA 62.8% 63.9%
AA 16.2 17.6
A 14.0 13.6
BBB 4.2 4.5
Non Rated/Other 2.8 .4
----- -----
100.0% 100.0%
As of December 31, 1996, the Company held $1,088.3 million of asset-backed
securities which represented 24.5% of the total investment portfolio. The
portfolio included collateralized mortgage obligations (CMOs) and commercial
mortgage-backed obligations (CMBs) totaling $303.0 million and $480.2 million,
respectively. As of December 31, 1996, the CMO portfolio included sequential
bonds representing 88.8% of the CMO portfolio ($269.0 million) with an average
life of 2.9 years, and planned amortization class bonds representing 11.2% of
the CMO portfolio ($34.0 million) with an average life of 1.4 years. The CMO
portfolio had a weighted average Moody's or Standard & Poor's rating of AAA. At
December 31, 1996, the CMB portfolio had an average life of 5.4 years and a
weighted average Moody's or Standard & Poor's rating of AA-. The CMB portfolio
included $122.7 million of CMB interest-only certificates, which had an average
life of 5.1 years and a weighted average Moody's or S&P's rating of AAA at
December 31, 1996. At December 31, 1996,
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the CMO and CMB portfolios had unrealized gains of $1.7 million and $2.1
million, respectively. The single largest unrealized loss in any individual CMO
and CMB security was $.3 million and $.8 million, respectively, at December 31,
1996. Both the CMO and CMB portfolios are highly liquid with readily available
quotes and contain no residual interests. The remainder of the asset-backed
portfolio is invested primarily in auto loan and other asset-backed securities.
Investments in the Company's portfolio have varying degrees of risk. The primary
market risk exposure to the fixed-income portfolio is interest rate risk, which
is limited by Company restrictions as to the acceptable range of duration.
Equity securities generally have greater risks than the non-equity portion of
the portfolio since these securities are subordinate to rights of debt holders
and other creditors of the issuer and are subject to the volatility of the
equity markets. In addition, the foreign equity portfolio is exposed to foreign
currency exchange risk, which is reduced by an active hedging policy. The
Company regularly evaluates individual holdings for evidence of impairment.
Changes in market value are evaluated to determine the extent to which such
changes are attributable to: (i) interest rates, (ii) market-related factors
other than interest rates and (iii) financial conditions, business prospects and
other fundamental factors specific to the issuer. Declines attributable to
issuer fundamentals are reviewed in further detail. Available evidence is
considered to estimate the realizable value of the investment. When a security
in the Company's investment portfolio has a decline in market value which is
other than temporary, the Company is required by GAAP to reduce the carrying
value of such security to its net realizable value.
Financial instruments with off-balance-sheet risk are used to manage the risks
and enhance the yields of the available-for-sale portfolio. This is accomplished
by modifying the basis, duration, interest rate or foreign currency
characteristics of the portfolio or hedged securities. Net cash requirements are
limited to changes in market values which may vary based upon changes in
interest rates and other factors. Exposure to credit risk is limited to the
carrying value; collateral is not required to support the credit risk. During
1995, the Company added a government bond trading portfolio to benefit from
short-term market rate opportunities. The Company has stringent restrictions on
the amount of open positions in the trading portfolio limiting its exposure to
acceptable levels. At December 31, 1996 and 1995, there were no trading
securities or off-balance-sheet trading positions.
RESULTS OF OPERATIONS
Operating income, which excludes net realized gains and losses from security
sales and one-time items, was $309.1 million, or $4.08 per share, in 1996,
$220.1 million, or $2.84 per share, in 1995 and $212.7 million, or $2.76 per
share, in 1994. The GAAP combined ratio was 91.5 in 1996, 94.3 in 1995 and 91.7
(88.5 including the elimination of the "supplemental reserve" discussed below)
in 1994.
Direct premiums written increased 19% to $3,638.4 million in 1996, compared to
$3,068.9 million in 1995 and $2,645.1 million in 1994. Net premiums written
increased 18% to $3,441.7 million, compared to $2,912.8 million in 1995 and
$2,457.2 million in 1994. The difference between direct and net premiums written
is largely attributable to premiums written under state-mandated involuntary
Commercial Auto Insurance Procedures (CAIP), for which the Company retains no
indemnity risk, of $99.5 million in 1996, $105.4 million in 1995 and $115.4
million in 1994. The Company provided policy and claim processing services to 27
state CAIPs in 1996, compared to 28 in 1995 and 1994. Premiums earned, which are
a function of the amount of premiums written in the current and prior periods,
increased 17% in 1996, compared to 24% in 1995 and 31% in 1994.
