<PAGE> 1
================================================================================
SCHEDULE 14A
(RULE 14a)
INFORMATION REQUIRED IN PROXY STATEMENT
SCHEDULE 14A INFORMATION
PROXY STATEMENT PURSUANT TO SECTION 14(a) OF THE SECURITIES
EXCHANGE ACT OF 1934
(AMENDMENT NO. )
Filed by the Registrant [X]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
<TABLE>
<S> <C>
[ ] Preliminary Proxy Statement [ ] CONFIDENTIAL, FOR USE OF THE COMMISSION
ONLY (AS PERMITTED BY RULE 14a-6(e)(2))
[X] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to sec.240.14a-11(c) or sec.240.14a-12
</TABLE>
THE PROGRESSIVE CORPORATION
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
X X X X X X X X X X
(NAME OF PERSON(S) FILING PROXY STATEMENT, IF OTHER THAN THE REGISTRANT)
Payment of Filing Fee (Check the appropriate box):
[X] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
(1) Title of each class of securities to which transaction applies:
(2) Aggregate number of securities to which transaction applies:
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the
filing fee is calculated and state how it was determined):
(4) Proposed maximum aggregate value of transaction:
(5) Total fee paid:
[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number,
or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid:
(2) Form, Schedule or Registration Statement No.:
(3) Filing Party:
(4) Date Filed:
================================================================================
<PAGE> 2
PROGRESSIVE LOGO
NOTICE OF ANNUAL MEETING OF SHAREHOLDERS
TO BE HELD APRIL 24, 1998
Notice is hereby given that the Annual Meeting of Shareholders of The
Progressive Corporation will be held at 6671 Beta Drive, Mayfield Village, Ohio,
on Friday, April 24, 1998, at 10:00 a.m., Cleveland time, for the following
purposes:
1. To elect three directors, each to serve for a term of three years;
2. To approve an amendment to the Company's Amended Articles of
Incorporation to increase the number of authorized Common Shares, $1.00 par
value, from 200,000,000 to 300,000,000;
3. To approve The Progressive Corporation 1998 Directors' Stock Option
Plan; and
4. To transact such other business as may properly come before the
meeting.
Only shareholders of record at the close of business on February 27, 1998,
will be entitled to notice of and to vote at said meeting or any adjournment
thereof.
By Order of the Board of Directors.
DAVID M. SCHNEIDER, Secretary
March 17, 1998
SHAREHOLDERS WHO DO NOT EXPECT TO ATTEND THE MEETING IN PERSON ARE URGED TO
DATE AND SIGN THE ENCLOSED PROXY AND RETURN IT IN THE ENCLOSED POSTAGE-PAID
ENVELOPE.
<PAGE> 3
THE PROGRESSIVE CORPORATION
PROXY STATEMENT
This statement is furnished in connection with the solicitation of proxies
for use at the Annual Meeting of Shareholders of The Progressive Corporation, an
Ohio corporation ("Company"), to be held at 10:00 a.m., Cleveland time, on
Friday, April 24, 1998, at 6671 Beta Drive, Mayfield Village, Ohio 44143, and at
any adjournment thereof. This statement and the accompanying proxy, together
with the Company's Annual Report to Shareholders for the fiscal year ended
December 31, 1997, will first be sent to shareholders on or about March 23,
1998.
The close of business on February 27, 1998, has been fixed as the record
date for the determination of shareholders entitled to notice of and to vote at
the meeting. At that date, the Company had outstanding 72,427,300 Common Shares,
each of which will be entitled to one vote.
ITEM 1: ELECTION OF DIRECTORS
The Company's Code of Regulations provides that the number of directors be
fixed by the shareholders at no less than five or more than twelve. The number
of directors has been fixed at ten. The Code of Regulations provides that the
directors are to be divided into three classes as nearly equal in number as
possible and that the classes are to be elected for staggered terms of three
years each. Directors of one class are elected annually. At the meeting, the
shares represented by the proxies obtained hereby, unless otherwise specified,
will be voted for the election as directors of the three nominees hereinafter
named, each to serve for a three-year term and until his respective successor is
duly elected and qualified. One vacancy will remain on the Board. If, by reason
of death or other unexpected occurrence, any one or more of the nominees
hereinafter named should not be available for election, the proxies will be
voted for such substitute nominee(s), if any, as the Board of Directors may
propose.
The reason for fixing the number of directors at a higher number than the
number to be in office immediately after the Annual Meeting is to have a vacancy
available which could be filled by the directors without the time and expense
involved in holding a special meeting of shareholders, should a person who could
make a valuable contribution as a director of the Company become available
during the year. Vacancies in the Board may be filled for the remainder of the
unexpired term of the class of directors to which the new director is assigned.
Assignments will be made so that the directors are distributed among the several
classes as nearly equally as possible. No decision has been made to fill the
vacancy, nor have any candidates been considered and approved by the Board of
Directors. Proxies cannot be voted at the Annual Meeting for a greater number of
persons than the three nominees named in this proxy statement. No shareholder
nominations for the election of directors have been received within the time
period required by Section 13 of Article II of the Code of Regulations.
1
<PAGE> 4
If notice in writing is given by any shareholder to the President or
Secretary not less than 48 hours before the time fixed for holding the meeting
that he desires that the voting for election of directors shall be cumulative,
and if an announcement of the giving of such notice is made upon the convening
of such meeting by the Chairman or Secretary or by or on behalf of the
shareholder giving such notice, each shareholder shall have the right to
cumulate such voting power as he possesses at such election and to give one
nominee a number of votes equal to the number of directors to be elected
multiplied by the number of shares he holds, or to distribute such number of
votes among two or more nominees, as he sees fit. If the enclosed proxy is
executed and returned and voting for the election of directors is cumulative,
the persons named in the enclosed proxy will have the authority to cumulate
votes and to vote the shares represented by such proxy, and by other proxies
held by them, so as to elect as many of the three nominees named below as
possible.
The following information is set forth with respect to each person
nominated for election as a director and for those directors whose terms will
continue after the Annual Meeting. Unless otherwise indicated, each such nominee
and director has held the principal occupation indicated for more than the last
five years. Each such nominee is currently a director of the Company.
NOMINEES FOR ELECTION AT THE ANNUAL MEETING
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION AND DIRECTOR TERM
NAME AGE LAST FIVE YEARS' BUSINESS EXPERIENCE SINCE EXPIRES
---- --- ------------------------------------ -------- -------
<S> <C> <C> <C> <C>
B. Charles Ames (1) 72 Principal, Clayton, Dubilier & Rice, 1983 2001
Inc., New York, New York (investment
banking)
Peter B. Lewis (2) 64 President and Chief Executive Officer 1965 2001
of the Company; Chairman of the Board
of the Company since April 1993;
President, Chairman of the Board and
Chief Executive Officer of Progressive
Casualty Insurance Company
Donald B. Shackelford (3) 65 Chairman of the Board, State Savings 1976 2001
Bank, Columbus, Ohio (savings bank)
</TABLE>
2
<PAGE> 5
DIRECTORS WHOSE TERMS WILL CONTINUE AFTER THE ANNUAL MEETING
<TABLE>
<CAPTION>
PRINCIPAL OCCUPATION AND DIRECTOR TERM
NAME AGE LAST FIVE YEARS' BUSINESS EXPERIENCE SINCE EXPIRES
---- --- ------------------------------------ -------- -------
<S> <C> <C> <C> <C>
Milton N. Allen (4) 70 Director of various companies 1978 1999
Charles A. Davis (5) 49 Limited Partner, Goldman Sachs Group 1996 1999
L.P., New York, New York (investment
banking) since December 1994; Gen-
eral Partner, Goldman Sachs & Co.,
prior to December 1994
Paul B. Sigler 64 Professor, Yale University and 1981 1999
Investigator in the Howard Hughes
Medical Institute
Stephen R. Hardis (6) 62 Chairman of the Board of Eaton Corpo- 1988 2000
ration, Cleveland, Ohio (manufactur-
ing) since January 1996; Vice Chairman
of Eaton Corporation prior to January
1996; Chief Executive Officer of Eaton
Corporation since September 1995;
Chief Financial and Administrative
Officer of Eaton Corporation prior to
September 1995
Janet Hill (7) 50 President, Staubach Alexander Hill, 1995 2000
LLC, Washington, D.C. (commercial real
estate consulting) since January 1995
and Vice President, Alexander &
Associates, Inc., Washington,
D.C. (management consulting)
Norman S. Matthews (8) 65 Consultant, New York, New York 1981 2000
</TABLE>
- ---------------
(1) Mr. Ames is also a director of M.A. Hanna Company, Riverwood Holding, Inc.
and Lexmark Holding, Inc., which are publicly held, and WESCO Distribution,
Inc. and CDW Holding, Inc., which are privately held.
(2) Mr. Peter B. Lewis is also an officer and director of other subsidiaries of
the Company. Mr. Daniel R. Lewis, an executive officer of the Company, is
the brother of Mr. Peter Lewis.
(3) Mr. Shackelford is also a director of The Limited, Inc., Worthington Foods,
Inc., Abercrombie & Fitch Co. and Intimate Brands, Inc., which are publicly
held.
(4) Mr. Allen is also a director of Actron Manufacturing Company and The
Bradford Group, Inc., which are privately held.
3
<PAGE> 6
(5) Mr. Davis is also a director of Heilig-Meyers Company, Lechters, Inc. and
Media General, Inc., which are publicly held, and Merchants Bancshares,
Inc., which is privately held.
(6) Mr. Hardis is also a director of Nordson Corporation, Lexmark Holding, Inc.
and KeyCorp, all of which, as well as Eaton Corporation, are publicly held.
(7) Ms. Hill is also a director of Wendy's International, Inc. and Deans Foods
Company, which are publicly held, and the First Union Bank of Virginia,
Maryland and the District of Columbia, a wholly owned subsidiary of the
First Union Corporation, which is publicly held.
(8) Mr. Matthews is also a director of Lechters, Inc., Toys "R" Us, Loehmann's,
Inc. and Finlay Fine Jewelry, Inc., which are publicly held.
Five meetings of the Board of Directors were held during 1997, and the
Board adopted resolutions by written action pursuant to Ohio corporation law on
one occasion.
The Board has named an Executive Committee, an Audit Committee and an
Executive Compensation Committee, as described below. The Board has not
designated a nominating committee.
Messrs. Allen, Hardis and Lewis are the current members of the Board's
Executive Committee, which exercises all powers of the Board between Board
meetings, except the power to fill vacancies on the Board or its committees.
During 1997, the Executive Committee adopted resolutions by written action
pursuant to Ohio corporation law on eight occasions.
Messrs. Allen, Ames, Davis and Hardis are the current members of the
Board's Audit Committee, which assures that organization, policies, controls and
systems are in place to monitor performance; provides an independent channel to
receive appropriate communications from employees, auditors, legal counsel,
bankers and consultants; and monitors the public release of financial
information. The Audit Committee met six times during 1997.
Ms. Hill and Messrs. Matthews, Shackelford and Sigler are the current
members of the Board's Executive Compensation Committee. This committee monitors
and directs the administration of the Company's executive compensation program,
including the various cash and stock incentive programs in which officers and
employees of the Company participate. If the proposal set forth in Item 3 is
approved by shareholders, this Committee will determine the awards under the
1998 Directors' Stock Option Plan. During 1997, the Executive Compensation
Committee met five times and adopted resolutions by written action pursuant to
Ohio corporation law on one occasion.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Charles A. Davis is a limited partner of the Goldman Sachs Group, L.P.
("GSG"). GSG is the 99% general partner of Goldman, Sachs & Co. ("GS"). GS is an
investment banking firm that regularly performs services such as acting as a
financial advisor and serving as principal or
4
<PAGE> 7
agent in the purchase and sale of securities. GS has performed such services for
the Company and may be called upon to provide similar or other services for the
Company in the future.
Mr. Davis owns, indirectly through an intermediary corporation, a 12%
equity interest in Visual Radio, Inc., a privately held company that provides
consulting, technology and training to companies that use the Internet. The
Company is engaged in discussions that will likely result in the Company
purchasing such services from Visual Radio during 1998. The Company expects that
total expenditures for these services will be approximately $150,000 in 1998.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
Ms. Hill and Messrs. Matthews, Shackelford and Sigler are the members of
the Company's Executive Compensation Committee. There are no Compensation
Committee interlocks.
5
<PAGE> 8
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
Security Ownership of Certain Beneficial Owners. The following information
is set forth with respect to persons known to management to be the beneficial
owners, as of January 31, 1998, of more than 5% of the Company's Common Shares:
<TABLE>
<CAPTION>
NAME AND ADDRESS AMOUNT AND NATURE OF PERCENT
OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP(1) OF CLASS
------------------- ----------------------- --------
<S> <C> <C>
Peter B. Lewis.................................... 10,199,713(2) 14.0%
6300 Wilson Mills Road
Mayfield Village, Ohio 44143
Ruane, Cunniff & Co., Inc......................... 9,602,603(3) 13.3%
767 Fifth Avenue
Suite 4701
New York, New York 10153-4798
</TABLE>
- ---------------
(1) Except as otherwise indicated, the persons listed as beneficial owners of
the Common Shares have sole voting and investment power with respect to
those shares. Certain of the information contained in this table, including
related footnotes, is based on the Schedule 13G filings made by the
beneficial owners identified herein.
(2) Includes 14,274 Common Shares held for Mr. Lewis by a trustee under the
Company's Retirement Security Program, 354,500 Common Shares subject to
currently exercisable stock options, 1,858,757 Common Shares held by Mr.
Lewis as trustee of two trusts established for the benefit of his brother,
532,354 shares held by a charitable corporation of which Mr. Lewis serves as
a trustee and an officer, and 298,000 Common Shares held by two limited
partnerships in each of which Mr. Lewis is a general partner. The amount
does not include 934,440 Common Shares held of record by National City Bank
as trustee of a trust established by Mr. Lewis for the benefit of his adult
children, as to which shares he disclaims any beneficial interest.
(3) The Common Shares are held in investment accounts maintained with Ruane,
Cunniff & Co., Inc. as of December 31, 1997, and it disclaims any beneficial
interest in such shares. Ruane, Cunniff & Co., Inc. has advised that it has
sole voting power as to 6,440,392 of these shares, no voting power as to the
balance of these shares, sole investment power as to 5,202,603 of these
shares and shared investment power as to 4,400,000 of these shares.
6
<PAGE> 9
Security Ownership of Management. The following information is set forth
with respect to the Company's Common Shares beneficially owned as of January 31,
1998, by all directors and nominees for election as directors of the Company,
each of the named executive officers and by all directors and executive officers
of the Company as a group:
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF PERCENT
NAME BENEFICIAL OWNERSHIP(1) OF CLASS
---- ----------------------- --------
<S> <C> <C>
Milton N. Allen................................... 47,254(2) *
B. Charles Ames................................... 53,005(3) *
Alan R. Bauer..................................... 103,372(4) *
Charles B. Chokel................................. 119,874(5) *
Charles A. Davis.................................. 2,000(6) *
W. Thomas Forrester............................... 31,154(7) *
William H. Graves................................. 90,191(8) *
Stephen R. Hardis................................. 33,808(3) *
Janet Hill........................................ 6,500(9) *
Peter B. Lewis.................................... 10,199,713(10) 14.0%
Norman S. Matthews................................ 38,201(11) *
Robert J. McMillan................................ 111,824(12) *
Glenn M. Renwick.................................. 49,625(13) *
Donald B. Shackelford............................. 96,002(14) *
Paul B. Sigler.................................... 11,606(15) *
All 21 Executive Officers
and Directors as a Group........................ 11,691,687(16) 15.9%
</TABLE>
- ---------------
<TABLE>
<C> <S>
* Less than 1% of the outstanding Common Shares of the
Company.
(1) Includes Common Shares held for executive officers under The
Progressive Retirement Security Program and currently
exercisable stock options held by directors and executive
officers under various incentive plans maintained by the
Company. Unless otherwise indicated below, beneficial
ownership of the Common Shares reported in the table is
comprised of both sole voting power and sole investment
power, or voting power and investment power that is shared
with the spouse and/or minor children of the director or
executive officer.
(2) Includes 2,400 Common Shares owned by Mr. Allen's wife, as
to which shares he disclaims any beneficial interest, and
28,000 Common Shares subject to currently exercisable stock
options.
(3) Includes 28,000 Common Shares subject to currently
exercisable stock options.
</TABLE>
7
<PAGE> 10
<TABLE>
<C> <S>
(4) Includes 72,700 Common Shares subject to currently exercisable stock options and 853 Common Shares held
under The Progressive Corporation Executive Deferred Compensation Plan, as to which shares Mr. Bauer has
sole investment power but no voting power.
(5) Includes 19,974 Common Shares owned by Mr. Chokel's wife, as to which shares he disclaims any beneficial
interest, 28,000 Common Shares subject to currently exercisable stock options and 19,172 Common Shares held
by Mr. Chokel as trustee of a family trust.
(6) Consists of 2,000 Common Shares subject to currently exercisable stock options.
(7) Includes 10,100 Common Shares subject to currently exercisable stock options.
(8) Includes 56,900 Common Shares subject to currently exercisable stock options.
(9) Includes 6,000 Common Shares subject to currently exercisable stock options.
(10) See footnote 2 on page 6.
(11) Includes 22,000 Common Shares subject to currently exercisable stock options.
(12) Includes 57,000 Common Shares subject to currently exercisable stock options.
(13) Includes 25,100 Common Shares subject to currently exercisable stock options and 1,911 Common Shares held
under The Progressive Corporation Executive Deferred Compensation Plan, as to which shares Mr. Renwick has
sole investment but no voting power.
(14) Includes 28,000 Common Shares subject to currently exercisable stock options and 6,831 Common Shares held
by Mr. Shackelford as trustee of a trust established for the benefit of his daughter.
(15) Includes 10,000 Common Shares subject to currently exercisable stock options.
(16) Includes 1,052,500 Common Shares subject to currently exercisable stock options.
</TABLE>
Section 16(a) Beneficial Ownership Reporting Compliance. Due to a
typographical error in Milton N. Allen's April 1997 Form 4, a sale of 155 shares
by Mr. Allen, as trustee of a charitable remainder trust, was incorrectly
reported as being the sale of 115 shares. An amended Form 4 was filed as soon as
this error was discovered. The November 1, 1996 sale of 200 shares by a trust of
which Daniel R. Lewis' wife is the beneficiary was reported in a Form 4 filed in
February 1998. A Form 4 reporting the January 31, 1997 sale of 10,000 shares by
Peter B. Lewis, as trustee of the D. R. Lewis Flint Trust, was filed 17 days
late.
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<PAGE> 11
EXECUTIVE COMPENSATION
The following information is set forth with respect to the Company's Chief
Executive Officer and the other six most highly compensated executive officers,
each of whom was serving as an executive officer at December 31, 1997 (the
"named executive officers").