The Company's Core business units' net premiums written grew 19%, 21% and 38% in
1996, 1995 and 1994, respectively, primarily driven by an increase in unit
sales. In 1996, the Company raised rates an average of 2.5%, compared 6.5% in
1995 and no rate changes in 1994. The Company continues to write standard and
preferred auto risks which represented between 10% and 15% of total Core
business volume. To encourage writing more standard and preferred risks and to
improve customer retention, the Company adjusted the contingent cash incentive
compensation program for 1997 to credit its conservative estimates of the
increase in value created by adding new customers. The Company believes that
growing the numbers of policyholders, particularly standard and preferred risks
with their higher retention rates, builds intrinsic
16
17
value because renewals are more profitable than first year business. The drive
to add customers faster will result in more spending to promote our brand and to
develop more claim adjusters and customer service representatives. These costs,
along with expected losses on first year business, are likely to bring profit
margins more in line with the Company's objective of achieving a 4% underwriting
profit margin over the entire retention period of an insured. In 1996, the Core
business units generated an underwriting profit margin of 8%, compared to 5% in
1995 and 7% in 1994.
Claim costs, the Company's most significant expense, represent actual payments
made and changes in estimated future payments to be made to or on behalf of its
policyholders, including expenses required to settle claims and losses. These
costs include a loss estimate for future assignments and assessments, based on
current business, under state-mandated involuntary automobile programs. Claims
costs are influenced by inflation and loss severity and frequency, the impact of
which is mitigated by adequate pricing. Increases in the rate of inflation
increase loss payments, which are made after premiums are collected.
Accordingly, anticipated rates of inflation are taken into account when the
Company establishes premium rates and loss reserves. Claim costs, expressed as a
percentage of premiums earned, were 70% in 1996, compared to 71% in 1995 and 67%
(excluding the elimination of the "supplemental reserve") in 1994.
During 1994, based on a review of the adequacy of its total loss reserves, the
Company eliminated its $71.0 million "supplemental reserve," resulting in a
one-time increase in earnings of $.62 per share, a 3.2 point increase in the
underwriting profit margin and a $46.2 million increase in capital. The Company
historically established case and IBNR reserves by product with the objective of
being accurate to within plus or minus 2%. Pricing 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. At December
31, 1994, even without the high level of comfort provided by the "supplemental
reserve," the Company's reserves would have been redundant by approximately 2%
to 4% over the previous 5 years. The Company believes that this change in the
estimate of its reserves placed it more in line with the practices of other
companies in the industry.
Because the Company is primarily an insurer of motor vehicles, it has limited
exposure for environmental, product and general liability claims. The Company
has established reserves for these exposures, in amounts which it believes to be
adequate based on information currently known by it. The Company does not
believe that these claims will have a material impact on the Company's
liquidity, results of operation, cash flows or financial condition.
During 1994, the Company settled the dispute, arising out of its 1985
acquisition of American Star Insurance Company (since renamed National
Continental Insurance Company) over the seller's refusal to pay certain losses
on pre-sale business written by American Star. Under the settlement, National
Continental received $10.1 million from the seller and agreed to be solely
responsible for the next $20 million of gross losses. The seller will thereafter
be responsible for half the losses, net of reinsurance, if it achieves certain
minimum net worth requirements. In addition to the $10.1 million, National
Continental will be entitled to the proceeds of various treaty and facultative
reinsurance policies that had been purchased by American Star. National
Continental has established reserves for these exposures, which are mainly for
product liability and environmental claims, in amounts it believes to be
adequate based on information currently available to it, including a study by
independent actuaries for the seller. Total reserves on this business are $26.4
million, of which $9.4 million is recoverable from reinsurers. The Company will
continue to monitor these exposures, adjust the related reserves appropriately
as additional information becomes known and disclose any material developments.
Policy acquisition and other underwriting expenses as a percentage of premiums
earned were 22% in 1996, compared to 23% in 1995 and 25% in 1994.
Service businesses generated a pretax operating profit of $4.3 million in 1996,
compared to $8.7 million in 1995 and $10.0 million in 1994. The decrease in
operating profit is partially attributable to new businesses entered into during
1996.
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Recurring investment income (interest and dividends) increased 13% to $225.8
million in 1996, compared to $199.1 million in 1995 and $158.5 million in 1994,
primarily due to an increase in the average investment portfolio. Net realized
gains on security sales were $7.1 million in 1996, $46.7 million in 1995 and
$23.8 million in 1994.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995: EXCEPT FOR HISTORICAL INFORMATION, THE MATTERS DISCUSSED IN THIS ANNUAL
REPORT ON FORM 10-K ARE FORWARD-LOOKING STATEMENTS THAT ARE SUBJECT TO CERTAIN
RISKS AND UNCERTAINTIES THAT COULD CAUSE THE ACTUAL RESULTS TO DIFFER MATERIALLY
FROM THOSE PROJECTED, INCLUDING ACCEPTANCE OF THE PRODUCTS, PRICING COMPETITION,
MARKET CONDITIONS AND OTHER RISKS DETAILED FROM TIME TO TIME IN THE COMPANY'S
SEC REPORTS. THE COMPANY ASSUMES NO OBLIGATION TO UPDATE THE INFORMATION IN THIS
ANNUAL REPORT.
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 1996 Annual Report, pages 33
through 46 and pages 50 through 55.
The following note is hereby added to Item 8 of the Company's 1996 Annual Report
on Form 10-K, supplementing the Notes to the Consolidated Financial Statements
which are incorporated by reference therein:
Note 1. Reporting and Accounting Policies
- ------------------------------------------
New Accounting Standards - In February 1997, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards (SFAS) 128, "Earnings
Per Share." The statement simplifies the computation of earnings per share
(EPS). Under the statement, primary EPS would be replaced by a simpler
calculation called "basic" EPS. Basic EPS would be calculated by dividing
income available to common shareholders by the weighted average number of
shares outstanding. Stock options and other common stock equivalents (CSE)
would be excluded from the basic EPS calculation. The current fully diluted EPS
would be replaced with "diluted" EPS. The primary difference in the diluted
EPS calculation would require the average common stock price be used in
determing the number of CSE relating stock options, rather than the greater of
the average price or closing price. SFAS 128 requires dual presentation of
basic and diluted EPS on the face of the income statement, including a
reconciliaiton of the numerator and denominator used in computing basic and
diluted EPS. For 1996, the Company would have reported basic EPS of $4.29 and
diluted EPS of $4.14. SFAS 128 is effective for periods beginning after
December 15, 1997. Earlier application is not permitted.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
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PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
A description of the directors, all of whom have been nominated for election as
directors at the 1997 Annual Meeting of Shareholders of the Registrant, is
incorporated herein by reference from the section entitled "Election of
Directors" in the Proxy Statement, pages 3 and 4.
A description of the executive officers of the Registrant and its subsidiaries
follows. These descriptions reflect the Company's termination of its officership
program and consequent elimination of many officer positions, effective December
31, 1993. Unless otherwise indicated, the executive officer has held the
position(s) indicated for at least the last five years.
Offices Held and
Name Age Last Five Years' Business Experience
---- --- ------------------------------------
Peter B. Lewis 63 Chairman since April 1993; President, Chief Executive Officer and a director of the
Registrant and Progressive Casualty Insurance Company ("Progressive Casualty"),
the principal subsidiary of the Registrant.
Alan R. Bauer 44 Process Leader for International and Internet Operations since December 1996;
Independent Agent Marketing Process Leader from March 1996 to December 1996; West
Division President prior to March 1996.
Charles B. Chokel 43 Treasurer of the Registrant since December 1994; Chief Financial Officer of the
Registrant; Senior Vice President - Finance of Progressive Casualty prior to December
1993.
Allan W. Ditchfield 59 Chief Information Officer of the Registrant; Senior Vice President - Information
Services of Progressive Casualty prior to December 1993.
W. Thomas Forrester II 48 Ownership Process Leader of the Registrant since March 1996; Central States Division
President from January 1995 to March 1996; Diversified Division President in 1994;
CAIP/Transportation Division President in 1993; CAIP Division President in 1992.
William H. Graves 40 Claims Process Leader of the Registrant since March 1996; South Central Division
President prior to March 1996.
Daniel R. Lewis 50 Independent Agent Marketing Process Leader of the Registrant since December 1996;
General Manager of South Florida Community from November 1994 to December 1996;
Treasurer of the Registrant and Central Division President prior to December 1994.
Robert J. McMillan 45 Product Process Leader of the Registrant since March 1996; Florida Division President
prior to March 1996.
Glenn M. Renwick 41 Direct Marketing Process Leader since March 1996; Director of Consumer Marketing prior
to March 1996.
David M. Schneider 59 Chief Legal Officer and Secretary of the Registrant; Senior Vice President of
Progressive Casualty prior to December 1993.
Tiona M. Thompson 46 Chief Human Resources Officer of the Registrant since December 1993; Vice President -
Human Resources of Progressive Casualty prior to December 1993.
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Section 16(a) Beneficial Ownership Reporting Compliance. Daniel R. Lewis
inadvertently failed to include in his Form 3 filed in April 1996, 50,000 shares
held in a family investment partnership. Daniel Lewis filed an amended Form 3
promptly following discovery. A Form 4 reporting the sale of 81 shares by a
trust under which Milton Allen is a beneficiary was inadvertently filed four
days late. Charles B. Chokel transferred 2,682 shares in 1992 to a family trust
of which he is trustee and a beneficiary. These shares were erroneously reported
as being directly owned by Mr. Chokel until January 1997, when the error was
discovered and promptly corrected. Peter B. Lewis filed an amended Form 4 for
April 1995, clarifying the nature of a change in the form of his beneficial
ownership of 125,000 shares from directly held to held by a family partnership.
A 1996 Form 5 reporting a transfer of 50,000 shares to a trust of which Peter
Lewis is trustee was filed thirteen days late.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference from the section of the Proxy Statement entitled
"Executive Compensation," pages 8 through 20.
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, 1996, 1995 and 1994
Consolidated Balance Sheets - December 31, 1996
and 1995
Consolidated Statements of Changes in Shareholders'
Equity - December 31, 1996, 1995 and 1994
Consolidated Statements of Cash Flows -
December 31, 1996, 1995 and 1994
Notes to Consolidated Financial Statements
Supplemental Information*
*Not covered by Report of Independent Accountants.