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION
ANNUAL COMPENSATION AWARDS
------------------------------------ ------------
OTHER SECURITIES
ANNUAL UNDERLYING ALL OTHER
NAME AND SALARY BONUS(1) COMPENSATION OPTIONS COMPENSATION(3)
PRINCIPAL POSITION YEAR ($) ($) ($) (#) ($)
------------------ ---- -------- ---------- ------------ ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
Peter B. Lewis 1997 $830,769 $1,949,234 $141,976(2) 73,600 $ 7,770
Chairman, President and 1996 800,000 1,320,840 151,234(2) 108,200 7,635
Chief Executive Officer 1995 800,000 772,800 147,197(2) 93,200 294,018
Charles B. Chokel 1997 383,654 833,967 -- 28,200 16,378(4)
Treasurer and Chief 1996 321,889 496,844 -- 36,000 15,949
Financial Officer 1995 298,310 285,880 -- 26,000 123,162
William H. Graves 1997 325,385 581,161 -- 15,800 15,612(5)
Claims Process 1996 294,231 414,159 -- 22,100 5,631
Leader 1995 249,444 134,601 -- 13,100 79,786
Glenn M. Renwick 1997 325,385 581,161 -- 15,800 15,462(6)
Technology 1996 295,207 396,151 -- 22,100 12,818
Process Leader 1995 258,458 181,422 -- 13,100 80,613
Alan R. Bauer 1997 325,385 565,519 -- 15,800 35,136(7)
International/ 1996 294,231 384,736 -- 22,100 7,008
Internet Officer 1995 249,632 202,202 -- 13,100 6,663
W. Thomas Forrester 1997 325,385 565,519 -- 15,800 5,545
Ownership 1996 294,240 394,558 -- 22,100 13,243
Process Leader 1995 250,080 199,815 -- 13,100 11,338
Robert J. McMillan 1997 325,385 565,519 -- 15,800 32,966(8)
Consumer Marketing 1996 298,149 389,860 -- 22,100 7,008
Process Leader 1995 283,962 105,082 -- 13,100 12,627
</TABLE>
- ---------------
(1) Includes bonus amounts, if any, deferred under The Progressive Corporation
Executive Deferred Compensation Plan.
(2) Other Annual Compensation includes $108,124, $117,001 and $121,264, in the
form of personal use of corporate aircraft in 1997, 1996 and 1995,
respectively.
(3) Except as otherwise disclosed, amounts represent employer contributions made
during 1997 under the Company's Retirement Security Program.
(4) In addition to contributions made under the Company's Retirement Security
program, amount also includes a $9,750 single lump sum payment in lieu of
salary increase for exceeding specific performance objectives during 1996.
9
<PAGE> 12
(5) In addition to contributions made under the Company's Retirement Security
program, amount also includes a $9,000 single lump sum payment in lieu of
salary increase for exceeding specific performance objectives during 1996
and $311 as an anniversary award for 15 years of employment with the
Company.
(6) In addition to contributions made under the Company's Retirement Security
Program, amount also includes $9,000 single lump sum payment in lieu of
salary increase for exceeding specific performance objectives during 1996.
(7) In addition to contributions made under the Company's Retirement Security
Program, amount also includes a $28,020 relocation bonus.
(8) In addition to contributions made under the Company's Retirement Security
Program, amount also includes a $26,250 relocation bonus.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
- --------------------------------------------------------------------- VALUE AT ASSUMED
NUMBER OF ANNUAL RATES OF STOCK
SECURITIES % OF TOTAL PRICE APPRECIATION
UNDERLYING OPTIONS FOR OPTION TERM
OPTIONS GRANTED TO EXERCISE -----------------------
GRANTED(1) EMPLOYEES PRICE EXPIRATION 5% 10%
NAME (#) IN 1997 ($/SHARE) DATE ($) ($)
---- ---------- ---------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Peter B. Lewis 73,600 10.1% $68.375 12/31/06 $2,774,504 $6,833,736
Charles B. Chokel 28,200 3.9 68.375 12/31/06 1,063,057 2,618,361
William H. Graves 15,800 2.2 68.375 12/31/06 595,614 1,467,025
Glenn M. Renwick 15,800 2.2 68.375 12/31/06 595,614 1,467,025
Alan R. Bauer 15,800 2.2 68.375 12/31/06 595,614 1,467,025
W. Thomas Forrester 15,800 2.2 68.375 12/31/06 595,614 1,467,025
Robert J. McMillan 15,800 2.2 68.375 12/31/06 595,614 1,467,025
</TABLE>
---------------------
(1) Options become exercisable January 1, 2002, subject to accelerated
vesting and a "cash-out" provision upon the occurrence of any "change
in control" of the Company or certain similar events described in both
the 1989 Incentive Plan and the 1995 Incentive Plan.
10
<PAGE> 13
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY
SHARES AT 12/31/97 OPTIONS AT 12/31/97
ACQUIRED VALUE (#) ($)
ON EXERCISE REALIZED EXERCISABLE/ EXERCISABLE/
NAME (#) ($) UNEXERCISABLE UNEXERCISABLE
---- ----------- ----------- ---------------------- --------------------------
<S> <C> <C> <C> <C> <C> <C>
Peter B. Lewis -- -- Exercisable 287,400 Exercisable $30,090,745
Unexercisable 464,500 Unexercisable 36,213,250
Charles B. Chokel 36,684 $2,930,855 Exercisable 16,500 Exercisable 1,722,880
Unexercisable 133,400 Unexercisable 10,050,762
William H. Graves -- -- Exercisable 52,200 Exercisable 5,455,955
Unexercisable 77,800 Unexercisable 5,886,461
Glenn M. Renwick 36,000 2,286,024 Exercisable 15,000 Exercisable 1,566,255
Unexercisable 78,600 Unexercisable 5,958,111
Alan R. Bauer -- -- Exercisable 63,000 Exercisable 6,583,287
Unexercisable 78,000 Unexercisable 5,904,236
W. Thomas Forrester 46,200 3,646,595 Exercisable -- Exercisable --
Unexercisable 78,600 Unexercisable 5,958,111
Robert J. McMillan 30,000 2,384,908 Exercisable 46,500 Exercisable 4,819,150
Unexercisable 84,000 Unexercisable 6,271,711
</TABLE>
11
<PAGE> 14
PENSION PLANS
Each of the named executive officers, as well as substantially all other
full-time employees of the Company and its subsidiaries who were hired before
January 1, 1989 and satisfy certain other requirements, are eligible to
participate in The Progressive Pension Plan ("Pension Plan"). The Pension Plan
is a defined benefit plan within the meaning of the Employee Retirement Income
Security Act of 1974, as amended ("ERISA"), is a qualified plan under Section
401(a) of the Internal Revenue Code of 1986, as amended ("Code") and is subject
to the minimum funding standards of Section 412 of the Code.
Benefits payable under the Pension Plan are determined pursuant to a
formula based upon a participant's years of service with the Company and its
subsidiaries, the participant's average annual compensation not in excess of the
Social Security taxable wage base during such years of service ("Average
Earnings") and Social Security benefits. For purposes of determining Average
Earnings, the Pension Plan recognizes base salary, overtime earnings, cash
bonuses and commissions. The benefit formula is: 2% of Average Earnings times
years of service minus 50% of primary Social Security benefit for years of
service through December 31, 1988, plus 1.3% of Average Earnings times years of
service through December 31, 1993.
Participants accrue benefits under the Pension Plan formula over their
years of service with the Company and its subsidiaries, and become fully vested
in their accrued benefits under the Pension Plan upon (i) completion of five
years of service (subject to certain break-in-service rules); (ii) attainment of
age 65; or (iii) retirement on account of permanent and total disability.
The estimated net annual pensions (expressed as a life and 120-month
certain annuity) payable upon retirement at normal retirement age (65) under the
Pension Plan for each of the seven named executive officers are as follows: Mr.
Lewis, $10,188; Mr. Chokel, $9,042; Mr. Graves, $8,020; Mr. Renwick, $5,412; Mr.
Bauer, $8,905; Mr. Forrester, $6,263; and Mr. McMillan, $9,220.
As of December 31, 1993, all benefit accruals under the Pension Plan were
frozen. The Company now has a two-tiered Retirement Security Program ("RSP").
The RSP is a defined contribution pension plan with the meaning of ERISA and a
qualified plan under the Code and covers all employees who meet requirements as
to age and length of service. The first tier of the RSP provides employer
contributions of 1% to 5% of annual eligible compensation up to the Social
Security wage base, based on years of eligible service. The second tier is a
long-term savings plan under which the Company matches, into a company stock
account, amounts contributed to the Plan by each employee up to a maximum of 3%
of the employee's eligible compensation. All named executive officers are
eligible to participate in the RSP, and contributions made by the Company in
1995 are included in "All Other Compensation" in the Summary Compensation Table
on page 9.
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SEPARATION PLANS
The named executive officers, as well as substantially all other regular,
non-temporary employees of the Company and its subsidiaries, are eligible to
participate in The Progressive Corporation Separation Allowance Plan
("Separation Plan"). The Separation Plan provides payments to eligible employees
whose employment is involuntarily terminated as a result of a reduction in force
or a reorganization, as defined in the Separation Plan. Payments are based on
compensation in effect immediately prior to termination and years of service and
cannot exceed an aggregate of two years of compensation. The Separation Plan is
a welfare benefit plan within the meaning of ERISA. All payments under the
Separation Plan are made from the general assets of the Company and its
subsidiaries. Individual employment or separation arrangements may supplement or
supersede the Separation Plan in whole or in part.
DIRECTORS' FEES AND PLANS
Each member of the Board of Directors who is not an employee of the Company
currently receives an annual director's fee of $8,000 ("Retainer Fee"). In
addition, each such director receives fees for attendance at meetings of the
Board and those committees of the Board of which he is a member ("Meeting Fee").
Directors currently receive $3,000 for attendance at each regular meeting of the
Board and $1,000 for attendance at each special meeting, unless attendance is by
telephone, in which case the fee is $500. Each member of a Board committee
receives $750 for attendance at each meeting of the committee, except that the
committee chairman receives $1,000 for attendance at each such meeting, unless
attendance is by telephone, in which case the fee is $500. Directors are also
compensated for attendance at certain meetings of the Company's senior managers,
which are typically attended by one or two directors, at rates equal to the fee
received for attendance at regular Board meetings.
Each director of the Company who is not an employee of the Company
participates in The Progressive Corporation Directors Deferral Plan, as amended
("Directors Deferral Plan"). Each participant in the Directors Deferral Plan may
elect, annually, to defer receipt of all or a portion of his Meeting Fees for
the following year until the date designated by the director in accordance with
the plan. A participating director may elect to have such deferred fees credited
to or allocated between (a) a cash account which will earn interest at a rate
equal to the rate of interest on new 3-month certificates of deposit, and (b) a
stock account under which the deferred fees are converted into units equivalent
in value and dividend rights to the Company's Common Shares. Account balances
may not be transferred from one account to another. All such accounts will be
distributed in cash, in a lump sum or installments, when and as designated by
the participating director at the time of election or, if earlier, upon the
death of the director. All director's Retainer Fees are deferred, credited to a
stock account and distributed in cash on a date designated by the participating
director in accordance with the terms of the plan. All account balances of a
director will be distributed to his beneficiary, if he dies. However, if any
director ceases to serve as such for any reason other than death, disability or
removal without
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<PAGE> 16
cause prior to the expiration of his current term, all Retainer Fees credited to
his stock account during such term are forfeited.
Each director who is not an employee of the Company is eligible to receive
awards under The Progressive Corporation 1990 Directors' Stock Option Plan, as
amended ("Directors' Stock Plan"). The Directors' Stock Plan authorizes the
issuance of up to 450,000 Common Shares, subject to adjustment for stock splits
and similar events. Promptly after each Annual Meeting of Shareholders, each
participating director receives an option to purchase 2,000 Common Shares with
an exercise price equal to the fair market value of the Common Shares on the
date of such Annual Meeting. The term of each such stock option is ten years
commencing on the date of grant. Options become exercisable six months and one
day following the date of grant and are not transferable. Upon death, to the
extent then exercisable, a stock option may be exercised for a period of one
year. During 1997, the Company granted stock options under this plan covering an
aggregate of 16,000 shares to eight directors. The Directors' Stock Plan will be
replaced by The Progressive Corporation 1998 Directors' Stock Option Plan if the
proposal set forth in Item 3 is approved by shareholders.
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<PAGE> 17
EXECUTIVE COMPENSATION COMMITTEE REPORT
EXECUTIVE COMPENSATION POLICY
The Company's executive compensation program is administered under the
direction of the Executive Compensation Committee of the Board of Directors
("Committee"). The Committee is comprised of four independent, nonemployee
directors. The executive compensation program is designed to promote the
following objectives:
- Attract, retain and motivate executives who can significantly contribute
to the success of the Company.
- Reward the achievement of business objectives that have been approved by
the Board.
- Provide a rational, consistent and competitive executive compensation
system that is well understood by those to whom it applies.
- Tie a significant portion of executive compensation to the long-term
performance of the Company's Common Shares.
The Committee believes that if these objectives are consistently achieved,
shareholder value will be enhanced over time.
EXECUTIVE COMPENSATION PROGRAM
For 1997, the Company's executive compensation program was designed to base
compensation on corporate, business unit and individual performance. Performance
objectives and related measurements, as well as the compensation awards that
would result from various levels of performance, were clearly defined in
advance.
The executive compensation program consists of three components: salary,
annual bonus and long-term incentives through equity-based awards. Variable
compensation (consisting of annual bonus and equity-based awards) is a larger
part of total compensation at more senior levels in the organization. For each
executive officer, a target amount is established for each component of variable
compensation. Target amounts are determined primarily by reference to data
contained in national compensation surveys. These surveys include compensation
data for a broad range of public companies in a variety of industries. Since the
Company competes for executive level personnel on a nationwide basis with
companies in a variety of industries, the compensation data utilized are not
limited to companies included in the P/C Group referred to on page 21. The
Company's objective is to pay its executives competitive salaries (i.e., at or
near the midpoint of the survey range of salaries for their respective
positions) and to provide variable compensation that can take total direct
compensation to or above the high end of the survey range for total direct
compensation when the Company and, if applicable, the executive's assigned
business unit meet or exceed challenging performance goals.
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<PAGE> 18
In addition to the executive compensation program, executive officers
participate in the Company's health and retirement plans which are available on
the same basis to all regular employees of the Company who satisfy minimum
eligibility requirements.
Salary Component
Executive officers receive a salary based on their responsibilities and
potential at market levels indicated by compensation survey data. The Company's
objective is to set executive salaries at or near the midpoint of the survey
range of salaries for similar positions at other companies judged to be
comparable. Salaries are reviewed annually and adjusted upward or downward for
changes in those factors and the individual's performance. Better performance
generally results in an increased salary, subject to the limits of the salary
range established by the Company. For executives who exceed expectations, some
part of the increase will be paid in a single lump sum, as a merit cash award,
rather than becoming a part of the future salary base.
Annual Bonus Component
In 1997, Messrs. Lewis and Chokel participated in the 1997 Executive Bonus
Plan. Messrs. Graves, Renwick, Bauer, Forrester and McMillan, along with all
other full-time employees of the Company, participated in the 1997 Gainsharing
Plan. These Plans have been designed to reward participants appropriately for
current corporate and/or business unit performance.
Under the 1997 Executive Bonus Plan, a target annual bonus amount, which
varied by position, was established for each participant. In 1997, Mr. Lewis's
target annual bonus amount equaled 135% of salary; for Mr. Chokel, the target
was 125% of salary.
Awards under the 1997 Executive Bonus Plan were determined by reference to
two quantitative components: a Core Business Gainsharing Component and an
Investment Component.
The Core Business Gainsharing Component was based on a performance matrix
("Gainsharing Matrix") which assigned a performance score to various
combinations of profitability and growth outcomes for the Company's personal and
commercial automobile insurance business ("Core Business"). Under the
Gainsharing Matrix, profitability was measured by comparing the combined ratio
("CR") achieved by the Core Business, determined in accordance with generally
accepted accounting principles ("GAAP"), against a target combined ratio, while
growth was measured in terms of the year-to-year change in net written premiums
for the Core Business. The Investment Component compared the performance of
individual segments of the Company's investment portfolio against the range of
performance results achieved by a pre-selected group of comparable investment
funds.
The weighting of the two components differed for the participating
executives, depending on the nature and scope of their assigned
responsibilities. A bonus award equal to the target annual bonus resulted if
designated goals were met. Actual awards could range from 0% to 200%
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<PAGE> 19
of the target annual bonus amount, depending on the extent to which performance
fell short of or exceeded the designated goals.
All other officers and qualified employees (approximately 13,400) of the
Company, including Messrs. Graves, Renwick, Bauer, Forrester and McMillan,
participated in the Company's 1997 Gainsharing Plan. The 1997 Gainsharing Plan
is substantially similar to the 1997 Executive Bonus Plan, but does not include
an Investment Component. Under the 1997 Gainsharing Plan, awards were based on
performance in achieving profitability and growth targets, as measured by the
Gainsharing Matrix, for both the Core Business and the individual participant's
business unit or product. In 1997, the participating executive officers were
assigned target annual bonus amounts ranging from 60-100% of salary.
Long-Term Incentive Component
In 1997, the executive compensation program included long-term incentives
through the granting of nonqualified stock options. This component is designed
to encourage the long-term retention of key executives and to align executive
compensation directly with the long-term enhancement of shareholder value. Stock
option grants are intended to focus the executive on managing the Company from
the perspective of an owner. The named executive officers and approximately 350
other management employees of the Company currently participate in the long-term
incentive program.
The stock options have an exercise price which is equal to the market price
of the Company's Common Shares on the date of grant, contain provisions which
defer vesting of the options for five years and may be exercised at any time
during the five years following vesting. The value of a stock option depends
directly on the future performance of the Company's Common Shares, since it has
value to the recipient only if and to the extent that the price of the Company's
Common Shares increases above the option exercise price.
Stock option awards are normally made annually. A target award value, which
varies by position, is established for each executive officer in order to bring
total targeted compensation to the top of the survey range. In 1997, for the
Company's executive officers, these target award values ranged from 75-275% of
salary, depending on job classification. The target award value is then divided
by a value per share developed through a modified Black-Scholes pricing model,
to determine the number of option shares to be awarded. In 1997, the pricing
model valued the stock options awarded to executive officers at $29.892 per
share, which is 43.72% of the per share exercise price of $68.375. The following
assumptions were used to derive the ratio: 10-year option term, .2538 annualized
volatility rate, 6.35% risk free rate of return and .36% dividend yield, and an
assumed annual attrition factor of 3.0% for each of the five years prior to
vesting.
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<PAGE> 20
CHIEF EXECUTIVE OFFICER COMPENSATION
Peter B. Lewis, the Company's Chief Executive Officer, received cash
compensation in the amount of $2,780,003 for 1997, consisting of a salary of
$830,769 and an annual bonus award of $1,949,234, in addition to the non-cash
compensation disclosed in the Summary Compensation Table and related footnotes
on page 9. Mr. Lewis's salary has been reduced from a high of $1,198,077 in
1991, because the Committee desires to place more emphasis on the variable
components of executive pay.
Mr. Lewis's annual bonus target for 1997 was $1,121,538, an amount equal to
135% of his salary. For Mr. Lewis, 80% of his bonus target was based on the Core
Business Gainsharing Component and 20% was based on the Investment Component.