(a)(2) Listing of Financial Statement Schedules
The following financial statement schedules of the Registrant
and its subsidiaries, Report of Independent Accountants and
Consent of Independent Accountants are included in Item 14(d):
Schedules
---------
Report of Independent Accountants
Consent of Independent Accountants
Schedule I - Summary of Investments -
Other than Investments in Related Parties
Schedule II - Condensed Financial
Information of Registrant
Schedule III - Supplementary Insurance
Information
21
22
Schedule IV - Reinsurance
Schedule VI - Supplemental Information Concerning
Property-Casualty Insurance Operations
No other schedules are required to be filed herewith
pursuant to Article 7 of Regulation S-X.
(a)(3) Listing of Exhibits
See exhibit index contained herein at pages 37 through 41.
Management contracts and compensatory plans and arrangements
are identified in the Exhibit Index as Exhibit Nos. (10)(A)
through (10)(O).
(b) Reports on Form 8-K
None.
(c) Exhibits
The exhibits in response to this portion of Item 14 are
submitted concurrently with this report.
(d) Financial Statement Schedules
The response to this portion of Item 14 is located at pages 28
through 36.
22
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 31, 1997 BY: /s/ Peter B. Lewis
------------------
Peter B. Lewis
Chairman, President and Chief
Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant in
the capacities and on the dates indicated.
/s/ Peter B. Lewis Chairman, President, Chief Executive March 31, 1997
- --------------------------------------- Officer and a Director
Peter B. Lewis
/s/ Charles B. Chokel Treasurer and Chief Financial Officer March 31, 1997
- ---------------------------------------
Charles B. Chokel
/s/ Jeffrey W. Basch Chief Accounting Officer March 31, 1997
- ---------------------------------------
Jeffrey W. Basch
Milton N. Allen* Director March 31, 1997
- ---------------------------------------
Milton N. Allen
B. Charles Ames* Director March 31, 1997
- ---------------------------------------
B. Charles Ames
Charles A. Davis* Director March 31, 1997
- ---------------------------------------
Charles A. Davis
Stephen R. Hardis* Director March 31, 1997
- ---------------------------------------
Stephen R. Hardis
Janet Hill* Director March 31, 1997
- ---------------------------------------
Janet Hill
Norman S. Matthews* Director March 31, 1997
- ---------------------------------------
Norman S. Matthews
23
24
Donald B. Shackelford* Director March 31, 1997
- ---------------------------------------
Donald B. Shackelford
Paul B. Sigler* Director March 31, 1997
- ---------------------------------------
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 31, 1997
-------------------------
David M. Schneider
Attorney-in-fact
24
25
ANNUAL REPORT ON FORM 10-K
ITEM 14(D)
FINANCIAL STATEMENT SCHEDULES
YEAR ENDED DECEMBER 31, 1996
THE PROGRESSIVE CORPORATION
MAYFIELD VILLAGE, OHIO
25
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 1996 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 21 and 22 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 21, 1997
26
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-3 (File No. 333-01745) filed
March 15, 1996, the Registration Statement on Form S-8 (File No. 33-57121)
filed December 29, 1994, the Registration Statement on Form S-8 (File No.
33-64210) filed June 10, 1993, the Registration Statement on Form S-8 (File No.
33-51034) filed August 20, 1992, the Registration Statement on Form S-8 (File
No. 33-46944) filed April 3, 1992, the Registration Statement on Form S-8 (File
No. 33-38793) filed February 4, 1991, the Registration Statement on Form S-8
(File No. 33-38107) filed December 6, 1990, the Registration Statement on Form
S-8 (File No. 33-37707) filed November 9, 1990, the Registration Statement on
Form S-8 (File No. 33-33240) filed January 31, 1990, and the Registration
Statement on Form S-8 (File No. 33-16509) filed August 14, 1987, of our reports
dated January 21, 1997, on our audits of the consolidated financial statements
and financial statement schedules of The Progressive Corporation and
subsidiaries as of December 31, 1996 and 1995, and for each of the three years
in the period ended December 31, 1996, which reports are included in this
Annual Report on Form 10-K.
COOPERS & LYBRAND L.L.P.
Cleveland, Ohio
March 31, 1997
27
28
SCHEDULE I -- SUMMARY OF INVESTMENTS -- OTHER
THAN INVESTMENTS IN RELATED PARTIES
THE PROGRESSIVE CORPORATION AND SUBSIDIARIES
- --------------------------------------------
(millions)
December 31, 1996
-----------------------------------------------------------------
Amount At Which Shown
In The
Type of Investment Cost Market Value Balance Sheet
-----------------------------------------------------------------
Fixed Maturities:
Available-for-sale:
United States Government and
government agencies and
authorities $ 830.1 $ 829.1 $ 829.1
States, municipalities and political
subdivisions 1,314.7 1,331.3 1,331.3
Asset-backed securities 1,084.3 1,088.3 1,088.3
Foreign government obligations 48.7 51.1 51.1
Corporate and other debt securities 49.9 52.1 52.1
Redeemable preferred stock 56.4 57.3 57.3
-----------------------------------------------------------------
Total fixed maturities 3,384.1 3,409.2 3,409.2
-----------------------------------------------------------------
Equity securities:
Common stocks 458.9 540.1 540.1
Preferred stocks 333.8 341.6 341.6
-----------------------------------------------------------------
Total equity securities 792.7 881.7 881.7
-----------------------------------------------------------------
Short-term investments 159.7 159.7 159.7
-----------------------------------------------------------------
Total investments $4,336.5 $4,450.6 $4,450.6
=================================================================
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, 1996.
28
29
SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF INCOME
THE PROGRESSIVE CORPORATION (PARENT COMPANY)
- --------------------------------------------
(millions)
Years Ended December 31,
1996 1995 1994
----------------------------------------------------
Revenues
Dividends from subsidiaries* $125.0 $120.8 $ 53.0
Intercompany investment income* 36.5 37.2 29.8
----------------------------------------------------
161.5 158.0 82.8
----------------------------------------------------
Expenses
Interest expense 61.4 57.1 56.7
Other operating costs and expenses 4.1 3.6 3.8
Loss on disposition of subsidiary* -- -- 5.3
----------------------------------------------------
65.5 60.7 65.8
----------------------------------------------------
Operating income and income before income
taxes and other items below 96.0 97.3 17.0
Income tax benefit (10.2) (7.3) (12.2)
----------------------------------------------------
Income before equity in undistributed earnings of
subsidiaries 106.2 104.6 29.2
Equity in undistributed net income of consolidated
subsidiaries* 207.5 145.9 245.1
----------------------------------------------------
Net income $313.7 $250.5 $274.3
====================================================
*Eliminated in consolidation.
See notes to condensed financial statements.
29
30
SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
CONDENSED BALANCE SHEETS
THE PROGRESSIVE CORPORATION (PARENT COMPANY)
- --------------------------------------------
(millions)
December 31,
1996 1995
-----------------------------------------------
ASSETS
Investment in non-consolidated affiliates $ .4 $ .4
Investment in subsidiaries* 1,755.7 1,456.7
Receivable from subsidiary* 695.8 660.8
Intercompany receivable* 6.6 25.6
Income taxes 13.0 26.1
Other assets 2.8 1.6
-----------------------------------------------
TOTAL ASSETS $2,474.3 $2,171.2
===============================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued expenses $ 22.1 $ 20.3
Funded debt 775.3 675.1
-----------------------------------------------
Total liabilities 797.4 695.4
-----------------------------------------------
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 0 and 3.4 shares) -- 83.6
Common Shares, $1.00 par value, authorized 200.0
shares, issued 83.1, including treasury
shares of 11.6 and 11.0 71.5 72.1
Paid-in capital 381.8 374.8
Net unrealized appreciation of investment
in equity securities of consolidated subsidiaries 74.0 51.1
Retained earnings 1,149.6 894.2
-----------------------------------------------
Total shareholders' equity 1,676.9 1,475.8
-----------------------------------------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $2,474.3 $2,171.2
===============================================
*Eliminated in consolidation.
See notes to condensed financial statements.
30
31
SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
CONDENSED STATEMENTS OF CASH FLOWS
THE PROGRESSIVE CORPORATION (PARENT COMPANY)
- --------------------------------------------
(millions)
Years Ended December 31,
1996 1995 1994
--------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $313.7 $250.5 $274.3
Adjustments to reconcile net income to net cash
used in operating activities:
Equity in income of consolidated subsidiaries (332.5) (266.7) (298.1)
Amortization -- -- 1.5
Changes in:
Intercompany receivable or payable 19.0 1.6 (61.1)
Accounts payable and accrued expenses 1.8 1.3 12.9
Income taxes 13.1 3.9 24.3
Other, net (.9) (.1) 1.0
--------------------------------------------------
Net cash provided by (used in) operating 14.2 (9.5) (45.2)
activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Additional investments in equity securities of
consolidated subsidiaries (42.2) (42.1) (56.9)
Return of capital from consolidated subsidiary .5 -- 20.1
Purchase of consolidated subsidiaries (26.6) -- --
Dividends received from consolidated subsidiaries 125.0 120.8 53.0
--------------------------------------------------
Net cash provided by investing activities 56.7 78.7 16.2
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 6.9 10.1 2.7
Tax benefits from the exercise of stock options 5.9 8.5 2.4
Redemption of Preferred shares (80.8) -- --
Proceeds from funded debt 99.6 -- 198.4
Receivable from subsidiary (35.0) (61.4) (114.8)
Dividends paid to shareholders (19.6) (24.1) (23.4)
Acquisition of treasury shares (47.9) (2.3) (36.3)
--------------------------------------------------
Net cash provided by (used in) financing
activities (70.9) (69.2) 29.0
--------------------------------------------------
Change in cash -- -- --
Cash, beginning of year -- -- --
--------------------------------------------------
Cash, end of year $ -- $ -- $ --
==================================================
See notes to condensed financial statements.
31
32
SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT (CONTINUED)
NOTES TO CONDENSED FINANCIAL STATEMENTS
- ---------------------------------------
The accompanying condensed financial statements of The Progressive Corporation
(the "Registrant") should be read in conjunction with the consolidated financial
statements and notes thereto of The Progressive Corporation and subsidiaries
included in the Registrant's 1996 Annual Report.