For 1997, the Core Business Gainsharing Component was determined by a
Gainsharing Matrix which measures profitability and growth in net written
premiums for the Company's Core Business. In 1997, the Company's Core Business
achieved a CR of 93.1, with 33% growth in net written premiums, resulting in a
performance score of 1.738 for the Core Business Gainsharing Component. In
addition, the Investment Component score was 1.740 compared to a target of 1.0.
Applying the weighting factors to the performance scores for each of the
components, and then combining the results, produced a Performance Factor of
1.738. Mr. Lewis therefore earned 173.8% of target, or $1,949,234, as his annual
bonus.
For the long-term incentive component of his compensation, on March 12,
1997, Mr. Lewis was awarded stock options to purchase 73,600 of the Company's
Common Shares at an exercise price of $68.375 per share. This award vests on
January 1, 2002, and was determined in accordance with the stock option formula
described above.
OMNIBUS BUDGET RECONCILIATION ACT OF 1993
In 1993, the Internal Revenue Code of 1986 was amended by the Omnibus
Budget Reconciliation Act of 1993 ("Budget Reconciliation Act"), which limits to
$1 million per year the deduction allowed for Federal income tax purposes for
compensation paid to the chief executive officer and the four other most highly
compensated executive officers of a public company ("Deduction Limit"). This
Deduction Limit, which became effective in 1994, does not apply to compensation
paid under a plan that meets certain requirements for "performance-based
compensation." To qualify for this exception, (a) the compensation must be
payable solely on account of the attainment of one or more pre-established
objective performance goals; (b) the performance goals must be established by a
compensation committee of the board of directors that is comprised solely of two
or more "outside directors;" (c) the material terms of the performance goals
must be disclosed to and approved by shareholders before payment; and (d) the
compensation committee must certify in writing prior to payment that the
performance goals and any other material terms have been satisfied.
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<PAGE> 21
Compensation attributable to a stock option award is deemed to satisfy the
requirements for "performance-based compensation" if the award is made by a
compensation committee comprised solely of two or more "outside directors," the
plan under which the award has been granted is approved by shareholders and
states the maximum number of shares with respect to which options may be granted
during a specified period to any employee and, under the terms of the option,
the amount of compensation the employee could receive is based solely on an
increase in the value of the stock after the date of the award. Generally, the
Deduction Limit does not apply to any compensation payable under a written
contract that was in effect on February 17, 1993, or pursuant to a plan or
arrangement approved by shareholders prior to December 20, 1993, provided
certain requirements are met.
It is the Company's policy to structure its incentive compensation programs
to satisfy the requirements for the "performance-based compensation" exception
to the Deduction Limit and, thus, to preserve the full deductibility of all
compensation paid thereunder, to the extent practicable. The Company's stock
incentive plans, as well as the 1997 Executive Bonus Plan, have been submitted
to and approved by the Company's shareholders. Compensation awards under these
Plans are designed to satisfy the requirements of the "performance based
compensation" exception to the Deduction Limit. Salaries and any perquisites are
subject to approval of the Committee, but will not be submitted to a vote of
shareholders, and thus will not be deductible if and to the extent that such
compensation exceeds $1 million per year for any such executive.
SUMMARY
The Committee believes that executive compensation should be linked to the
creation of shareholder value. The Company's executive compensation program thus
includes significant long-term incentives, through equity-based awards, which
are tied to the long-term performance of the Company's Common Shares. The
Committee recognizes, however, that while stock prices may reflect corporate
performance over the long term, other factors, such as general economic
conditions and varying investors' attitudes toward the stock market in general,
and specific industries in particular, may significantly affect stock prices at
any point in time. Accordingly, the annual cash components of the program,
consisting of salary and annual bonus, emphasize individual performance and the
realization of defined business objectives, which are independent of short-range
fluctuations in the stock price.
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<PAGE> 22
The executive compensation program thus has been designed to align
executive compensation with both the Company's business goals and long-term
shareholder interests. The Committee believes that the program, as implemented,
is balanced and consistent with these objectives. The Committee will continue to
monitor the operation of the program and cause the program to be adjusted and
refined, as necessary, to ensure that it continues to support both corporate and
shareholder goals.
EXECUTIVE COMPENSATION COMMITTEE
Donald B. Shackelford, Chairman
Janet Hill
Norman S. Matthews
Paul B. Sigler
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<PAGE> 23
PERFORMANCE GRAPH
The following performance graph compares the performance of the Company's
Common Shares ("PGR") to the Standard & Poor's 500 Index ("S & P Index") and the
Value Line Property/Casualty Industry Group ("P/C Group") for the last five
years.
CUMULATIVE FIVE-YEAR TOTAL RETURN*
PGR, S&P INDEX, P/C GROUP
(PERFORMANCE RESULTS THROUGH 12/31/97)
<TABLE>
<CAPTION>
MEASUREMENT PERIOD
(FISCAL YEAR COVERED) PGR S&P INDEX P/C GROUP
<S> <C> <C> <C>
1992 100 100 100
1993 140 110 102
1994 122 112 101
1995 171 154 142
1996 236 190 182
1997 422 253 280
</TABLE>
*Assumes reinvestment of dividends.
Source: Value Line, Inc.
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<PAGE> 24
ITEM 2: APPROVAL OF AMENDMENT TO THE COMPANY'S AMENDED ARTICLES OF
INCORPORATION TO INCREASE THE NUMBER OF AUTHORIZED COMMON
SHARES FROM 200,000,000 TO 300,000,000
The Board of Directors is submitting to shareholders for approval an
amendment to the Company's Amended Articles of Incorporation ("Amended
Articles") to increase the number of Common Shares, $1.00 par value, which the
Company is authorized to issue from 200,000,000 to 300,000,000 and recommends
that the Company's shareholders approve the amendment.
The full text of the first paragraph of Article FOURTH of the Amended
Articles reflecting this amendment is attached to this proxy statement as
Exhibit A. The following description of the amendment is qualified in its
entirety by reference to Exhibit A.
The additional Common Shares for which authorization is sought would have
the same rights and privileges as the Common Shares currently outstanding.
Holders of Common Shares have no preemptive rights to subscribe for or purchase
any additional shares of the Company.
As of February 27, 1998, 72,427,300 Common Shares were outstanding and
10,293,849 additional shares were reserved for issuance under various stock
option and other employee benefit plans maintained by the Company (although only
4,964,092 of such shares are currently subject to outstanding stock options or
other awards). As of that date, a balance of 106,629,832 Common Shares remained
authorized but unissued and not subject to reservation, and 10,649,019 shares
were held in treasury.
Although the Company currently has no plan or commitment that would result
in the sale or issuance of additional Common Shares (other than pursuant to
employee benefit plans) the Board believes that the number of Common Shares
currently available for issuance is insufficient to meet the future needs of the
Company.
REASON FOR AND EFFECTS OF PROPOSED AMENDMENT
The Board believes that it is desirable to have additional authorized but
unissued Common Shares available for possible future share dividends or splits,
employee benefit programs, financing and acquisition transactions and other
general corporate purposes. For example, the Company issued 38,453,952 Common
Shares pursuant to a 3-for-1 stock split effected in the form of a share
dividend in December 1992 and sold 4,950,000 Common Shares to the public in July
1993. The Company also issued 9,000,000 shares in December 1992 upon the
conversion of its $75,000,000 Floating Rate Convertible Subordinated Debentures
due 2008. While there can be no assurance that additional share distributions or
sales of Company securities will be made in the future, the Board wishes to have
sufficient Common Shares available for such purposes if conditions warrant such
distributions or sales. Such authorized but unissued Common Shares would be
available for issuance without further action by the shareholders, unless such
action is required by applicable law or the rules of any stock exchange on which
the Company's securities
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<PAGE> 25
may be listed. The Company's Common Shares are currently listed on the New York
Stock Exchange.
The Company's purpose in increasing the number of authorized Common Shares
available for issuance is described in the preceding paragraph. Nevertheless,
the existence of authorized and unissued Common Shares might be considered as
having the effect of discouraging an attempt by another person or entity,
through the acquisition of a substantial number of the Company's Common Shares,
to acquire control of the Company with a view to effecting a merger, sale of the
Company's assets or similar transaction, since the issuance of Common Shares
could be used to dilute the share ownership and voting rights of such person or
entity. Further, any of such authorized but unissued Common Shares could be
privately placed with purchasers who might support incumbent management, making
a change in control of the Company and removal of incumbent management more
difficult.
DESCRIPTION OF CAPITAL SHARES
The Company's Amended Articles currently authorize (a) 200,000,000 Common
Shares, $1.00 par value, of which 72,427,300 were issued and outstanding at
February 27, 1998; (b) 20,000,000 Serial Preferred Shares, without par value
("Serial Preferred Shares"), none of which are currently outstanding and (c)
5,000,000 Voting Preference Shares, without par value ("Voting Preference
Shares"), none of which are currently outstanding (the Serial Preferred Shares
and Voting Preference Shares are collectively referred to herein as "Preferred
Shares").
Because the Company is a holding company, its rights and the rights of its
creditors and shareholders to participate in the assets of any subsidiary upon
the latter's liquidation or recapitalization will be subject to the prior claims
of the subsidiary's creditors, except to the extent that the Company may itself
be a creditor with recognized claims against the subsidiary, other than as a
holder of the subsidiary's outstanding shares of capital stock.
In addition, insurance statutes in many states impose limitations on the
ability of regulated insurance companies to pay dividends and transfer assets to
their affiliates. Such statutes may require prior approval for the payment of
dividends by the Company's regulated insurance company subsidiaries to the
Company or its affiliates. Since a significant source of the Company's
internally generated cash flow is dividends paid to it by its subsidiaries, the
Company's ability to meet its obligations and pay dividends on its outstanding
shares may be affected by any such limitations or prior approval requirements.
COMMON SHARES
Subject to the rights of the Company's creditors and the holders of any
outstanding Preferred Shares, the holders of Common Shares are entitled to
receive such dividends as may be declared by the Board of Directors and to share
ratably in assets available for distribution upon liquidation. There are no
preemptive rights, conversion rights, redemption provisions or
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<PAGE> 26
sinking fund provisions with respect to the Common Shares. Holders of Common
Shares are entitled to one vote per share. Upon compliance by holders of Common
Shares with certain statutory notice provisions, such holders are entitled to
cumulate their votes in the election of directors.
PREFERRED SHARES
The Board of Directors of the Company is empowered to authorize the
issuance of Serial Preferred Shares and Voting Preference Shares, each of which
may be issued in one or more series. All series of Serial Preferred Shares and
Voting Preference Shares will rank equally and will be identical in all
respects, except that the rights of holders of Serial Preferred Shares and
Voting Preference Shares may differ as to voting rights and provisions for
certain consents, and that the Board of Directors may fix with respect to each
such series without further action by the shareholders, prior to issuance
thereof, the following terms: (a) the designation of the series; (b) the
authorized number of shares of the series, subject to certain increases and
decreases as determined by the Board of Directors from time to time; (c) the
dividend rate or rates of the series; (d) the date or dates from which dividends
shall accrue and (if applicable) be cumulative and the dates on which and the
period or periods for which dividends, if declared, shall be payable; (e) the
redemption rights and prices, if any; (f) the terms and amounts of the sinking
fund, if any; (g) the amount payable on shares of the series in the event of any
voluntary or involuntary liquidation, dissolution or winding up of the affairs
of the Company; (h) whether the shares of the series shall be convertible into
Common Shares or shares of any other class and, if so, the conversion rate or
rates or price or prices, any adjustments thereof and all other terms and
conditions upon which such conversion may be made and (i) the restrictions on
the issuance of shares of the same or any other class or series. All series of
Preferred Shares would rank, as to dividend and liquidation rights, senior to
Common Shares.
The holders of Serial Preferred Shares shall have no voting rights, except
as otherwise provided by law and specifically provided in the Amended Articles
with respect to certain matters. The holders of Voting Preference Shares shall
(x) be entitled to one vote per share, (y) vote as a class with the Common
Shares (except as otherwise provided by law or the Amended Articles) and (z)
have certain special voting rights substantially similar to those specifically
provided to holders of Serial Preferred Shares and special voting rights with
respect to certain extraordinary transactions involving the Company. Under the
Company's Amended Articles, the affirmative vote or consent of holders of at
least two-thirds of the Voting Preference Shares at the time outstanding would
be necessary to effect a merger or consolidation with the Company, the sale of
all or substantially all of the Company's assets and certain other transactions.
Holders of Preferred Shares will have no preemptive rights to purchase or
subscribe for any additional Preferred Shares or other securities of the
Company. Preferred Shares may be issued
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<PAGE> 27
by the Company if and when the Board of Directors deems it desirable without
further shareholder action. The Company has no present plan to issue any
Preferred Shares and no Preferred Shares are currently outstanding.
Because of its authority to create and issue any series of Preferred Shares
without shareholder approval, the Board of Directors could adversely affect the
voting power and other rights of the Common Shares. The issuance of Preferred
Shares could also have the effect of delaying, deferring or preventing a change
in control of the Company. The ability of the Board of Directors to issue
Preferred Shares, while providing flexibility in connection with financings,
acquisitions and other corporate purposes, nevertheless could have the effect of
discouraging an attempt by another person or entity, through the acquisition of
a substantial number of Common Shares, to acquire control of the Company with a
view to effecting a merger, sale of the Company's assets or similar transaction,
since the issuance of Preferred Shares could be used to dilute the share
ownership and voting rights of a person or entity seeking to obtain control of
the Company. Additionally, any issuance of Preferred Shares could result in
there being a class of shares with conversion features and preference over the
Common Shares with respect to dividends and distributions in liquidation and, in
the event of any such conversion, could also result in the dilution of net
income and book value per share of the Company. Moreover, an issuance or private
placement of Voting Preference Shares to or with persons supporting current
management of the Company could deter an unsolicited tender offer or other
attempt by others to acquire control of the Company with a view to effecting a
merger or consolidation with the Company, sale of all or a substantial part of
the Company's assets or similar transaction, because the terms of the Voting
Preference Shares require that the holders thereof approve all such transactions
by a two-thirds vote. As a result, a vote by the holders of such shares could
block a merger, sale of the Company's assets or similar transaction which a
majority of the Common Shareholders of the Company believes desirable.
PROVISIONS THAT COULD DISCOURAGE A CHANGE OF CONTROL; OHIO LAWS REGARDING
CONTROL SHARE ACQUISITIONS AND MERGER MORATORIUM
The proposed amendment could have the effect of discouraging a merger,
tender offer or other change in control of the Company or the replacement of its
directors and management. Certain other provisions of the Company's Amended
Articles and Code of Regulations, and of Ohio corporation law, could have a
similar effect.
The Company's Amended Articles contain requirements for approval of certain
business combinations involving the Company. These provisions require that,
unless a "fair price" requirement has been satisfied, any merger and certain
other business combination transactions involving the Company and any holder of
20% or more of the Company's Common Shares ("Related Person") cannot be
completed unless the transaction is approved either by a majority of the
Company's "Continuing Directors" (as defined in the Amended Articles) or by the
affirmative vote of the holders of 75% of the Common Shares having voting power
with respect
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<PAGE> 28
to any such proposal and by the affirmative vote of the holders of a majority of
the Common Shares having voting power with respect to any such proposal other
than the Common Shares owned by the Related Person. Under the "fair price"
provision, the cash or other consideration to be paid for each of the Company's
Common Shares acquired in the transaction cannot be less than the highest per
share price paid by the Related Person in acquiring any of the Company's Common
Shares. These provisions may not be amended or repealed except by the vote of
holders of 75% of the Common Shares having voting power with respect to any such
proposal. The directors and executive officers of the Company beneficially own
approximately 15.9% of the outstanding Common Shares.
On April 25, 1997, the Company's shareholders approved amendments to the
Company's Code of Regulations which classify the Board of Directors into three
classes of directors serving staggered three-year terms, increase the
shareholder vote necessary to increase or decrease the number of directors to
75% of the voting power of the Company, require advance written notice to the
Company of shareholder nominations for the election of directors and increase
the shareholder vote necessary to amend or repeal the foregoing provisions to
75% of the voting power of the Company.
The Code of Regulations of the Company currently provides that directors
may be removed without cause only by the affirmative vote of 75% of the voting
power of the Company with respect to the election of directors. This provision
would prevent a shareholder possessing a majority, but less than 75%, of the
voting power of the Company from unilaterally removing directors and replacing
them with its own representatives.
In addition, Ohio corporation law requires prior shareholder approval of
any "control share acquisition" of certain Ohio corporations, including the
Company. A "control share acquisition" is defined as the acquisition of
one-fifth, one-third or a majority of the voting power of the corporation in the
election of directors. Under these provisions, any person who proposes to make a
control share acquisition of the Company is required to notify the Company in
advance of the proposed transaction and upon receipt of such notice, the Company
must call a special meeting of shareholders to vote on the transaction. A
twofold quorum requirement would have to be met at the meeting; that is, both
the holders of a majority of the voting shares, and the holders of a majority of
the voting shares after excluding shares held by the acquiring person, certain
directors and officers of the Company, and certain other holders who have
acquired a large block of the Company's stock after public disclosure of the
proposed control share acquisition, would have to be present in person or by
proxy at the meeting. The proposed acquisition could proceed only if it is
approved by a majority of both of these quorums. The notice, special meeting and
shareholder approval requirements must be met each time a person's holdings,
after giving effect to the proposed share purchase, would exceed any of the
one-fifth, one-third or majority voting power thresholds.
Further, Ohio corporation law includes "merger moratorium" provisions that,
in general, prohibit certain Ohio corporations, including the Company (an
"issuing public corporation"),
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from entering into a merger, consolidation or other specified transaction
("Regulated Transaction") with any person who, together with related parties,
has the right to exercise 10% or more of the voting power of the issuing public
corporation in the election of directors ("interested shareholder"), for a
period of three years after the date on which such person became an interested
shareholder ("share acquisition date"), unless, prior to such share acquisition
date, the directors of the issuing public corporation approved either the
Regulated Transaction or the purchase of shares which resulted in such person
becoming an "interested shareholder." After the three-year period, the issuing
public corporation may engage in a Regulated Transaction with the interested
shareholder only if (a) the directors of such corporation had approved the
purchase of shares by the interested shareholder prior to such share acquisition
date, (b) the transaction is approved by the affirmative vote of the holders of
at least two-thirds of the voting power of the issuing public corporation (or
such other proportion as the articles may provide) and by at least a majority of
the disinterested shares or (c) certain "fair price" requirements are satisfied
with the respect to the consideration payable in the transaction to the holders
of disinterested shares.
The Company and its shareholders are subject to the "control share
acquisition" and "merger moratorium" laws whether or not the proposed amendment
is adopted. The proposed amendment is not part of a comprehensive plan of the
Board or management to implement a series of "anti-takeover" measures and
neither the Board nor management presently intends to propose any other or
additional amendments to the Company's Amended Articles of Incorporation or Code
of Regulations that may have such an effect.
VOTE REQUIRED FOR APPROVAL
Under Ohio corporation law and the Company's Amended Articles, the
affirmative vote of a majority of the outstanding Common Shares is required for
approval of this proposal.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE FOR THIS PROPOSAL.
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<PAGE> 30
ITEM 3: PROPOSAL TO APPROVE THE PROGRESSIVE CORPORATION
1998 DIRECTORS' STOCK OPTION PLAN
GENERAL
The Progressive Corporation 1998 Directors' Stock Option Plan ("1998 Plan")
was adopted by the Board of Directors on February 6, 1998, subject to
shareholder approval as described below. The full text of the 1998 Plan will be
filed as an exhibit to the Company's Annual Report on Form 10-K for the year
ended December 31, 1997. The following description is qualified in its entirety
by reference to the 1998 Plan.
The 1998 Plan is subject to approval by shareholders at the Annual Meeting.
Such approval is required by the rules of the New York Stock Exchange. If
approved by shareholders, the 1998 Plan will replace the 1990 Directors' Stock
Option Plan ("1990 Plan") with respect to future stock option awards for
directors. The termination of the 1990 Plan will not affect the rights of
directors with respect to any outstanding stock options previously granted
thereunder. The 1990 Plan is a "formula" plan, under which the decisions
concerning the timing, price and amount of all stock option awards granted to
participating directors are determined in advance and specified in the Plan.
Under the 1990 Plan, after each Annual Meeting of Shareholders, each
non-employee director of the Company receives a stock option to purchase 2,000
Common Shares at a per share exercise price equal to the fair market value of
the Common Shares on the date of such Annual Meeting. This formula ensured that
the grant of such options would qualify for the exemption from the forfeiture
provisions of Sections 16(b) of the Securities Exchange Act of 1934 ("1934 Act")
provided by Rule 16b-3 of the Securities and Exchange Commission. Generally,
Section 16(b) provides for the forfeiture of any profit realized by officers,
directors and 10% shareholders of a public company from any combination of a
purchase and sale of the company's equity securities within any six-month period
("short-swing liability"). Rule 16b-3 provides an exemption from Section 16(b)
for certain transactions under employee stock plans, provided specified
conditions are met.
Rule 16b-3 was amended in 1996. Prior to these amendments, the exemption
afforded by the Rule was conditioned, among other things, upon shareholder
approval of the plan. Under the 1996 amendments, shareholder approval of a
stock-based plan is no longer required as a condition to the exemption provided
by the Rule; instead individual stock option awards may now be approved by
either shareholders, the full board of directors or a board committee consisting
of not less than two "non-employee" directors. These amendments allow companies
to replace their rigid formula plans with new plans that offer the flexibility
to structure the size and value of individual stock option awards in light of
competitive conditions, while retaining the exemption from short-swing liability
provided by Rule 16b-3, as amended. The Board believes that it is in the best
interest of the Company to replace the 1990 Plan with the 1998 Plan in order to
provide the Company with the flexibility to determine the size and value of
individual awards in light of trends in director compensation and to help ensure
that the
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<PAGE> 31
Company's compensation program for Board members remains both fair and
competitive. If shareholders fail to approve the 1998 Plan, the 1990 Plan will
remain in effect until April 27, 2000, and the Company may adopt a cash-based
plan or provide other alternative means to attract, retain and reward directors.
The purposes of the 1998 Plan are to enable the Company to attract, retain
and reward directors of the Company and to strengthen the mutuality of interest
between such directors and the Company's shareholders by offering such directors
options to purchase Common Shares of the Company.
The 1998 Plan provides for the granting to eligible directors of the
Company of options ("Stock Options") to purchase Common Shares, $1.00 par value,
of the Company. All directors of the Company who are not full-time employees of
the Company or any of its subsidiaries are eligible to participate in the 1998
Plan. There are currently eight non-employee directors of the Company. Under the
terms of the 1998 Plan, Stock Options may be granted with respect to an
aggregate of not more than 200,000 Common Shares, subject to adjustment for
stock splits and similar events. The Common Shares issuable under the 1998 Plan
will be either authorized but unissued or treasury shares. Common Shares subject
to Stock Options under the 1998 Plan which are forfeited or terminated or expire
unexercised shall be again available for distribution in connection with future
awards of Stock Options under the Plan. The closing price of the Common Shares
on the New York Stock Exchange on March 3, 1998 was $117 5/16.
ADMINISTRATION
The 1998 Plan will be administered by the Executive Compensation Committee
of the Board of Directors. The Committee consists of not less than three Board
members, all of whom are "non-employee directors" within the meaning of Rule
16b-3. The Committee members serve at the pleasure of the Board.
The Committee has full power and authority to interpret and administer the
1998 Plan, to select the individuals to whom awards will be granted under the
1998 Plan and to determine the number of shares that may be purchased under
awards granted to each participant, the consideration, if any, to be paid for
such awards, the timing of such awards, the terms and conditions of such awards
and the terms and conditions of the related stock option agreements entered into
with participants.
The Committee has the authority to adopt, alter and repeal such rules,
guidelines and practices governing the 1998 Plan as it shall deem advisable from
time to time; to interpret the terms and provisions of the plan and any award
issued under the plan (and any agreements relating thereto); and to otherwise
supervise the administration of the plan.
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<PAGE> 32
TERMS OF STOCK OPTIONS
Each Stock Option granted under the 1998 Plan will be evidenced by the
execution of a stock option agreement in form approved by the Committee. The
option exercise price per Common Share under a Stock Option will be equal to the
Fair Market Value (as defined in the 1998 Plan) of the Common Shares on the date
of grant. The Committee may substitute new Stock Options for previously granted
Stock Options, including previously granted Stock Options having a higher option
exercise price.
The term of each Stock Option will be determined by the Committee and may
not exceed 10 years from the date of grant.
The Committee will determine the time or times at which, and the conditions
under which, each Stock Option may be exercised. Unless otherwise determined by
the Committee at or after grant, no Stock Option may be exercisable prior to six
months and one day following the date of grant. The Committee may provide that
Stock Options may be exercisable only in installments or only after a specified
vesting date, and the Committee may accelerate or waive such installment
exercise provisions or vesting date at any time at or after the date of grant.
Stock Options may be exercised, in whole or in part, by giving written
notice of exercise to the Company specifying the number of Common Shares to be
purchased. Such notice must be accompanied by payment in full of the purchase
price for such Common Shares, either in cash or by check or such other
instrument as the Company may accept. Unless otherwise determined by the
Committee, the option exercise price may be paid in full or in part by delivery
of unrestricted Common Shares or Common Shares that are part of the Stock Option
being exercised. In each case, the Common Shares so delivered will be valued at
Fair Market Value on the exercise date.
Stock Options shall not be transferable by the participant. All Stock
Options may be exercised only by the participant, by his estate in the event of
his death, or by his authorized legal representative if the participant is
unable to exercise an option as a result of disability.
If a participant dies while holding an unexercised Stock Option, such Stock
Option may thereafter be exercised, to the extent such option was exercisable at
the time of death or would have become exercisable within one year thereafter
had the participant continued to fulfill all conditions of the award during such
period, by the participant's estate (acting through its fiduciary) for a period
of one year from the date of death, regardless of the term of the Stock Option
remaining after the participant's death. The balance of the Stock Option will be
forfeited.
If a participant is unable to serve as a director by reason of disability,
any Stock Option then held by such participant may thereafter be exercised, to
the extent such Stock Option was exercisable at the inception of such disability
or would have become exercisable within one year thereafter had the participant
continued to fulfill all conditions of the award during such period, by the
participant or by the participant's duly authorized legal representative if the
participant
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<PAGE> 33
is unable to exercise the Stock Option as a result of his disability, for a
period of one year (or such other period as the Committee may specify at or
after grant) from the date of the inception of such disability; provided,
however, that in no event may any such Stock Option be exercised prior to six
months and one day from the date of grant. The balance of the Stock Option will
be forfeited.
The Company may at any time buy out, for a payment in cash or Common
Shares, a Stock Option previously granted, on such terms and conditions as shall
be agreed upon by the Company and the participant.
CHANGE IN CONTROL
Certain acceleration and valuation provisions take effect with respect to
outstanding Stock Options upon the occurrence of a Change in Control or a
Potential Change in Control (as such terms are defined in the 1998 Plan) of the
Company. In the event of a Change in Control or a Potential Change in Control,
any Stock Options then outstanding will be cashed out for the Change in Control
Price (as defined in the 1998 Plan), unless the Change in Control is approved by
the Board of Directors prior thereto.
ADJUSTMENTS FOR STOCK DIVIDENDS, MERGERS, ETC.
In the event of any consolidation or merger, stock split or combination,
stock dividend or other change in the Common Shares, such adjustment will be
made in the aggregate number of shares reserved for issuance under the 1998
Plan, and in the number and option price of shares subject to outstanding Stock
Options as shall be necessary to prevent dilution of the participants'
interests.
AMENDMENT AND TERMINATION
The Board may at any time, in its sole discretion, amend, alter or
discontinue the 1998 Plan, or amend the terms of any outstanding Stock Option
granted thereunder. No such action shall be taken, however, which would impair
the rights of a participant under a Stock Option previously granted without the
participant's consent. The Company's shareholders will be asked to approve any
amendment to the 1998 Plan required to be submitted for shareholder approval
under Section 16 of the 1934 Act or the rules and regulations promulgated
thereunder or under the rules of the New York Stock Exchange.
FEDERAL INCOME TAX CONSEQUENCES OF THE PLAN
The following is a brief summary of the general federal income tax
consequences of transactions under the 1998 Plan based on federal income tax
laws in effect as of the date hereof. This summary is not intended to be
exhaustive and does not describe foreign, state or local tax consequences.
31
<PAGE> 34
Stock Options granted under the 1998 Plan do not qualify as incentive stock
options under Section 422 of the Internal Revenue Code of 1986, as amended
("Code"), and are therefore deemed to be non-qualified stock options for federal
income tax purposes. Generally, therefore, (a) no income is realized by the
optionee at the time the option is granted; (b) upon exercise of the option, the
optionee realizes ordinary income in an amount equal to the excess, if any, of
the fair market value of the shares on the date of exercise over the option
exercise price paid for the shares, and the Company is entitled to a tax
deduction in the amount of ordinary income realized (provided that applicable
reporting requirements are satisfied); and (c) upon disposition of the shares
received upon the exercise of the option, the optionee recognizes, as either
short-term, mid-term or long-term capital gain (loss), depending upon the length
of time that the optionee has held the shares, gain (loss) equal to the
difference between the amount realized and the fair market value of the shares
on the date of exercise.
With respect to the exercise of a Stock Option and the payment of the
option exercise price by the delivery of shares, to the extent that the number
of shares received does not exceed the number of shares surrendered, no taxable
income will be realized by the optionee at that time, the tax basis of the
shares received will be the same as the tax basis of the shares surrendered, and
the holding period of the optionee in the shares received will include his
holding period in the shares surrendered. To the extent that the number of
shares received upon the exercise of the option exceeds the number of shares
surrendered, ordinary income will be realized by the optionee at that time in
the amount of the fair market value of such excess shares, the tax basis of such
excess shares will be such fair market value, and the holding period of the
optionee in such shares will begin on the date such shares are transferred to
the optionee.
Upon a subsequent sale of any shares acquired pursuant to the exercise of a
Stock Option, an optionee will have capital gain (loss) equal to the difference
between the amount realized upon such sale and the optionee's basis in the
shares. The optionee's basis is equal to the sum of the purchase price of such
shares and the amount of income, if any, recognized upon the exercise of such
Stock Option. Whether any such capital gain (loss) is short-term, mid-term or
long-term will depend on the optionee's holding period with respect to the
shares.
CAPITAL GAINS
Under current law, long-term capital gains of individuals are subject to a
maximum tax rate of 20% (or 10% for individuals in the 15% ordinary income tax
bracket). Mid-term capital gains of individuals are subject to a maximum tax
rate of 28%. Short-term capital gains of individuals are subject to the same tax
rates as those applicable to ordinary income. Capital losses must be offset
against any capital gains, and only the lesser of the excess of such capital
losses over such capital gains or $3,000 ($1,500 in the case of a married
individual filing a separate return) is deductible against other income.
Long-term capital gain or loss treatment is applicable if the holding
period is more than 18 months. Mid-term capital gain or loss treatment is
applicable if the holding period is more than
32
<PAGE> 35
one year but not more than 18 months. Short-term capital gain or loss treatment
is applicable if the holding period is one year or less.
OTHER BENEFIT PLANS FOR DIRECTORS
In voting on this proposal, shareholders should consider the provisions
that the Company has already made to compensate and reward directors. The
Company pays retainer and meeting fees to directors, maintains the Directors
Deferral Plan and has granted stock options to participating directors under the
1990 Plan. These fees and plans are described above under "Executive
Compensation," beginning on page 9.
VOTE REQUIRED FOR APPROVAL
The affirmative vote of a majority of the votes cast on this proposal,
provided the total number of votes cast represents a majority of the outstanding
Common Shares, is required for the approval of this proposal.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE FOR THIS PROPOSAL.
33
<PAGE> 36
INDEPENDENT ACCOUNTANTS
At the meeting of the Board of Directors of the Company held on February 6,
1998, the Board selected Coopers & Lybrand L.L.P. to serve as the independent
accountants for the Company and its subsidiaries for 1998. Representatives of
Coopers & Lybrand L.L.P. are expected to be present at the Annual Meeting with
the opportunity to make a statement about the Company's financial condition, if
they desire to do so, and to respond to appropriate questions.
SHAREHOLDER PROPOSALS
Any shareholder who intends to present a proposal at the 1999 Annual
Meeting of Shareholders for inclusion in the proxy statement and form of proxy
relating to that meeting is advised that the proposal must be received by the
Secretary at the Company's principal executive offices located at 6300 Wilson
Mills Road, Mayfield Village, Ohio 44143, not later than November 25, 1998. The
Company will not be required to include in its proxy statement or form of proxy
any shareholder proposal which is received after that date or which otherwise
fails to meet requirements for shareholder proposals established by regulations
of the Securities and Exchange Commission.
SHAREHOLDER VOTE TABULATION
Votes will be tabulated by or under the direction of Inspectors of
Election, who may be regular employees of the Company. The Inspectors of
Election will certify the results of the voting at the Annual Meeting.
The director nominees who receive the greatest number of affirmative votes
will be elected directors. Abstentions and broker non-votes thus will not affect
the results of the election.
The proposal to amend the Company's Amended Articles of Incorporation to
increase the number of authorized Common Shares from 200,000,000 to 300,000,000
will be adopted if approved by the affirmative vote of a majority of the
outstanding Common Shares. Abstentions and broker non-votes will not be counted
as affirmative votes and thus will have the same effect as a vote against this
proposal.
The proposal to approve The Progressive Corporation 1998 Directors' Stock
Option Plan will be adopted if approved by the affirmative vote of the majority
of the votes cast on the proposal, provided a majority of the outstanding Common
Shares are voted on the proposal. Abstentions and broker non-votes will not be
counted as cast votes.
34
<PAGE> 37
OTHER MATTERS
The solicitation of proxies is made by and on behalf of the Board of
Directors. The cost of the solicitation, including the reasonable expenses of
brokerage firms or other nominees for forwarding proxy materials to beneficial
owners, will be borne by the Company. In addition to solicitation by mail,
proxies may be solicited by telephone, telegraph or personally. The Company has
engaged the firm of Morrow & Co., New York, New York, to assist it in the
solicitation of proxies at an estimated cost of $16,000. Proxies may be
solicited by directors, officers and employees of the Company without additional
compensation.
If the enclosed proxy is executed and returned, the shares represented
thereby will be voted in accordance with any specifications made therein by the
shareholder. In the absence of any such specifications, the proxies will be
voted (a) to elect the three nominees named under "Election of Directors" above;
(b) FOR the proposal to amend the Company's Amended Articles of Incorporation to
increase the number of authorized Common Shares from 200,000,000 to 300,000,000
and (c) FOR the proposal to approve The Progressive Corporation 1998 Directors'
Stock Option Plan.
The presence of any shareholder at the meeting will not operate to revoke
his proxy. A proxy may be revoked at any time insofar as it has not been
exercised by giving written notice to the Company or in open meeting.
If any other matters shall properly come before the meeting, the persons
named in the proxy, or their substitutes, will vote thereon in accordance with
their judgment. The Board of Directors does not know at this time of any other
matters that will be presented for action at the meeting.
35
<PAGE> 38
AVAILABLE INFORMATION
THE COMPANY WILL FURNISH, WITHOUT CHARGE, TO EACH PERSON TO WHOM A PROXY
STATEMENT IS DELIVERED, UPON ORAL OR WRITTEN REQUEST, A COPY OF THE COMPANY'S
ANNUAL REPORT ON FORM 10-K FOR 1997 (OTHER THAN CERTAIN EXHIBITS). REQUESTS FOR
SUCH DOCUMENT SHOULD BE SUBMITTED IN WRITING TO JEFFREY W. BASCH, CHIEF
ACCOUNTING OFFICER, THE PROGRESSIVE CORPORATION, 6300 WILSON MILLS ROAD,
MAYFIELD VILLAGE, OH 44143, OR BY TELEPHONE AT (440) 446-2851.
By Order of the Board of Directors.
David M. Schneider, Secretary
March 17, 1998
36
<PAGE> 39
EXHIBIT A
The following is the full text of the first paragraph of Article FOURTH of
the Amended Articles of Incorporation of The Progressive Corporation
("Company"), reflecting the amendment described in Item 2 of the Company's Proxy
Statement dated March 17, 1998.
FOURTH. The authorized number of shares of the corporation is
325,000,000, consisting of 20,000,000 Serial Preferred Shares, without
par value (hereinafter called "Serial Preferred Shares"), 5,000,000
Voting Preference Shares, without par value (hereinafter called "Voting
Preference Shares"), and 300,000,000 Common Shares, $1.00 par value
(hereinafter called "Common Shares").
A-1
<PAGE> 40
THE PROGRESSIVE CORPORATION
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS FOR THE ANNUAL
MEETING OF SHAREHOLDERS
The undersigned hereby appoints Charles B. Chokel, David M.
Schneider and Dane A. Shrallow, and each of them, with full power of
substitution, as proxies for the undersigned to attend the Annual
Meeting of Shareholders of The Progressive Corporation, to be held at
6671 Beta Drive, Mayfield Village, Ohio, at 10:00 a.m., Cleveland
time, on April 24, 1998, and thereat, and at any adjournment thereof,
to vote and act with respect to all Common Shares of the Company which
the undersigned would be entitled to vote, with all power the
undersigned would possess if present in person, as follows:
1. [ ] WITH or [ ] WITHOUT authority to vote (except as marked to the
contrary below) for the election as directors of all three
nominees listed below, each to serve for a term of three (3)
years.
B. Charles Ames, Peter B. Lewis and Donald B. Shackelford
(INSTRUCTION: To withhold authority to vote for any individual
nominee, print that nominee's name on the space
provided below.)
----------------------------------------------------------------------
2. Proposal to approve an amendment to the Company's Amended Articles
of Incorporation to increase the number of authorized Common
Shares, $1.00 par value, from 200,000,000 to 300,000,000.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. Proposal to approve The Progressive Corporation 1998 Directors'
Stock Option Plan.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
(Continued, and to be dated and signed, on the other side)
(Continued from the other side)
4. In their discretion, to vote upon such other business as may
properly come before the meeting.