STATEMENTS OF CASH FLOWS -- For the purpose of the Statements of Cash Flows,
cash includes only bank demand deposits. The Registrant paid income taxes of
$120.4 million in 1996, and $75.5 million, and $89.8 million in 1995 and
1994, respectively. Total interest paid was $60.2 million for 1996, $56.5
million for 1995 and $49.8 million for 1994.
DEBT -- Funded debt at December 31 consisted of:
(millions) 1996 1995
---------------------------------------------------------
7.30% Notes $ 99.6 $ --
6.60% Notes 198.8 198.7
7% Notes 148.3 148.3
8 3/4% Notes 29.5 29.2
10% Notes 149.6 149.5
10 1/8% Subordinated Notes 149.5 149.4
---------------------------------------------------------
$775.3 $675.1
=========================================================
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,
1996 and 1995, the Registrant had no borrowings under this arrangement.
In May 1996, the Registrant sold $100.0 million of noncallable 7.30% Notes due
2006 with interest payable semiannually. The fair value of these Notes was
$101.7 million at December 31, 1996.
In January 1994, the Registrant sold $200.0 million of noncallable 6.60% Notes
due 2004 with interest payable semiannually. The fair value of the Notes was
$197.1 million and $203.6 million at December 31, 1996 and 1995, respectively.
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
$144.3 million and $156.6 million at December 31, 1996 and 1995, respectively.
In May 1989, the Registrant issued $30.0 million of 8 3/4% Notes due 1999 with
interest payable semiannually. The fair value of these Notes was $31.6 million
and $32.7 million at December 31, 1996 and 1995, respectively.
32
33
SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
NOTES TO CONDENSED FINANCIAL STATEMENTS
- ---------------------------------------
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 such Notes are
noncallable with interest payable semiannually on both issues. The fair value of
the 10% Notes and 10 1/8% Subordinated Notes were $167.8 million and $168.4
million, respectively, at December 31, 1996, and $175.9 million and $176.1
million, respectively, at December 31, 1995.
As of December 31, 1996, the Registrant was in compliance with its debt
covenants.
Aggregate principal payments on funded debt outstanding at December 31, 1996 are
$0 for 1997 and 1998, $30.0 million for 1999, $300.0 million for 2000, $0 for
2001, and $450.0 million thereafter.
INCOME TAXES -- The Registrant files a consolidated Federal income tax return
with all eligible subsidiaries. The Federal income taxes in the accompanying
Condensed Balance Sheets represent amounts recoverable from the Internal Revenue
Service by the Registrant as agent for the consolidated tax group. The
Registrant and its subsidiaries have adopted, pursuant to a written agreement, a
method of allocating consolidated Federal income taxes. Amounts allocated to the
subsidiaries under the written agreement are included in Intercompany Receivable
from Subsidiaries in the accompanying Condensed Balance Sheets.
INVESTMENTS IN CONSOLIDATED SUBSIDIARIES -- The Registrant, through its
investment in consolidated subsidiaries, recognizes the changes in unrealized
gains (losses) on equity securities of the subsidiaries. These amounts were:
(millions) 1996 1995 1994
-----------------------------------------------------------------
Unrealized gains (losses):
Available-for-sale: fixed maturities $(18.3) $ 86.1 $(73.4)
equity securities 53.7 40.0 (25.4)
Deferred income taxes (12.5) (44.3) 34.6
-----------------------------------------------------------------
$ 22.9 $ 81.8 $(64.2)
=================================================================
OTHER MATTERS -- The information relating to incentive compensation plans is
incorporated by reference from Note 8, EMPLOYEE BENEFIT PLANS, "Incentive
Compensation Plans" on pages 44 and 45 of the Registrant's 1996 Annual Report.
33
34
SCHEDULE III -- 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(2) premiums payable revenue income(1) expenses(2)
------------------------------------------------------------------------------------
Year ended December 31, 1996:
Insurance Lines $200.1 $1,800.6 $1,467.3 $ -- $3,199.3 $225.8 $2,236.1
====================================================================================
Year ended December 31, 1995:
Insurance Lines $181.9 $1,610.5 $1,209.6 $ -- $2,727.2 $199.1 $1,943.8
====================================================================================
Year ended December 31, 1994:
Insurance Lines $161.6 $1,434.4 $1,036.7 $ -- $2,191.1 $158.5 $1,397.3
====================================================================================
Amortization
of deferred
policy Other Net
acquisition operating premiums
Segment costs expenses written
------------------------------------------------
Year ended December 31, 1996:
Insurance Lines $482.6 $208.5 $3,441.7
================================================
Year ended December 31, 1995:
Insurance Lines $459.6 $167.2 $2,912.8
================================================
Year ended December 31, 1994:
Insurance Lines $391.5 $150.8 $2,457.2
================================================
(1)Excluding investment expenses of $6.1 million in 1996, $8.1 million in 1995
and $8.7 million in 1994.
(2)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 14 for further discussion.