THIS PROXY, WHEN PROPERLY EXECUTED, WILL BE VOTED AS SPECIFIED BY
THE SHAREHOLDER. IF NO SPECIFICATIONS ARE MADE, THIS PROXY WILL BE
VOTED TO ELECT THE NOMINEES IDENTIFIED IN ITEM 1 ABOVE AND TO APPROVE
THE PROPOSALS DESCRIBED IN ITEMS 2 AND 3 ABOVE.
Receipt of Notice of Annual Meeting of Shareholders and the related
Proxy Statement dated March 17, 1998, is hereby acknowledged.
Date: , 1998
-----------------------
----------------------------------
----------------------------------
----------------------------------
Signature of Shareholder(s)
PLEASE SIGN AS YOUR NAME OR NAMES
APPEAR HEREON. IF SHARES ARE HELD
JOINTLY, ALL HOLDERS MUST SIGN.
WHEN SIGNING AS ATTORNEY,
EXECUTOR, ADMINISTRATOR, TRUSTEE
OR GUARDIAN, PLEASE GIVE YOUR FULL
TITLE. IF A CORPORATION, PLEASE
SIGN IN FULL CORPORATE NAME BY
PRESIDENT OR OTHER AUTHORIZED
OFFICER. IF A PARTNERSHIP, PLEASE
SIGN IN PARTNERSHIP NAME BY
AUTHORIZED PERSON.
Proxy Card
<PAGE> 41
Sixtieth Anniversary Edition
TRUE
STORIES
[STAR]
The Progressive Corporation Annual Report 1997
<PAGE> 42
1997 Financial Highlights ............................... 4
Vision, Core Values and Objectives ...................... 5
Letter to Shareholders .................................. 16
Financial Review ........................................ 34
<PAGE> 43
words and pictures
Progressive is committed to providing innovative insurance products and
services at the lowest possible cost. We respond to consumers 24 hours a day, 7
days a week when, how and where they need us. But don't take our word for it.
In this year's annual report we'd like to share with you just a few of the
stories of the past year--stories that we believe show how Progressive is
meeting customers' needs and changing the face of auto insurance. And to let
you in the picture fully, we have commissioned eleven artists to respond
visually to each of our narratives. The efforts on paper and canvas of Marty
Ackley, Donald Baechler, Linda Burnham, Jody Guralnick, Jane Hammond, David
Humphrey, Sean Mellyn, Amy Sillman, Elena Sisto, Megan Williams and Andy Yoder
appear in the pages to come and will join Progressive's growing collection of
contemporary art.
1
<PAGE> 44
[ARTWORK]
2
<PAGE> 45
no. 1
a story of success
Our company recently celebrated its 60th year of operations. In 1937, the
Progressive insurance organization began business during a difficult but
hopeful era. From the start, we have been a forward-looking firm, growing into
new markets and pioneering new ways to meet consumers' needs. In 1956, when
Progressive Casualty Insurance Company was founded, we became one of the first
specialty underwriters of nonstandard auto insurance. In 1965, our success led
to the formation of The Progressive Corporation, a holding company whose 86
subsidiaries and 1 mutual insurance company affiliate have since provided a
range of personal automobile and other specialty property-casualty insurance
and related services throughout the United States and Canada. As we end the
year, our market (which includes personal auto insurance in the U.S. and
Ontario, along with commercial vehicle insurance) is estimated to consist of
$135.4 billion of premiums and Progressive finds itself with a 3.3% share.
Donald Baechler, acrylic and collage on paper, 1997
3
<PAGE> 46
1997 Financial Highlights
<TABLE>
<CAPTION>
(millions-except per share amounts) AVERAGE ANNUAL COMPOUNDED
RATE OF INCREASE (DECREASE)
----------------------------
5-YEAR 10-YEAR
1997 1996 % CHANGE 1993-1997 1988-1997
FOR THE YEAR
<S> <C> <C> <C> <C> <C>
Direct premiums written $ 4,825.2 $ 3,638.4 33% 24% 15%
Net premiums written 4,665.1 3,441.7 36 26 15
Net premiums earned 4,189.5 3,199.3 31 24 15
Total revenues 4,608.2 3,478.4 32 22 16
Operating income 336.0 309.1 9 21 14
Net income 400.0 313.7 28 21 16
Per share(1):
Operating income 4.46 4.12 8 21 15
Net income 5.31 4.14 28 21 17
Underwriting margin(2) 6.6% 8.5% 8 6
AT YEAR-END
Consolidated shareholders' equity $ 2,135.9 $ 1,676.9 27 28 18
Common Shares outstanding 72.3 71.5 1 2 (2)
Book value per Common Share $ 29.54 $ 23.45 26 30 20
Market capitalization $ 8,667.0 $ 4,817.3 80 35 26
Return on average common shareholders' equity(2) 20.9% 20.5% 23 23
STOCK PRICE APPRECIATION(3) 1-YEAR 5-YEAR 10-YEAR
Progressive 78.4% 33.3% 29.0%
S&P 500 33.3% 20.2% 18.0%
</TABLE>
1 Presented on a diluted basis.
2 The 5- and 10-year amounts represent averages for the period, not rates of
increase.
3 Assumes dividend reinvestment.
4
<PAGE> 47
Vision, Core Values and Objectives
Communicating a clear picture of Progressive by stating what we try to achieve
(Vision), what guides our behavior (Core Values), what our people expect to
accomplish (Objectives), and how we evaluate performance (Measurements), permits
all people associated with Progressive to understand their role and enjoy their
contributions.
VISION
We seek to be an excellent, innovative, growing and enduring business by
reducing the human trauma and economic costs of auto accidents, theft and other
perils while building a recognized, trusted, admired, business-generating
consumer brand. We seek to earn a superior return on equity and to provide a
positive environment to attract quality people and achieve ambitious growth
plans.
CORE VALUES
Progressive's Core Values are pragmatic statements of what works best for us in
the real world and they govern our decisions and behavior. We want them
understood and embraced by all Progressive people. Growth and change provide new
perspective and require regular refinement of Core Values.
Integrity We revere honesty. We adhere to high ethical standards, report
completely, encourage disclosing bad news and welcome disagreement.
Golden Rule We respect all people, value the differences among them and deal
with them in the way we want to be dealt with. This requires us to know
ourselves and to try to understand others.
Objectives We strive to be clear and open about Progressive's ambitious
objectives and our people's personal and team objectives. We evaluate
performance against all these objectives.
Excellence We strive constantly to improve in order to meet and exceed the
highest expectations of our customers, shareholders and people. "Quality" is
Progressive's process for teaching and encouraging our people to improve
performance and reduce the costs of what they do for customers. We base rewards
on results and promotion on ability.
Profit The opportunity to earn a profit is how the competitive free-enterprise
system motivates investment to enhance human health and happiness. Our
increasing profits reflect our customers and claimants increasingly positive
view of Progressive. We strive to find the most cost-effective ways to reduce
the human trauma and economic costs of automobile accidents. We value social and
economic well-being and strive to give back to our communities.
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They knew they had found their policyholder when they saw the balloons: "I've
had an accident. I'm at a phone booth. I'm late for a party and I'm holding
three balloons." Not that they had to look far. Two Progressive representatives
were busy organizing a new claim office in the Bronx when the Manhattan office
called and asked if they could help a policyholder who had a minor auto
accident nearby. They looked out the window and there she was! Now, Progressive
has been opening new claim offices across the country to ensure that our
Immediate Response(R) claims service is just that--immediate. But even we can't
pretend to have located our Bronx office with that degree of foresight. Still,
there was something uncanny about the whole situation. We were preparing for a
grand opening, our policyholder had the balloons, and our Bronx office responded
to its first claim in about 30 seconds. Might make you think that Progressive is
a company of destiny.
Sean Mellyn, oil on canvas, 1997
OF BALLOONS
AND FATE
NO. 2
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[ARTWORK]
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[ARTWORK]
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Until our claim representative Robert Simon arrived on the scene, a Progressive
policyholder in Garden City, Kansas was having a bad day. First, some of his
cows were missing. Then, when he set off after them, his truck got stuck in a
field. Finally, while trying to get unstuck, he inadvertently started a grass
fire that almost removed the garden from Garden City. It spread for three miles
destroying fields, fences and equipment. How did our claim representative react?
Unable to assess the devastation from the ground, he hired a pilot to fly him
over the scene, swooped down out of the clouds and determined that the damage
wasn't as bad as it seemed. In the end, the claim was settled within the
property damage policy limits. Progressive's claim representative Robert Simon
may not have saved the day entirely, but he certainly took the edge off.
Jane Hammond, mixed media on rice paper, 1997
ABOVE AND BEYOND
NO. 3
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- --------------------------------------------------------------------------------
Financial Objectives and Measurements
Consistent achievement of superior results requires that our people understand
Progressive's objectives and their specific role, and that their personal
objectives dovetail with Progressive's. Our objectives are ambitious yet
realistic. We are committed to achieving financial objectives over rolling
five-year periods. Experience always clarifies objectives and illuminates better
strategies. We constantly evolve as we monitor the execution of our strategies
and progress toward achieving our objectives.
RETURN ON SHAREHOLDERS' EQUITY
Our most important financial goal is to achieve an after-tax return on
shareholders' equity over a five-year period that is at least 15 percentage
points greater than the rate of inflation (measured by the Consumer Price Index
which was 1.7% in 1997, and averaged 2.6% over the past five years and 3.4% over
the past ten years). Return on equity was 20.9% in 1997, and averaged 23.3% over
the past five years and 22.8% over the past ten years.
PROFITABILITY
Progressive is driven by the goal of producing a 4% underwriting profit over the
entire retention period of an insured. Overall, we had an underwriting profit of
6.6% in 1997, 8.1% for the past five years and 5.8% for the past ten years.
Estimated industry results for the personal auto insurance market were
underwriting gains of 2.0% in 1997 and underwriting losses of .6% and 3.0%, for
the past five and ten years, respectively.
GROWTH
We seek increases in net premium volume that are at least 15 percentage points
greater than the rate of inflation. Company-wide net premiums written increased
35.5% in 1997, 26.3% compounded annually over the past five years and 15.4% over
the past ten years. Net premiums written in the personal auto insurance market
for the same periods grew 5.9%, 5.3% and 5.9%.
ACHIEVEMENTS
We are convinced that the best way to maximize shareholder value is to achieve
these financial objectives consistently. A shareholder who purchased 100 shares
of Progressive for $1,800 in our first public stock offering on April 15, 1971,
owned 7,689 shares on December 31, 1997, with a market value of $922,000, for a
26.3% compounded annual return, compared to the 8.9% return achieved by
investors in the Standard & Poor's 500 during the same period. In addition, the
shareholder received dividends of $1,845 in 1997, bringing total dividends
received to $16,345 since the shares were purchased.
In the ten years since December 31, 1987, Progressive shareholders have
realized compounded annual returns of 29.0%, compared to 18.0% for the S&P 500.
In the five years since December 31, 1992, Progressive shareholders' returns
were 33.3%, compared to 20.2% for the S&P 500. In 1997, the returns were 78.4%
on Progressive shares and 33.3% on the S&P 500.
The repurchase of Progressive stock is another way the Company increases
shareholder value. Over the years, when we have adequate capital and
Progressive's stock is attractively priced, we have repurchased our shares.
Since 1971, we spent $571.2 million repurchasing our shares, at an average cost
of $6.96 per share. During 1997, we repurchased 30,193 Common Shares to offset
obligations under various employee benefit plans.
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1997 Objectives and Accomplishments
<TABLE>
<CAPTION>
1997 last 5 years last 10 years
<S> <C> <C> <C>
RETURN ON SHAREHOLDERS' EQUITY
Objective 16.7% 17.6% 18.4%
Accomplishment 20.9 23.3 22.8
UNDERWRITING PROFIT (LOSS)
Objective 4.0 4.0 4.0
Accomplishment 6.6 8.1 5.8
Industry-Personal Auto Insurance Market 2.0 (.6) (3.0)
GROWTH (ANNUALIZED)
Objective 16.7 17.6 18.4
Accomplishment 35.5 26.3 15.4
Industry-Personal Auto Insurance Market 5.9 5.3 5.9
</TABLE>
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In a free-association test recently administered to 1,153 college students, the
word "insurance" prompted the response "romance" in 82.8% of cases...Alright,
we admit it--we're only kidding. Still, for our claim representatives (at our
more than 350 claim offices), romance isn't an unknown continent. On a recent
Saturday evening, Chandra Haines, a Progressive claim representative in
Savannah, Georgia came to the rescue of a young couple involved in a fender
bender. She helped them contact their families, and, despite the late hour,
arranged to have their car repaired immediately. The couple, who had just been
married, were heading to Florida for their honeymoon and had thought for certain
their trip was ruined. But they weren't counting on the efficiency of
Progressive's Immediate Response(R) claims service. In a romantic cause, our
claim representatives stand ready to slay any dragon.
THE
ROMANCE
OF
IMMEDIATE RESPONSE
NO. 4
---
Marty Ackley, mixed media on canvas, 1997
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[ARTWORK]
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[ARTWORK]
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NO. 5
---
Question: When is a two-hour delay still an immediate response? Answer: When a
tornado rips through your property and the rest of your neighborhood. It took a
Progressive claim representative two hours one Friday evening to navigate his
way through the debris and find the home of one of our policyholders after a
tornado wreaked havoc in Smyrna, Tennessee. The twister had lifted our
policyholder's garage high into the air and then very considerately deposited it
straight down onto his pickup truck. Our claim representative made his way to
the scene, assessed the damage and had a check in the policyholder's hand by the
next business day. Under the circumstances, we hesitate to call our service a
whirlwind, but we won't sit at home waiting out the weather.
WHIRLWIND
Megan Williams, gouache, pastel and charcoal on paper, 1997
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Letter to Shareholders
In 1997, Progressive continued on its path to leadership in automobile
insurance. I am proud and happy to report that we believe that our private
passenger auto premium growth in 1997 made Progressive the 5th largest United
States auto insurance company. We grew in 1997 by increasing our share of the
approximately $25 billion nonstandard auto insurance market and by continuing to
grow in the approximately $89 billion standard and preferred auto insurance
market. We work hard and invest heavily in people and process in order to reduce
the human trauma and economic costs of auto accidents. Our results reflect the
cost of these investments, designed to make us more competitive for all auto
insurance.
In 1997, Progressive's organization continued to adapt to the Company's larger
size and focus on the customer. Our focus on "Process" became more ingrained and
natural, and a number of major accomplishments occurred.
During 1997, we hired and trained over 5,700 people company-wide to help us
keep pace with our extraordinary growth. Our net premiums written grew 36% and
our total number of auto policyholders increased by 575,000 to 2.5 million. We
answered 16 million telephone calls during the year, responding to the policy
servicing needs of our customers 24 hours a day, 7 days a week. To maintain our
high standards and meet our customers' expectations was a challenge. We
identified opportunities to improve this process and made strides in this
direction by rolling out the first iteration of our Ownership Workbench, a smart
system designed to increase customer service, quality and productivity.
Despite the record increase in new employees, we were also able to improve the
timeliness of our Immediate Response(R) claims service and produce an average
claim severity that was more favorable than the entire industry. In addition to
hiring quality people, we continued to make significant investments in
technology to improve the way we respond to customers. We installed new phone
switches in our claim branches and developed new workflows to more effectively
answer our 25,000 daily claim calls. Also, through our wireless Claims
Workbench, we were able to increase the amount of information our claim
representatives have available when they meet with customers off-site.
Progressive recognized early on that the Internet would be come an
increasingly important vehicle for commerce communication. We launched America's
first auto insurance web site in April 1995, offering our customers a quick way
to find a local agent and to determine whether their vehicle is subject to any
federal recall. We continued to lead the way, being the first auto insurer to
offer interactive quoting and customer account status in 1996 and the first to
conduct direct Internet sales and accept online payments in 1997. Progressive's
web site (www.progressive.com) has won several awards, being named one of
ComputerWorld magazine's Premier 100 Web Sites and WebMaster magazine's top 50
Internet sites. As our experience with the Internet grows, so does our
excitement around how it will benefit our customers and our agents. Plans for
the future include enabling agents and customers to conduct more of their
transactions online, broadening our online sales offerings, and offering
"paperless" alternatives to our customers and agents.
Progressive's strong focus on customers leads to steady growth in market share
which, in turn, permits us to reduce the costs of doing business and become even
more competitive. Our people's superb response to the challenge of creating and
managing growth reaffirms both how committed and how talented they are. Great
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people operating with a clear Vision, strong Core Values and creative Strategies
will continue to drive Progressive's profitable growth.
Like all shareholders, we want premium growth to translate into current
earnings growth and a higher stock price. However, we manage by executing
meaningful, long-term strategies that build value which we expect to be
reflected in the stock price over five-year periods. Therefore, as an
investment, Progressive stock may be most attractive to investors interested in
long-term appreciation. On August 1, 1997, Standard & Poor's recognized our
leadership in the auto insurance business and strong historical financial
performance by adding Progressive to the S&P 500 Index. I am proud to report
that Progressive's total return to shareholders' in 1997, was 78.4%, ranking
28th out of the 500 companies in this index.
To facilitate growth and the execution of our strategies, we expanded the
number of local business units to bring us closer to the customer. During 1997,
we formed 21 new business units bringing the number of communities/states where
our operations are run by a local manager to 47 and bringing the total number of
business units to 54. In addition, we expanded our "Policy Team," which is now
comprised of 13 people who make Progressive's final management-level decisions.
A new role on the Policy Team is the Community Manager Support Process Leader
who is responsible for encouraging experimentation, fostering communication
among community managers and advocating community manager perspectives on the
Policy Team. This Process Leader joins our six other Process Leaders,
respectively responsible for Product, Independent Agent Marketing, Consumer
Marketing, Ownership (customer service), Technology and Claims, as well as the
Chief Financial, Human Resources, Legal, Information and International/Internet
Officers, and me, to ensure that we sustain our superior performance in the face
of increasingly intense competition and increasingly rapid technological change.
Most community managers report to Process Leaders. Community managers are
responsible for reducing claim costs while improving service, managing agent
distribution and relationships, direct marketing, and deciding price levels for
their territory. During 1997, we concentrated on developing our community
managers to help them meet their objectives. We defined the necessary
competencies and attributes and designed a Leadership Model showing how these
qualities are linked to attaining world-class results. Several community
managers participated in a week-long program focused on the dimensions included
in the model. The cornerstone of the experience was an assessment tool which
provided feedback to community managers and helped them create individual
development plans.
Progressive's unique approach to management continues to evolve along with its
business strategy. Our management philosophy includes the following:
Total Quality Management dovetails with our Excellence Core Value--doing
better than we did before--and empowers Progressive people to change how
they function if the change measurably improves customer service or reduces
costs, and if it does not disrupt others in the work chain. Because measurement
is essential to TQM, we have dramatically improved our ability to measure
performance and to control quality.
Teamwork is the way we work. We continue to improve the ways in which we
motivate, manage, evaluate and reward teams.
Steady Cost Reduction has been, and continues to be, critical to our
strategy. Underwriting expenses were 22.5% of premiums in 1997, compared to
21.6% in 1996 and 35.0% in 1990.