34
35
SCHEDULE IV -- REINSURANCE
THE PROGRESSIVE CORPORATION AND SUBSIDIARIES
- --------------------------------------------
(millions)
Assumed Percentage
Year Ended Ceded to From of Amount
Gross Amount Other Other Assumed
December 31, 1996 Companies Companies Net Amount to Net
- ----------------- -----------------------------------------------------------------------------------
Life Insurance in force $ .1 $ .1 $ -- $ -- --
===================================================================================
Premiums earned:
Accident and health $ -- $ -- $ -- $ -- --
Property and liability 3,380.7 185.2 3.8 3,199.3 .1%
Life -- -- -- -- --
------------------------------------------------------------------
Total premiums earned $3,380.7 $185.2 $3.8 $3,199.3 --
==================================================================
December 31, 1995
- ------------------
Life Insurance in force $ .4 $ .1 $ -- $ .3 --
==================================================================================
Premiums earned:
Accident and health $ -- $ -- $ -- $ -- --%
Property and liability 2,895.9 168.8 .1 2,727.2 --
Life -- -- -- -- --
------------------------------------------------------------------
Total premiums earned $2,895.9 $168.8 $ .1 $2,727.2 --
==================================================================
December 31, 1994
- -----------------
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
==================================================================
35
36
SCHEDULE VI -SUPPLEMENTAL INFORMATION CONCERNING PROPERTY - CASUALTY INSURANCE
OPERATIONS
THE PROGRESSIVE CORPORATION AND SUBSIDIARIES
- --------------------------------------------
(millions)
Paid Losses and
Losses and Loss Adjustment Expenses Loss Adjustment
Incurred Related to Expenses
-------------------------------------------------- -------------------
Current Prior
Year Ended Year Years
-------------------------- ---------------------
December 31, 1996 $2,341.9 $(105.8) $2,017.6
========================= ====================== ===================
December 31, 1995 $2,000.4 $(56.6) $1,729.6
========================= ====================== ===================
December 31, 1994(1) $1,539.8 $(142.5) $1,310.9
========================= ====================== ===================
Pursuant to Rule 12-18 of Regulation S-X. See Schedule III, page 34, for the
additional information required in Schedule VI.
(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 14 for further discussion.
36
37
EXHIBIT INDEX
Exhibit Form
Under 10-K
Reg. Exhi- If Incorporated by Reference, Documents
S-K, bit with Which Exhibit was Previously Filed
Item 601 No. Description of Exhibit 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 Filed herewith
(4) 4(A) $4,000,000 Hillsborough County Industrial Development Annual Report on Form 10-K (Filed with SEC on
Authority Industrial Development Revenue Bonds, Series March 28, 1995; see Exhibit 4(A) therein)
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 on
Progressive and State Street Bank and Trust Company March 29, 1994; see Exhibit 4(B) therein)
(successor in interest to Rhode Island Hospital Trust
National Bank), as Trustee ("Subordinated Indenture") (including
Table of Contents and cross-reference sheet)
(4) 4(C) Form of 10 1/8% Subordinated Notes due 2000 issued in Annual Report on Form 10-K (Filed with SEC on
the aggregate principal amount of $150,000,000 under the 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 on
Progressive and State Street Bank and Trust Company March 29, 1994; see Exhibit 4(D) therein)
(successor in interest to The First National Bank of
Boston), as Trustee ("1988 Senior Indenture") (including Table
of Contents and cross-reference sheet)
37
38
EXHIBIT INDEX
Exhibit Form
Under 10-K
Reg. Exhi- If Incorporated by Reference, Documents
S-K, bit with Which Exhibit was Previously Filed
Item 601 No. Description of Exhibit with SEC
- -------------------------------------------------------------------------------------------------------------------------------
(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 Indenture on March 29, 1994; see Exhibit 4(E) therein)
(4) 4(F) Form of 8 3/4% Notes due 1999 issued in the aggregate principal Annual Report on Form 10-K (Filed with SEC
amount of $30,000,000 under the 1988 Senior Indenture on March 28, 1995; see Exhibit 4(F) therein)
(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 amended on March 29, 1994; See Exhibit 4(I) therein)
February 1, 1994)
(4) 4(H) Indenture dated as of September 15, 1993 between Quarterly Report on Form 10-Q (Filed with
Progressive and State Street Bank and Trust Company (successor in SEC on November 5, 1993; see Exhibit 4(A)
interest to The First National Bank of Boston), therein)
as Trustee ("1993 Senior Indenture") (including Table of Contents
and cross-reference sheet)
(4) 4(I) Form of 7% Notes due 2013 issued in the aggregate principal amount Quarterly Report on Form 10-Q (Filed with
of $150,000,000 under the 1993 Senior Indenture SEC on November 5, 1993; see Exhibit 4(B)
therein)
(4) 4(J) Form of 6.60% Notes due 2004 issued in the aggregate principal Annual Report on Form 10-K (Filed with
amount of $200,000,000 under the 1993 Senior Indenture SEC on March 29, 1994; see Exhibit 4(L)
therein)
(4) 4(K) Supplemental Indenture dated March 15, 1996 between the Registrant Annual Report on Form 10-K (Filed with
and State Street Bank and Trust Company, evidencing the SEC on March 15, 1996; see Exhibit 4(K)
designation of State Street Bank and Trust Company, as successor therein)
Trustee under the 1993 Senior Indenture
38
39
EXHIBIT INDEX
Exhibit Form
Under 10-K
Reg. Exhi- If Incorporated by Reference, Documents
S-K, bit with Which Exhibit was Previously Filed
Item 601 No. Description of Exhibit with SEC
- -----------------------------------------------------------------------------------------------------------------------------------
(4) 4(L) Form of 7.30% Notes due 2006, issued in the aggregate principal Quarterly Report on Form 10-Q (Filed
amount of $100,000,000 under the Senior Indenture dated September with SEC on July 31, 1996; see Exhibit
15, 1993, between the Company and State Street Bank and Trust, as 4 therein)
amended and supplemented
(10)(iii) 10(A) The Progressive Corporation 1995 Gainsharing Plan, as amended on Annual Report on Form 10-K (Filed with
December 8, 1995 SEC on March 15, 1996; see Exhibit 10(B)
therein)
(10)(iii) 10(B) The Progressive Corporation 1997 Gainsharing Plan Filed herewith
(10)(iii) 10(C) The Progressive Corporation 1995 Executive Bonus Plan, Annual Report on Form 10-K (Filed with
as amended on December 8, 1995 and as further amended SEC on March 15, 1996; see Exhibit 10(C)
on February 21, 1996 therein)
(10)(iii) 10(D) The Progressive Corporation 1997 Executive Bonus Plan Filed herewith
(10)(iii) 10(E) The Progressive Corporation 1996 Process Management Quarterly Report on Form 10-Q (Filed
Bonus Plan with SEC on May 1, 1996; see Exhibit
10(A) therein)
(10)(iii) 10(F) The Progressive Corporation Directors Deferral Plan (Amendment and Quarterly Report on Form 10-Q (Filed
Restatement), as further amended on October 25, 1996 with SEC on November 13, 1996; see
Exhibit 10 therein)
(10)(iii) 10(G) The Progressive Corporation 1989 Incentive Plan (amended and Annual Report on Form 10-K (Filed with
restated as of April 24, 1992, as further amended on July 1, 1992 SEC on March 30, 1993; see Exhibit
and February 5, 1993) 10(G) therein)
39
40
EXHIBIT INDEX
Exhibit Form
Under 10-K
Reg. Exhi- If Incorporated by Reference, Documents
S-K, bit with Which Exhibit was Previously Filed
Item 601 No. Description of Exhibit with SEC
- -------------------------------------------------------------------------------------------------------------------------------
(10)(iii) 10(H) Share Option Agreement dated March 17, 1989, between Progressive Annual Report on Form 10-K (Filed with
and David M. Schneider SEC on March 28, 1995; see Exhibit 10(H)
therein)
(10)(iii) 10(I) The Progressive Corporation 1990 Directors' Quarterly Report on Form 10-Q
Stock Option Plan (Amended and Restated (Filed with SEC on November 12, 1992; see
as of April 24, 1992 and as further amended on Exhibit 10(A) therein)
July 1, 1992)
(10)(iii) 10(J) Agreement dated March 11, 1996 with Bruce W. Marlow Annual Report on Form 10-K (Filed with
SEC on March 15, 1996; see Exhibit 10(H)
therein)
(10)(iii) 10(K) Amending Agreement dated April 1, 1996 between the Company and Quarterly Report on Form 10-Q (Filed
Bruce W. Marlow relating to certain outstanding stock options with SEC on July 31, 1996; see Exhibit
previously granted to Mr. Marlow 10 therein)
(10)(iii) 10(L) The Progressive Corporation 1995 Incentive Plan Annual Report on Form 10-K (Filed with
SEC on March 28, 1995; see Exhibit 10(L)
therein)
(10)(iii) 10(M) The Progressive Corporation Executive Deferred Filed herewith
Compensation Plan (January 1, 1997 Amended and Restated)
(10)(iii) 10(N) Form of Non-Qualified Stock Option Agreement under The Progressive Quarterly Report on Form 10-Q (Filed
Corporation 1989 Incentive Plan (single award) with SEC on May 1, 1996; see Exhibit
10(B) therein)
(10)(iii) 10(O) Form of Non-Qualified Stock Option Agreement under The Progressive Quarterly Report on Form 10-Q (Filed
Corporation 1989 Incentive Plan (multiple awards) with SEC on May 1, 1996; see Exhibit
10(C) therein)
40
41
EXHIBIT INDEX
Exhibit Form
Under 10-K
Reg. Exhi- If Incorporated by Reference, Documents
S-K, bit with Which Exhibit was Previously Filed
Item 601 No. Description of Exhibit with SEC
- -------------------------------------------------------------------------------------------------------------------------------
(11) 11 Computation of Earnings Per Share Filed herewith
(12) 12 Computation of Ratio of Earnings to Fixed Charges Filed herewith
(13) 13 The Progressive Corporation 1996 Annual Report Filed herewith
(21) 21 Subsidiaries of The Progressive Corporation Filed herewith
(23) 23 Consent of Independent Accountants Incorporated herein by reference to
page 27 of this Annual Report on Form
10-K
(24) 24 Powers of Attorney Filed herewith
(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, 1996 only
No other exhibits are required to be filed herewith pursuant to Item 601 of
Regulation S-K.
41