In 1997, we incurred additional expenses to support our infrastructure and to
hire and train people in anticipation of our growth. We also introduced our
advertising campaign to 13 states, bringing the total number of states where we
advertise to 19. In addition, we paid out record profit-sharing bonuses to
employees this year. In 1997, 14.4% of total compensation resulted from our
Gainsharing program (contingent cash incentive compensation program for all
Progressive people). We set our annual Gainsharing target at achieving a
combined ratio of 96% over the entire retention period of a policyholder and
growth in net premium volume in excess of 15% plus the rate of inflation. Our
outstanding financial results caused our payout to exceed our annual target by
an amount that had a .5 point effect on the expense ratio. Process Management by
top managers eliminates much staff/line friction, fosters cooperation among
business units and departments, and requires balancing delicate trade-offs
between local autonomy and collective effectiveness.
Thorough Testing of new ideas has replaced our former propensity to seize
perceived opportunities and develop them as fast as possible.
Performance-based Compensation pays our people very well for exceptional
performance, makes contingent pay significant to everyone and fosters the
achievement of our demanding objectives.
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RESULTS
In 1997, net premiums written increased 36% to $4,665.1 million, compared to
$3,441.7 million in 1996. We posted an annual underwriting profit for the 25th
time in the last 31 years and bettered our 4% underwriting goal with a 6.6%
margin in 1997.
Operating income, which excludes net realized gains on security sales and
one-time items, is the best measure of how well we manage our insurance
operations. Operating income increased to $336.0 million, or $4.46, compared to
$309.1 million, or $4.12 per share, in 1996. Operating income excludes $98.5
million of net realized gains in 1997, compared to $7.1 million in 1996. Net
income was $400.0 million, or $5.31 per share, this year, compared to $313.7
million, or $4.14 per share, in 1996. Return on shareholders' equity was 20.9%,
compared to 20.5% in 1996.
PROGRESSIVE'S CORE BUSINESS
Ninety-six percent of Progressive's net premiums written is insurance for
private passenger automobiles, recreational vehicles and small fleets of
commercial vehicles, which we categorize as "core." Core business net premiums
written grew 33% to $4,467.4 million, compared to $3,367.2 million in 1996. The
underwriting profit margin was 6.9%, compared to 8.1% in 1996.
In 1997, we used a new approach which includes rating based partially upon
consumer financial responsibility. This approach has been approved by
regulators and is in use in the 31 states that represent 80% of our core
written premiums. We hope to complete the rollout of this approach into the
remaining business units where it can be offered in 1998. We believe our use of
financial responsibility in auto insurance rating produces a more accurate
distribution of losses among consumers and, therefore, produces more accurate
pricing resulting in lower rates for most consumers as compared to our previous
approach. In addition, by ensuring more consistent products on a national
basis, we are able to analyze the data better and reduce the complexity of our
products for our customer service representatives and programmers.
Four years ago, we consolidated our new, unique and superior customer services
into a Progressive brand by expanding service in a number of states and testing
ways to project the brand to potential customers. We focused managers on
empowering people and constantly improving the delivery of around-the-clock,
immediate response, information-rich service, designed to delight customers.
We use a combination of television commercials, direct mail and other media to
urge consumers to consider Progressive's unique combination of price and
service. In 1997, we expanded the number of markets in which we advertise to
over 40 media markets reaching parts of 19 states.
Our advertising is largely situational and dramatizes the concerns consumers
have in claims and buying experiences with their auto insurance and highlights
"what you should expect" as the Progressive difference. Several new commercials
were developed in 1997 and will be used in 1998 to further our brand
communication. The consumers' choice to buy through our independent agent
network or by calling 1 800 AUTO PRO(R) (1-800-288-6776) is supported by our
advertising and we are encouraged by its impact on both distributions. In an
average 15-minute call, consumers can receive a quote for their particular risk
profile from Progressive as well as the rates that would be charged by up to
three other leading auto insurers, including State Farm and Allstate. Our
representative also explains the following service improvements, which when
considered together, are unique to Progressive:
Assistance after an accident, or other loss, is Progressive's most important
service, so we implore our customers to call 1-800-274-4499 immediately after
any incident. Twenty four hours a day, 7 days a week, a Progressive person
answers the phone, takes the information, authorizes emergency measures and
almost always can have a Progressive claim representative meeting with the
customer or claimant within a few hours.
Universal acceptance, because consumers abhor being rejected or cancelled.
Progressive rarely rejects and never cancels honest customers who pay their
premiums in the 45 states where our complete program is operative.
Competitive rates for risks from ultra-preferred to nonstandard in the states
with our complete program. As experience makes us more comfortable with
pricing standard/preferred risks, we increasingly concentrate on this market
which accounted for between 20% and 25% of 1997 core premium volume and is
expected to become an increasing percentage of total premium volume.
Many different ways to buy, to accommodate different consumer preferences. More
than 30,000 independent insurance agencies (our most important method of
distribution) sell Progressive products. In addition, we have joint marketing
relationships with national accounts and Progressive's 1 800 AUTO PRO(R)
telephone service. In 1997, increased price competitiveness, superior service
and greater consumer awareness of the Progressive brand
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helped independent agents regain lost standard and preferred auto market share.
The number of independent agencies writing Progressive standard and preferred
auto more than doubled, resulting in 126% growth of agent-produced standard and
preferred new auto policies. 24 hours a day, 7 days a week service. Consumers
want to do business when it's convenient for them, so we operate 24 hours a day,
7 days a week to provide new insurance quotes, handle endorsements and questions
concerning current policies, and, most importantly, respond to accidents and
other incidents. Our customers depend upon our service, which is supported by a
real-time disaster management approach that continuously monitors performance of
internal systems, threatening weather patterns and other natural events. This
approach allows us to regularly reconfigure our network and place disaster
response teams in motion as soon as we hear of an event requiring special
resources.
PROGRESSIVE'S DIVERSIFIED BUSINESSES
The United Financial Casualty Company, Professional Liability Group, Midland
Financial Group and Motor Carrier business units provide combinations of service
and indemnity to businesses and individuals. Their primary products are
collateral protection coverage and loan tracking for automobile lenders and
financial institutions, directors and officers liability and fidelity coverage
for American Bankers Association member community banks, nonstandard auto
insurance, and underwriting and claim servicing for state involuntary residual
market commercial and personal auto programs. We are the largest provider of
collateral protection and D&O coverage to banks and the largest service carrier
for the involuntary market, though the market size for each declined in 1997.
On March 7, 1997, Progressive acquired Midland Financial Group, Inc. for
about $50 million. Midland underwrites and markets nonstandard private
passenger automobile insurance through approximately 3,700 independent agents
across 11 states, primarily in the southern and western United States. During
1997, Progressive was able to effectively raise rates, improve claim handling
and customer service, implement new measures and controls, consolidate offices
and introduce objectives, performance evaluations and Gainsharing incentives to
all Midland people.
The diversified businesses produced revenues and pre-tax profits of $248.7
million and $.7 million, respectively, in 1997, compared to $117.7 million and
$24.3 million in 1996. During 1997, Midland contributed revenues of $84.1
million.
INVESTMENTS AND CAPITAL MANAGEMENT
Progressive, like all insurance companies, consists of two distinct enterprises:
the operating insurance business and investment management. We recognize the
challenge and the opportunity of having two businesses, requiring different
expertise, resident in the same company. The success of each bears meaningfully
on the results of the other, and the success of the whole.
The financial markets are dynamic, requiring flexibility and responsiveness
from our professionals. Our portfolio is a financial institution that provides
capital to other enterprises and is a business that lends and invests. We aspire
to generate better after-tax portfolio returns than those available from
comparable outside management at less cost without losses that curtail
underwriting growth. Our approach to risk is conservative. A majority of the
investment decisions are derived from "bottom up" rather than "top down"
processes. We eschew formula investing. We endeavor to examine as broad a field
of opportunity as possible and to take advantage of opportunities that are
consistent with our available resources. The examination of every possibility is
less important than the quality of our performance at the tasks we undertake.
Our professionals should be broad gauge and of the highest quality, able to
compete effectively with their counterparts in other financial institutions. We
hire the best raw talent we can find, then train and develop it. We pay above
average compensation for good performance and to retain our best people. Stock
options align their interests with shareholders. We re-evaluate our compensation
approach annually to ensure that it is performance driven but does not motivate
counterproductive behavior. We want our professionals to possess financial
sophistication, thoroughness, experience and integrity. The exercise of good
judgment is our best protection against loss.
We are building long-term business relationships by co-venturing with outside
organizations and financial professionals that will enhance our investment
program. These relationships, combined with our internal resources, form a
virtual investment organization with more experience, expertise and access to
opportunity than any organization we could assemble internally.
The Company's rapid growth and high margins produce expanding capital
resources that support the operating business or are deployed in financial
investments. Our highest priorities are to: manage the Company's capital to
support all the insurance we can profitably underwrite, without issuing stock or
losing our
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investment-grade debt rating; improve our debt cost relative to peer companies;
and repurchase stock more cost effectively than a passive strategy.
Our investment processes fall into five broad categories: stocks, bonds,
alternative investments, capital management and acquisitions. All require
quantitative skills and a knowledge of accounting, financial analysis,
economics, financial markets and securities regulation. Common stock and the
bond portfolio performance is compared to a sample of other managed portfolios
on an annual basis.
Common Stock Investing Our holdings consist of a diversified portfolio of
publicly-traded issues. Foreign investments are evaluated on an individual
basis. A knowledge of the stock markets and trading, and the analysis of
industries, business processes, historical performance and financial structure,
in combination with the assessment of management capabilities, are the essential
competencies of our stock investing.
Fixed-Income Investing The fixed-income holdings are comprised of
investment-grade issues and BB rated securities, which do not exceed 5% of the
portfolio. Allocations are made to market sectors, including foreign denominated
securities on a fully hedged basis, with consideration for availability, degree
of opportunity and diversification. Quantitative analysis of security cash
flows, credit analysis, and knowledge of the bond markets, trading, derivatives,
options, foreign exchange and risk management are the key skill sets.
Alternative Investing The commitment to alternative investments is influenced by
the amount of capital in excess of our anticipated three-year need for
additional surplus. These securities can reduce the dilution of our return on
equity by producing returns on excess capital superior to the expected long-term
return on common stocks. Funds, private equities, mezzanine investments,
distressed securities and similar investments comprise this portfolio. These
equity-like commitments are anticipated to bear returns that are higher than,
and offer some diversification from, common stocks. A knowledge of specific
documentary requirements and the ability to conduct detailed due diligence and
negotiations are required in addition to competencies relevant to stock and bond
investing.
Capital Management We believe that the optimal capital structure is defined by a
debt to total capital ratio that maintains our A bond ratings. This structure
provides for a low cost of debt capital and the availability of higher leverage
to fund extraordinary needs without introducing a volatility to our stock price
that would prejudice our multiple. We try to reduce our interest expense by
issuing debt when interest rates are low. We repurchase stock on an
opportunistic basis to reduce or eliminate the dilution of employee option
exercises, improve the return on our stock and distribute excess capital to our
shareholders. The required knowledge and skills include: the dynamics of our
capital needs, rating agencies, capital markets, financing alternatives,
regulatory filings, documentation and hedging.
Contributions of surplus to new operating subsidiaries are evaluated on the
basis of the appropriateness of the expected return. Surplus exceeding one third
of net premiums written is returned to the holding company when possible.
Decisions regarding the underemployed leveraged equity retained in the holding
company are driven by estimated growth in operating surplus requirements for
three years, our ability to generate high returns on the excess above operating
requirements, the possibility of strategic investments and the relative value of
our stock in the context of a repurchase.
RISKS
Legislative and Regulatory Risk Insurance laws and regulations change
continually. On January 1, 1997, California enacted mandatory insurance laws,
requiring proof of insurance when renewing auto registrations. Several other
reforms were approved, but, because of the legal process, may not be effective
until the future. California passed Proposition 213, which eliminates pain and
suffering awards for uninsured motorists, drunk drivers and fleeing felons. An
appeal to the Supreme Court is likely. In addition, Louisiana passed its "no
pay, no play" bill, forcing uninsured drivers to self insure their first $10,000
in both bodily injury and property damage; concurrently, companies must roll
back rates 10% on the same coverage and offer uninsured motorists the option to
elect coverage that waives their right to recover pain and suffering damages at
a 20% discount. This case is still under appeal.
Unpredictable Underwriting Margin and Growth Rate Our strategy is to strive to
achieve a 4% underwriting profit margin over the entire retention period of an
insured. We cannot predict with precision the timing and pace of changes in
underwriting margins, in retention nor in the rate of growth. We monitor closely
to ensure that rates are adjusted promptly and adequately to obtain 4% margins
over the entire retention period of a policyholder.
Pricing Risk We continue to learn how to price standard and preferred auto
insurance, and to experiment
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with new ways to price certain segments. We minimize the risk implicit in new
pricing methodology by controlling volume in new programs and changing rates
immediately when experience dictates. During 1997, Progressive lowered
countrywide auto rates an average of .9%.
Homeowners Insurance This type of insurance has the potential to expose
Progressive to catastrophes. Thus, there will be risk if our auto insurance
market share objectives require us to offer it. In 1997, we began selling
Travelers homeowners insurance to direct customers in Ohio. This effort has yet
to produce any material results, but we continue to study the effects on our
auto sales. Our current lack of a homeowners product in most states is also
risky because many consumers prefer to buy all their insurance from one company.
We do not intend to enter the homeowners market at this time, primarily to avoid
the risk of disrupting our existing business rather than due to the risks
inherent in the homeowners line.
Advertised Brand Consumer advertising and brand awareness require higher
performance standards. We continually consider consumers' demands and appreciate
their ability to make wise choices. In response, we are always looking for new
and innovative ways to improve service at a lower cost.
Competitor Response Other insurers are reacting to Progressive's attempt to
change consumers' auto insurance experience, but we cannot predict when and how
their response will affect our growth and profitability. We monitor competitors
and improve our products and services to assure that our consumer offerings are
among the best in the industry. In addition, our people, with their knowledge of
our operations along with their skills and talents, are being sought by
companies with whom we compete. The property-casualty industry's excessive
capitalization, measured by the net premiums written to surplus ratio of .9 to
1, the lowest ratio for the industry in 60 years, means competitors might accept
lower returns on equity than they historically received.
THE FUTURE
Progressive is leading a wave of change in the United States' system for dealing
with auto accident injuries and property damage. We are reducing auto accident
victims' trauma and costs, improving how consumers feel about auto insurance and
being rewarded for our leadership and commitment. Success so far encourages us
to expand at a pace that tests our ability to provide the service we aspire to
deliver.
We begin 1998 as we began all other years--excited, respectful of the
challenge implicit in our objectives and strategy, humbled by our failures,
proud of having responded to them and confident that our excellent people will
continue to achieve superior results.
Much will be required to realize our Vision. At Progressive, it is always as
if we are just beginning our business and so we look at a future that is
brighter than ever.
We deeply appreciate the customers we are privileged to serve. Thank you for
your business, and thanks especially to the more than 30,000 independent
insurance agents who chose to do business with Progressive in 1997. We are
particularly grateful for our shareholders' continued confidence. To the men and
women who make Progressive a great company, thanks for all your contributions in
1997 and the promise you bring to our future.
Joy, Love and Peace
/s/ Peter B. Lewis
Peter B. Lewis
Chairman, President and Chief Executive Officer
21
<PAGE> 64
BAD NEWS
One Sunday evening in June, a motorist reported that he and his passengers had
suffered minor injuries when they were rear-ended by one of our policyholders.
By Monday afternoon, our claim representative had established liability,
inspected the damage, and settled all five injury claims. The motorist was
thrilled to have been served so promptly. An attorney hoping to represent him
wasn't. When he phoned us the next day, we could do no more than break the
unhappy news.
IS GOOD NEWS
NO. 6
---
Linda Burnham, mixed media on lithograph and paper, 1997
22
<PAGE> 65
[ARTWORK]
23
<PAGE> 66
[ARTWORK]
24
<PAGE> 67
LONG DISTANCE TICKLE
NO. 7
---
As Carolyn Cummings puts it, she was "tickled" by Progressive. No, it's not what
you might think. She had just bought a new pickup truck when she saw our "cool
television commercial." So she called 1 800 AUTO PRO(R) and talked to one of our
insurance counselors. Carolyn was impressed by the information we provided, but
what really stuck in her mind was the friendly service: "I could feel your
counselor's smile through the phone, and it sounded like she was doing a job she
enjoyed." Herself an experienced customer service representative, Carolyn not
only bought a policy but applied for a job! "I like to give great customer
service," she says, "and Progressive offers a great service." Today, Carolyn is
a counselor in the AUTO PRO unit. She's "tickled to be part of this company."
Elena Sisto, casein, watercolor and gouache on paper, 1997
25
<PAGE> 68
IMPRESSING A TROOPER
NO. 8
---
On his way home one evening, a Progressive claim representative happened upon a
minor auto accident involving one of our policyholders. As he was inspecting the
damage to the vehicle, the police arrived. "Well I guess since you're here, I
can leave," joked one of the troopers. Later, the trooper asked if the claim
representative wouldn't mind staying until the police investigation was
finished. So our representative waited. What did the trooper want? Just some
information and a business card. He was so impressed with our Immediate
Response(R) claims service that he wanted to become a policyholder!
Jody Guralnick, oil with collage on panel, 1997
26
<PAGE> 69
[ARTWORK]
27
<PAGE> 70
[ARTWORK]
28
<PAGE> 71
How long do you think an insurance company could survive if it informed a
prospective client of a competitor who offered a slightly lower rate? Joseph
Glose couldn't believe his ears when a Progressive insurance counselor quoted
him our price and then told him about another insurer who could offer a lower
rate: "They're in the Yellow Pages. Give them a call." Although Mr. Glose was
impressed by our counselor's frankness, he couldn't resist contacting the other
firm. But when they said they'd have to call him back with a quote and then
never did, he returned to us. "You weren't the lowest," he says, "but I felt
that you cared about me as a customer." Progressive has been caring, and in
business, for over 60 years. Every day we prove to ourselves that honesty is the
best policy.
NO. 9
---
HONESTY IS THE BEST POLICY
David Humphrey, oil on paper, 1997
29
<PAGE> 72
NO. 10
---
ALL YOU NEED IS LOVE
When Donald Hoffman, an independent insurance agent writing for a competitor of
ours, heard that one of his clients was badly injured in an auto accident with a
Progressive policyholder, his heart sank. Mr. Hoffman was in Jackson, Michigan;
his client was vacationing near Daytona Beach, Florida. There was little he
could do in person. Yet he needn't have worried. Progressive's Daytona Beach
claim representative Keith Pelkey and office branch manager Paul Love treated
Mr. Hoffman's client as if she was one of our own. "The compassion and concern
they showed were wonderful," says Mr. Hoffman. "They even came to the hospital
to help my customer." Donald Hoffman has since decided to end his relationship
with our competitor and to begin representing Progressive. In a crisis, you can
count on Progressive to be there.
Amy Sillman, oil and gouache on wood, 1997
30
<PAGE> 73
[ARTWORK]
31
<PAGE> 74
[ARTWORK]
32
<PAGE> 75
Join Progressive and see the world? That's what "Jane" did. Nearly three decades
ago, Jane joined Progressive straight out of school. She started as an odd-jobs
person but progressed to serving the company in almost all areas. Along the way
she participated in every company retirement savings plan for which she was
NO. 11
---
TRAVELS WITH PROGRESSIVE
eligible. Progressive matched her contributions, and Jane, confident in the
prospects of a company she served so loyally, invested 90% of her savings in
Progressive stock. Today, her total account balance exceeds 16.5 times her
original contributions. Thanks to the savings she accumulated during her travels
with Progressive, Jane will be traveling the world.
Andy Yoder, watercolor, and pastel on paper, 1997
33
<PAGE> 76
1997 FINANCIAL REVIEW
[STAR]
Consolidated Financial Statements ......................... 36
Management Discussion and Analysis ........................ 49
Analysis of Loss and LAE Development....................... 53
Direct Premiums Written by State .......................... 53
Quantative Market Risk Disclosure.......................... 54
Quarterly Financial and Common Share Data ................. 55
Ten Year Summaries ........................................ 56
34
<PAGE> 77
Report of Coopers & Lybrand L.L.P., Independent Accountants
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS, THE PROGRESSIVE CORPORATION:
We have audited the accompanying consolidated balance sheets of The Progressive
Corporation and subsidiaries as of December 31, 1997 and 1996, and the related
consolidated statements of income, changes in shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1997. These
financial statements are the responsibility of The Progressive Corporation and
subsidiaries' management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of The Progressive
Corporation and subsidiaries as of December 31, 1997 and 1996, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997 in conformity with generally
accepted accounting principles.
/s/ Coopers & Lybrand L.L.P.
Cleveland, Ohio
January 27, 1998
The Progressive Corporation and Subsidiaries
35
<PAGE> 78
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
(millions-except per share amounts)
For the years ended December 31, 1997 1996 1995
<S> <C> <C> <C>
NET PREMIUMS WRITTEN $ 4,665.1 $ 3,441.7 $ 2,912.8
========= ========= =========
REVENUES
Premiums earned $ 4,189.5 $ 3,199.3 $ 2,727.2
Investment income 274.9 225.8 199.1
Net realized gains on security sales 98.5 7.1 46.7
Service revenues 45.3 46.2 38.9
--------- --------- ---------
Total revenues 4,608.2 3,478.4 3,011.9
--------- --------- ---------
EXPENSES
Losses and loss adjustment expenses 2,967.5 2,236.1 1,943.8
Policy acquisition costs 607.8 482.6 459.6
Other underwriting expenses 336.0 208.5 167.2
Investment expenses 9.9 6.1 8.1
Service expenses 43.9 41.9 30.2
Interest expense 64.6 61.5 57.1
--------- --------- ---------
Total expenses 4,029.7 3,036.7 2,666.0
--------- --------- ---------
NET INCOME
Income before income taxes 578.5 441.7 345.9
Provision for income taxes 178.5 128.0 95.4
--------- --------- ---------
Net income $ 400.0 $ 313.7 $ 250.5
========= ========= =========
COMPUTATION OF EARNINGS PER SHARE
Net income $ 400.0 $ 313.7 $ 250.5
Less: Preferred Share dividends -- (3.5) (8.4)
Excess Preferred Share liquidation price over cost basis -- (2.9) --
--------- --------- ---------
Income available to common shareholders $ 400.0 $ 307.3 $ 242.1
========= ========= =========
Basic:
Average shares outstanding 72.0 71.6 71.8
========= ========= =========
Per share $ 5.56 $ 4.29 $ 3.37
========= ========= =========
Diluted:
Average shares outstanding 72.0 71.6 71.8
Net effect of dilutive stock options 3.3 2.6 2.4
--------- --------- ---------
Total equivalent shares 75.3 74.2 74.2
========= ========= =========
Per share $ 5.31 $ 4.14 $ 3.26
========= ========= =========
</TABLE>
See notes to consolidated financial statements.
36
The Progressive Corporation and Subsidiaries
<PAGE> 79
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(millions)
December 31, 1997 1996
<S> <C> <C>
ASSETS
Investments:
Available-for-sale:
Fixed maturities, at market (amortized cost: $3,836.8 and $3,384.1) $ 3,891.4 $ 3,409.2
Equity securities, at market:
Preferred stocks (cost: $333.9 and $333.8) 348.8 341.6
Common stocks (cost: $501.9 and $458.9) 620.8 540.1
Short-term investments, at amortized cost (market: $409.4 and $159.7) 409.4 159.7
----------- ----------
Total investments 5,270.4 4,450.6
Cash 23.3 15.4
Accrued investment income 44.3 46.9
Premiums receivable, net of allowance for doubtful accounts of $32.4 and $23.2 1,160.8 820.8
Reinsurance recoverables 317.5 310.0
Prepaid reinsurance premiums 79.8 85.8
Deferred acquisition costs 259.6 200.1
Income taxes 116.5 62.1
Property and equipment, net of accumulated depreciation of $158.3 and $126.7 260.4 169.9
Other assets 27.0 22.3
----------- ----------
Total assets $ 7,559.6 $ 6,183.9
=========== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
Unearned premiums $ 1,980.1 $ 1,467.3
Loss and loss adjustment expense reserves 2,146.6 1,800.6
Policy cancellation reserve 34.7 43.3
Accounts payable and accrued expenses 486.4 420.1
Debt 775.9 775.7
----------- ----------
Total liabilities 5,423.7 4,507.0
----------- ----------
Shareholders' equity:
Common Shares, $1.00 par value (authorized 200.0, issued 83.1,
including treasury shares of 10.8 and 11.6) 72.3 71.5
Paid-in capital 412.8 381.8
Net unrealized appreciation on investment securities 122.3 74.0
Retained earnings 1,528.5 1,149.6
----------- ----------
Total shareholders' equity 2,135.9 1,676.9
----------- ----------
Total liabilities and shareholders' equity $ 7,559.6 $ 6,183.9
=========== ==========
</TABLE>
See notes to consolidated financial statements.
37
The Progressive Corporation and Subsidiaries
<PAGE> 80
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
(millions-except per share amounts)
For the years ended December 31, 1997 1996 1995
<S> <C> <C> <C>
PREFERRED SHARES, NO PAR VALUE
Balance, Beginning of year $ -- $ 83.6 $ 85.8
Redemption of shares -- (77.9) --
Treasury shares purchased-cost basis -- (5.7) (2.2)
----------- ----------- ----------
Balance, End of year $ -- $ -- $ 83.6
----------- ----------- ----------
COMMON SHARES, $1.00 PAR VALUE
Balance, Beginning of year $ 71.5 $ 72.1 $ 71.2
Stock options exercised .8 .4 .9
Treasury shares purchased -- (1.0) --
----------- ----------- ----------
Balance, End of year $ 72.3 $ 71.5 $ 72.1
----------- ----------- ----------
PAID-IN CAPITAL
Balance, Beginning of year $ 381.8 $ 374.8 $ 357.1
Stock options exercised 13.3 6.5 9.2
Tax benefits on stock options exercised 17.6 5.9 8.5
Treasury shares purchased (.2) (5.4) --
Other .3 -- --
----------- ----------- ----------
Balance, End of year $ 412.8 $ 381.8 $ 374.8
----------- ----------- ----------
NET UNREALIZED APPRECIATION (DEPRECIATION) ON INVESTMENT SECURITIES
Balance, Beginning of year $ 74.0 $ 51.1 $ (30.7)
Change in net unrealized appreciation (depreciation) 48.3 22.9 81.8
----------- ----------- ----------
Balance, End of year $ 122.3 $ 74.0 $ 51.1
----------- ----------- ----------
RETAINED EARNINGS
Balance, Beginning of year $ 1,149.6 $ 894.2 $ 668.5
Net income 400.0 313.7 250.5
Cash dividends on Preferred Shares (93/8% annually) -- (3.2) (8.3)
Cash dividends on Common Shares ($.24, $.23
and $.22 per share) (17.3) (16.4) (15.8)
Treasury shares purchased: Common Shares (2.7) (35.5) --
Preferred Shares -- (.3) (.1)
Preferred Shares redeemed -- (2.9) --
Other, net (1.1) -- (.6)
----------- ----------- ----------
Balance, End of year $ 1,528.5 $ 1,149.6 $ 894.2
----------- ----------- ----------
TOTAL SHAREHOLDERS' EQUITY $ 2,135.9 $ 1,676.9 $ 1,475.8
=========== =========== ==========
</TABLE>
There are 20.0 million Serial Preferred Shares authorized. In May 1991, the
Company sold 4.0 million 93/8% Serial Preferred Shares, Series A; all remaining
Preferred Shares were redeemed, at the Company's option, on May 31, 1996, at a
cost of $25 per share, plus accrued and unpaid dividends through the redemption
date.
There are 5.0 million Voting Preference Shares authorized; no such shares have
been issued.
See notes to consolidated financial statements.
38
The Progressive Corporation and Subsidiaries
<PAGE> 81
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(millions)
For the years ended December 31, 1997 1996 1995
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 400.0 $ 313.7 $ 250.5
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 36.6 23.8 20.4
Net realized gains on security sales (98.5) (7.1) (46.7)
Changes in:
Unearned premiums 442.3 257.7 172.9
Loss and loss adjustment expense reserves 204.6 190.1 176.1
Accounts payable and accrued expenses 49.9 50.1 16.5
Policy cancellation reserve (8.6) 2.5 (6.5)
Prepaid reinsurance premiums 33.3 (15.3) 12.7
Reinsurance recoverables 62.7 28.1 41.6
Premiums receivable (310.9) (170.9) (107.5)
Deferred acquisition costs (52.7) (18.2) (20.3)
Income taxes (67.8) (16.3) .6
Other, net 43.8 14.0 20.3
-------- -------- --------
Net cash provided by operating activities 734.7 652.2 530.6
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases:
Held-to-maturity: fixed maturities -- -- (.2)
Available-for-sale: fixed maturities (6,764.3) (4,447.2) (2,575.5)
equity securities (658.2) (725.3) (763.1)
Sales:
Available-for-sale: fixed maturities 5,840.0 3,306.3 1,744.9
equity securities 581.7 537.7 593.6
Maturities, paydowns, calls and other:
Held-to-maturity: fixed maturities -- -- 87.1
Available-for-sale: fixed maturities 578.0 465.7 497.2
equity securities 125.4 62.5 10.4
Net (purchases) sales of short-term investments (248.6) 143.1 (23.7)
(Receivable) payable on securities (2.0) 76.3 (52.0)
Purchases of property and equipment (121.9) (35.8) (38.3)
Purchase of subsidiary, net of cash acquired (48.0) -- --
-------- -------- --------
Net cash used in investing activities (717.9) (616.7) (519.6)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from exercise of stock options 14.1 6.9 10.1
Tax benefits from exercise of stock options 17.6 5.9 8.5
Redemption of Preferred Shares -- (80.8) --
Proceeds from debt -- 99.6 --
Payments of debt (20.4) (.4) (.4)
Dividends paid to shareholders (17.3) (19.6) (24.1)
Acquisition of treasury shares (2.9) (47.9) (2.3)
-------- -------- --------
Net cash used in financing activities (8.9) (36.3) (8.2)
-------- -------- --------
Increase (decrease) in cash 7.9 (.8) 2.8
Cash, Beginning of year 15.4 16.2 13.4
-------- -------- --------
Cash, End of year $ 23.3 $ 15.4 $ 16.2
======== ======== ========
</TABLE>
See notes to consolidated financial statements.
39
The Progressive Corporation and Subsidiaries
<PAGE> 82
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997, 1996 and 1995
1. REPORTING AND ACCOUNTING POLICIES
Nature of Operations The Progressive Corporation, an insurance holding company
formed in 1965, owns 86 subsidiaries and has one mutual insurance company
affiliate. The companies provide personal auto-mobile insurance and other
specialty property-casualty insurance and related services sold primarily
through independent insurance agents in the United States and Canada.
Basis of Consolidation and Reporting The accompanying consolidated financial
statements include the accounts of The Progressive Corporation, its subsidiaries
and affiliate (the Company). All of the subsidiaries and the affiliate are
wholly owned or controlled. All significant intercompany accounts and
transactions are eliminated in consolidation. The parent company's investments
in subsidiaries exceeded their underlying book value at dates of acquisition by
$17.2 million, of which $8.9 million remains. In the opinion of management,
there is no present indication of diminished value in this amount.
Investments Held-to-maturity: fixed maturity securities are securities which the
Company has the positive intent and ability to hold to maturity. The Company has
no held-to-maturity securities. In November 1995, the Financial Accounting
Standards Board (FASB) issued a Special Report entitled "A Guide to
Implementation of Statement 115 on Accounting for Certain Investments in Debt
and Equity Securities." In accordance with the implementation guidance, the
Company reclassified its held-to-maturity securities to available-for-sale, and
marked the securities to market.
Available-for-sale: fixed maturity securities are securities held for
indefinite periods of time, and may be used as a part of the Company's
asset/liability strategy or sold in response to changes in interest rates,
anticipated prepayments, risk/reward characteristics, liquidity needs or similar
economic factors. These securities are carried at market value with the
corresponding unrealized appreciation or depreciation, net of deferred income
taxes, reflected in shareholders' equity. The asset-backed portfolio is
accounted for under the retrospective method; prepayment assumptions are based
on market expectations.
Available-for-sale: equity securities include common stocks and nonredeemable
preferred stocks and are reported at quoted market values. Changes in the market
values of these securities, net of deferred income taxes, are reflected as
unrealized appreciation or depreciation in shareholders' equity. Changes in
value due to foreign currency exchange are limited by foreign currency hedges;
unhedged amounts are not material and recognized in income in the current
period.
Trading securities are securities bought principally for the purpose of
selling them in the near term and are reported at market value. Changes in
market value are recognized in income in the current period. During the year,
the net activity in trading securities was not material to the Company's
financial position, cash flows and results of operations. The Company had no
trading securities at December 31, 1997 and 1996.
Derivative instruments, as defined by Statement of Financial Accounting
Standards (SFAS) 119, "Disclosures about Derivative Financial Instruments and
Fair Value of Financial Instruments," include futures, options, short positions,
forward positions, foreign currency forwards and interest rate swap agreements.
Derivative instruments held or issued for purposes other than trading include
derivative positions used for risk management of the available-for-sale
portfolio and hedge positions. Derivative positions used for risk management are
evaluated as to their effectiveness to modify the risk characteristics and
enhance the yields of the available-for-sale portfolio. Hedges are evaluated on
established criteria to determine the effectiveness of their correlation and
ability to reduce risk of specific securities or transactions. Those instruments
held or issued for risk management purposes are carried at market value in the
appropriate available-for-sale portfolio based on the nature of the derivative
instrument; changes in value of futures, options, foreign currency forwards and
short positions are recorded to income in the current period, and changes in the
value of forward positions and interest rate swaps are reflected in
shareholders' equity as unrealized appreciation or depreciation, net of deferred
income taxes. At disposition, changes in value of forward positions and interest
rate swap agreements are recognized in income as "net realized gains or losses
on security sales." Those instruments entered into for the purpose of hedging
are carried at market value; changes in value follow the recognition of the
asset being hedged. Gains or losses on closed hedge positions are recorded as
basis adjustments to the cost of the assets hedged and amortized over their
expected life. Unamortized amounts are recognized in income at the disposition
of the assets hedged. Gains and losses on foreign currency hedges offset the
foreign exchange gains and losses on the foreign equity portfolio. The net
hedged gain or loss is not material and is recognized into income in the current
period. Those instruments held or issued for trading purposes are carried at
market value and include derivatives held or issued for the specific purpose of
gen-erating profits and all other derivatives not meeting the criteria for
derivatives held or issued for other than trading purposes; changes in value are
recorded to income in the current period. During the year, the net activity in
derivative instruments held or issued for trading purposes was not material to
the Company's financial position, cash flows and results of operations; gains or
losses during the year were recognized in the available-for-sale portfolio. See
Note 2-Investments for further discussion.
Short-term investments include eurodollar deposits, commercial paper and other
securities maturing within one year and are reported at amortized cost, which
approximates market.
Investment securities are exposed to various risks such as interest rate,
market and credit. Market values of securities fluctuate based on the magnitude
of changing market conditions; significant changes in market conditions could
materially affect portfolio value in the near term.
Realized gains and losses on sales of securities are computed based on the
first-in first-out method.
Property and Equipment Property and equipment are recorded at cost. Depreciation
is provided over the estimated useful lives of the assets using accelerated
methods for computers and straight line for all other fixed assets. Insurance
Premiums and Receivables Insurance premiums written are earned primarily on a
pro rata basis over the period of risk. For products where more than 50 percent
cancellations are anticipated, premiums written and earned are reduced, though
cancellations have not yet occurred.
The Company provides insurance and related services to individuals, lenders
and motor carriers throughout the United States and in Canada, and offers a
variety of payment plans to meet individual customer needs. Generally, premiums
are collected in advance of providing risk coverage, minimizing the Company's
exposure to credit risk.
40
The Progressive Corporation and Subsidiaries
<PAGE> 83
Loss and Loss Adjustment Expense Reserves Loss reserves represent the estimated
liability on claims reported to the Company, plus reserves for losses incurred
but not yet reported. These estimates are reported net of amounts recoverable
from salvage and subrogation. Loss adjustment expense reserves represent the
estimated expenses required to settle these claims and losses. The methods
of making estimates and establishing these reserves are reviewed regularly, and
resulting adjustments are reflected in income currently. Such loss and loss
adjustment expense reserves could be susceptible to significant change in the
near term.
Reinsurance The Company's reinsurance transactions include premiums written
under state-mandated involuntary plans for commercial vehicles (Commercial Auto
Insurance Procedures--CAIP), for which the Company retains no indemnity risk
(see Note 5--Reinsurance for further discussion). The remaining reinsurance
arises from the Company seeking to reduce its loss exposure in its non-auto
businesses. Prepaid reinsurance premiums are recognized on a pro rata basis
over the period of risk.
Earnings Per Share In 1997, the Company adopted SFAS 128, "Earnings per Share,"
which requires disclosure of basic and diluted earnings per share, replacing
primary and fully diluted earnings per share as previously reported. Per SFAS
128, all prior periods have been restated. Prior to the redemption of the
Preferred Shares, net income was reduced by Preferred Share dividends earned
during the period and the excess of the fair value over the cost basis of
Preferred Shares repurchased for both the basic and diluted earnings per share
calculations. Basic earnings per share are computed using the weighted average
number of Common Shares outstanding and diluted earnings per share include
common stock equivalents, including stock options, assumed outstanding during
the period.
Deferred Acquisition Costs Deferred acquisition costs include commissions,
premium taxes and other costs incurred in connection with writing business.
These costs are deferred and amortized over the period in which the related
premiums are earned. The Company considers anticipated investment income in
determining the recoverability of these costs. There is no indication that these
costs will not be fully recoverable in the near term. The Company does not defer
advertising costs.
Service Revenues and Expenses Service revenues are earned on a pro rata basis
over the term of the related policies; acquisition expenses are deferred and
amortized over the period in which the related revenues are earned.
Supplemental Cash Flow Information Cash includes only bank demand deposits.
The Company paid income taxes of $166.9 million, $121.5 million and $75.5
million in 1997, 1996 and 1995, respectively. Total interest paid was $63.8
million for 1997, $60.3 million for 1996 and $56.6 million for 1995.
As discussed above, on December 1, 1995, the Company reclassified $248.4
million of its held-to-maturity securities to available-for-sale, recognizing
$10.4 million in gross unrealized gains.
Stock Options The Company follows the provisions of Accounting Principles Board
(APB) Opinion No. 25, "Accounting for Stock Issued to Employees," to account for
its stock option activity in the financial statements. The Company granted all
options currently outstanding at an exercise price equal to the market price at
the date of grant and, therefore, under APB 25, no compensation expense is
recorded. The Company follows the disclosure provisions of SFAS 123, "Accounting
for Stock-Based Compensation."
New Accounting Standards In June 1997, the FASB issued SFAS 130, "Reporting
Comprehensive Income," which requires transactions that are currently reported
directly to shareholders' equity be reported in a financial statement that is
displayed as prominently as other financial statements. SFAS 130, which is
effective for fiscal years beginning after December 15, 1997, impacts disclosure
requirements only. Therefore, SFAS 130 will have no impact on the Company's
financial condition, cash flows or results of operations. For 1997, the Company
would have reported comprehensive income of $447.6 million.
In June 1997, the FASB issued SFAS 131, "Disclosures about Segments of an
Enterprise and Related Information." SFAS 131 supersedes SFAS 14, "Financial
Reporting for Segments of a Business Enterprise," and requires companies to
report financial and descriptive information about their reportable operating
segments. The financial information is required to be reported on the basis that
is used internally for evaluating segment performance and deciding how to
allocate resources to segments. SFAS 131 requires disclosure only and will have
no impact on the Company's financial condition, cash flows or results of
operations. This statement is effective for periods beginning after December 15,
1997, with interim information required the year following adoption. The Company
is currently evaluating the required level of segment reporting.
In December 1997, the American Institute of Certified Public Accountants
issued Statement of Position (SOP) 97-3, "Accounting by Insurance and Other
Enterprises for Insurance-Related Assessments," which is effective for fiscal
years beginning after December 15, 1998. SOP 97-3 provides guidance for
determining when companies should recognize a liability for guaranty fund and
other insurance-related assessments, how to measure the liability, when offsets
can be recovered and disclosures required. Prior to this statement, companies
were permitted, but not required, to accrue for these potential assessments. The
Company's practice has been to accrue for any potential exposure from known
insolvencies. Therefore, this statement should have minimal impact on the
Company's financial condition, cash flows or results of operations.
Estimates The Company is required to make estimates and assumptions when
preparing its financial statements and accompanying notes in conformity with
generally accepted accounting principles (GAAP). Actual results could differ
from those estimates.
Reclassifications Certain amounts in the financial statements for prior periods
were classified to conform with the 1997 presentation.
41
<PAGE> 84
2. INVESTMENTS
The components of pretax investment income at December 31 were:
<TABLE>
<CAPTION>
(millions) 1997 1996 1995
<S> <C> <C> <C>
Held-to-maturity: fixed maturities $ -- $ -- $ 15.8
Available-for-sale:fixed maturities 219.1 183.9 140.3
equity securities 24.6 27.7 23.9
Short-term investments 31.2 14.2 19.1
------ ------ ------
Investment income 274.9 225.8 199.1
------ ------ ------
Gross realized gains:
Held-to-maturity: fixed maturities -- -- .8
Available-for-sale:fixed maturities 56.9 23.9 49.0
equity securities 121.4 39.7 32.5
Short-term investments -- -- .1
Gross realized losses:
Held-to-maturity: fixed maturities -- -- (.6)
Available-for-sale:fixed maturities (36.9) (29.6) (22.3)
equity securities (42.9) (26.9) (12.8)
------ ------ ------
Net realized gains on security sales 98.5 7.1 46.7
------ ------ ------
$373.4 $232.9 $245.8
====== ====== ======
</TABLE>
During 1997, the Company sold $178.4 million (proceeds of $200.8 million) of
non-investment-grade commercial mortgage-backed securities, recognizing a net
realized gain of $22.4 million and accounted for the transaction in accordance
with SFAS 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities."
The composition of the investment portfolio at December 31 was:
<TABLE>
<CAPTION>
(millions) GROSS GROSS
UNREALIZED UNREALIZED MARKET
COST GAINS LOSSES VALUE
1997
Available-for-sale:
<S> <C> <C> <C> <C>
U.S. government obligations $ 918.1 $ 2.1 $ (.6) $ 919.6
State and local government obligations 1,231.8 32.6 (.2) 1,264.2
Foreign government obligations 57.6 1.0 (.1) 58.5
Corporate debt securities 89.2 .8 -- 90.0
Asset-backed securities 1,501.4 23.9 (5.3) 1,520.0
Other debt securities 38.7 .7 (.3) 39.1
----------- ----------- ----------- ----------
3,836.8 61.1 (6.5) 3,891.4
Preferred stocks 333.9 15.1 (.2) 348.8
Common stocks 501.9 139.0 (20.1) 620.8
Short-term investments 409.4 -- -- 409.4
----------- ----------- ----------- ----------
$ 5,082.0 $ 215.2 $ (26.8) $ 5,270.4
=========== =========== =========== ==========
1996
Available-for-sale:
U.S. government obligations $ 830.1 $ 1.5 $ (2.5) $ 829.1
State and local government obligations 1,314.7 24.0 (7.4) 1,331.3
Foreign government obligations 48.7 2.4 -- 51.1
Corporate debt securities 48.6 2.2 -- 50.8
Asset-backed securities 1,084.3 10.5 (6.5) 1,088.3
Other debt securities 57.7 .9 -- 58.6
----------- ----------- ----------- ----------
3,384.1 41.5 (16.4) 3,409.2
Preferred stocks 333.8 8.5 (.7) 341.6
Common stocks 458.9 92.9 (11.7) 540.1
----------- ----------- ----------- ----------
Short-term investments 159.7 -- -- 159.7
----------- ----------- ----------- ----------
$ 4,336.5 $ 142.9 $ (28.8) $ 4,450.6
=========== =========== =========== ==========
</TABLE>
42
<PAGE> 85
Changes in net unrealized gains (losses) on fixed maturities and equity
securities were:
<TABLE>
<CAPTION>
(millions) 1997 1996 1995
<S> <C> <C> <C>
Unrealized gains (losses):
Held-to-maturity:fixed maturities $ -- $ -- $ (6.2)
=========== =========== ==========
Available-for-sale: fixed maturities $ 29.5 $ (18.3) $ 86.1
equity securities 44.8 53.7 40.0
Deferred income taxes (26.0) (12.5) (44.3)
----------- ----------- ----------
$ 48.3 $ 22.9 $ 81.8
=========== =========== ==========
</TABLE>
The composition of fixed maturities by maturity at December 31, 1997 was:
<TABLE>
<CAPTION>
(millions) MARKET
COST VALUE
<S> <C> <C>
Less than one year $ 375.6 $ 379.6
One to five years 2,039.7 2,066.6
Five to ten years 1,198.0 1,216.8
Ten years or greater 223.5 228.4
----------- ----------
$ 3,836.8 $ 3,891.4
=========== ==========
</TABLE>
Asset-backed securities are reported based upon their projected cash flows. All
other securities which do not have a single maturity date are reported at
average maturity.
At December 31, 1997, bonds in the principal amount of $67.3 million were on
deposit with various regulatory agencies to meet statutory requirements.
Securities with a market value of $25.9 million were held at December 31, 1997,
by a bankruptcy remote subsidiary and are not available to the general creditors
of the Company.
The components of derivative instruments held or issued for purposes other than
trading were:
<TABLE>
<CAPTION>
(millions) market value/ contract/
carrying value at notional value at
december 31, december 31,
----------------------- -------------------------
1997 1996 1997 1996
<S> <C> <C> <C> <C>
Forward and future positions:
Assets $ .8 $ (.3) $ 13.7 $ 16.5
Liabilities (.1) .8 13.4 34.0
Foreign currency forward and future positions:
Assets (.7) .5 50.9 62.0
Liabilities 1.7 1.0 67.2 145.4
----------------------- ------------------------
$ 1.7 $ 2.0 $ 145.2 $ 257.9
======================= ========================
</TABLE>
Derivative instruments classified as held or issued for purposes other than
trading 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. Derivative instruments may also be used for trading purposes.
During 1997, net losses of $.7 million (gross gains of $9.9 million; gross
losses of $10.6 million) in the trading portfolio were not material to the
Company's results of operations and are included in the results of the
available-for-sale portfolio. At December 31, 1997, the Company had short
trading positions in foreign currency and commodity futures with net market
values of $1.1 million and notional values of $64.4 million; the average market
values for long and short positions in 1997 were $.5 million and $.4 million,
respectively. At December 31, 1996, the Company did not have any open derivative
trading positions.
For all derivative positions, net cash requirements are limited to changes in
market values, which may vary based upon changes in interest rates, currency
exchange rates and other factors. Exposure to credit risk is limited to the
carrying value; unless otherwise noted, collateral is not required to support
the credit risk.
As of December 31, 1997, the Company had open investment funding commitments
of $80.6 million. The Company had no uncollateralized lines or letters of credit
as of December 31, 1997 or 1996.
43
<PAGE> 86
3. STATUTORY FINANCIAL INFORMATION
At December 31, 1997, $234.3 million of consolidated statutory policyholders'
surplus represents net admitted assets of the Company's insurance subsidiaries
that are required to meet minimum statutory surplus requirements in the
subsidiaries' states of domicile. The subsidiaries may be licensed in states,
other than their states of domicile, which may have higher minimum statutory
surplus requirements. Generally, the net admitted assets of insurance
subsidiaries that, subject to other applicable insurance laws and regulations,
are available for transfer to the parent company cannot include the net admitted
assets required to meet the minimum statutory surplus requirements of the states
where the subsidiaries are licensed.
During 1997, the insurance and other subsidiaries paid aggregate cash
dividends of $108.1 million to the parent company. Based on the dividend laws
currently in effect, the insurance subsidiaries may pay aggregate dividends
of $191.9 million in 1998 without prior approval from regulatory authorities.
Statutory policyholders' surplus was $1,725.3 million and $1,292.4 million at
December 31, 1997 and 1996, respectively. Statutory net income was $274.7
million, $277.9 million and $200.0 million for the years ended December 31,
1997, 1996 and 1995, respectively.
The Company's insurance subsidiaries, as part of their statutory filings, are
required to disclose their risk-based capital (RBC) requirements. The National
Association of Insurance Commissioners developed the RBC program to enable
regulators to take appropriate and timely regulatory actions with respect to
insurers that show signs of weak or deteriorating financial condition. 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.
4. LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES
Activity in the loss and loss adjustment expense reserves, prepared in
accordance with GAAP, is summarized as follows:
<TABLE>
<CAPTION>
(millions) 1997 1996 1995
<S> <C> <C> <C>
Balance at January 1 $ 1,800.6 $ 1,610.5 $ 1,434.4
Less reinsurance recoverables on unpaid losses 267.7 296.1 334.2
----------- ----------- ----------
Net balance at January 1 1,532.9 1,314.4 1,100.2
----------- ----------- ----------
Net reserves of subsidiary purchased 82.2 -- --
----------- ----------- ----------
Incurred related to:
Current year 3,070.8 2,341.9 2,000.4
Prior years (103.3) (105.8) (56.6)
----------- ----------- ----------
Total incurred 2,967.5 2,236.1 1,943.8
----------- ----------- ----------
Paid related to:
Current year 1,971.5 1,424.7 1,204.3
Prior years 743.6 592.9 525.3
----------- ----------- ----------
Total paid 2,715.1 2,017.6 1,729.6
----------- ----------- ----------
Net balance at December 31 1,867.5 1,532.9 1,314.4
Plus reinsurance recoverables on unpaid losses 279.1 267.7 296.1
----------- ----------- ----------
Balance at December 31 $ 2,146.6 $ 1,800.6 $ 1,610.5
=========== =========== ==========
</TABLE>
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, financial condition, cash flows or results of operations.
The Company writes auto insurance in the coastal states, which could be exposed
to natural catastrophes, such as hurricanes. Although the occurrence of a major
catastrophe could have a significant impact on the Company's quarterly results,
the Company believes such an event would not be so material as to disrupt the
overall normal operations of the Company. The Company is unable to predict if
any such events will occur in the near term.
5. REINSURANCE
Reinsurance contracts do not relieve the Company from its obligations to
policyholders. Failure of reinsurers to honor their obligations could result in
losses to the Company. The Company evaluates the financial condition of its
reinsurers and monitors concentrations of credit risk to minimize its exposure
to significant losses from reinsurer insolvencies.
As of December 31, 1997 and 1996, 44% and 52%, respectively, of
the "prepaid reinsurance premiums" and 60% and 68%, respectively, of the
"reinsurance recoverables" relate to CAIP, for which the Company retains no
indemnity risk.
44
<PAGE> 87
The effect of reinsurance on premiums written and earned as of December 31 is as
follows:
<TABLE>
<CAPTION>
(millions) 1997 1996 1995
-------------------------- ---------------------------- ---------------------------
WRITTEN EARNED WRITTEN EARNED WRITTEN EARNED
<S> <C> <C> <C> <C> <C> <C>
Direct premiums $4,825.2 $4,382.9 $3,638.4 $3,380.7 $3,068.9 $2,895.9
Assumed -- -- 3.8 3.8 .1 .1
Ceded (160.1) (193.4) (200.5) (185.2) (156.2) (168.8)
-------------------------- ---------------------------- ---------------------------
Net premiums $4,665.1 $4,189.5 $3,441.7 $3,199.3 $2,912.8 $2,727.2
========================== ============================ ===========================
</TABLE>
Losses and loss adjustment expenses are net of reinsurance ceded of $150.8
million in 1997, $117.3 million in 1996 and $104.1 million in 1995.
6. INCOME TAXES
Significant components of the Company's income tax provision were as follows:
<TABLE>
<CAPTION>
(millions) 1997 1996 1995
<S> <C> <C> <C>
Current tax provision $ 241.6 $ 163.9 $ 104.9
Deferred tax benefit (63.1) (35.9) (9.5)
----------- ----------- ----------
Total income tax provision $ 178.5 $ 128.0 $ 95.4
=========== =========== ==========
</TABLE>
The provision for income taxes in the accompanying consolidated statements of
income differs from the statutory rate as follows:
<TABLE>
<CAPTION>
(millions) 1997 1996 1995
---------------------- ---------------------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
Income before income taxes $ 578.5 $ 441.7 $ 345.9
========== =========== ===========
Tax at statutory rate $ 202.5 35% $ 154.6 35% $ 121.1 35%
Tax effect of:
Exempt interest income (19.6) (3) (21.1) (5) (21.9) (6)
Dividends received deduction (7.0) (1) (7.7) (2) (5.7) (2)
Other items, net 2.6 -- 2.2 1 1.9 1
---------------------- ---------------------- ---------------------
$ 178.5 31% $ 128.0 29% $ 95.4 28%
====================== ====================== =====================
</TABLE>
Deferred income taxes reflect the impact for financial statement reporting
purposes of temporary differences between the financial statement carrying
amounts and the tax bases of assets and liabilities. At December 31, 1997 and
1996, the components of the net deferred tax assets were as follows:
<TABLE>
<CAPTION>
(millions) 1997 1996
<S> <C> <C>
Deferred tax assets:
Unearned premium reserve $ 132.1 $ 96.7
Non-deductible accruals 37.0 38.8
Derivative instruments 6.9 2.8
Capitalized expenditures 12.7 8.3
Loss reserves 93.8 63.5
Other 12.3 2.8
Deferred tax liabilities:
Deferred acquisition costs (88.7) (70.0)
Unrealized gains (66.1) (40.1)
----------- ----------
Net deferred tax assets $ 140.0 $ 102.8
=========== ==========
</TABLE>
The Company is able to demonstrate that the benefit of its deferred tax assets
is fully realizable.
45
<PAGE> 88
7. EMPLOYEE BENEFIT PLANS
Retirement Plans The Company has a two-tiered Retirement Security Program. The
first tier is a defined contribution pension plan covering all employees who
meet requirements as to age and length of service. Contributions vary from 1% to
5% of annual eligible compensation up to the Social Security wage base, based on
years of eligible service. Company contributions were $5.1 million in 1997,
$4.2 million in 1996 and $3.6 million in 1995.
The second tier is a long-term savings plan under which the Company matches,
into a Company stock account, amounts contributed to the plan by an employee up
to a maximum of 3% of the employee's eligible compensation. Company
contributions were $7.3 million in 1997, $5.8 million in 1996 and $4.4 million
1995.
The Company has a defined benefit pension plan which covered employees hired
before January 1, 1989, who met requirements as to age and length of service.
This plan and future benefit accruals were frozen on December 31, 1993 and the
Company recognized a $1.5 million gain; the benefits accruals through the date
the plan was frozen were based on years of service and career average
compensation up to the Social Security tax base. As of December 31, 1997, the
Company had a pension asset of $2.0 million, compared to pension liabilities of
$1.2 million and $1.5 million in 1996 and 1995, respectively. The Company
recognized income of $.1 million, $0 and $.2 million in 1997, 1996 and 1995,
respectively. The Company's funding policy is to contribute annually the minimum
amount required by the Employee Retirement Income Security Act of 1974, as
amended. There is no past service liability requiring funding by the Company.
Postemployment Benefits The Company provides various postemployment benefits to
former or inactive employees who meet eligibility requirements, their
beneficiaries and covered dependents. Postemployment benefits include salary
continuation and disability-related benefits including workers' compensation
and, if elected, continuation of health care benefits. The Company's liability
was $1.5 million at December 31, 1997 and 1996.
Postretirement Benefits The Company provides postretirement health and life
insurance benefits to all employees who met requirements as to age and length of
service at December 31, 1988. The Company recognized expenses of $.2 million in
1997, $.4 million in 1996 and $.3 million in 1995. The Company's funding policy
is to contribute annually the maximum amount that can be deducted for Federal
income tax purposes. Contributions are intended to provide not only for benefits
attributed to services to date, but also for those expected to be earned in the
future.
Deferred Compensation The Company maintains The Progressive Corporation
Executive Deferred Compensation Plan (Deferral Plan), which permits eligible
executives to defer receipt of some or all of their annual bonuses or other
incentive awards. These deferred amounts are deemed invested in one or more
investment funds, including Common Shares of the Company, offered under the
Deferral Plan. All distributions from the Deferral Plan will be made in cash,
except that distributions representing amounts deemed invested in Common Shares
will be made in Common Shares. The Company reserved 300,000 Common Shares for
issuance under the Deferral Plan. The Company established an irrevocable grantor
trust to provide a source of funds to assist the Company in meeting its
liabilities under the Deferral Plan. At December 31, 1997 and 1996, the trust
held assets of $6.4 million and $2.6 million, respectively, of which $1.4
million and $.7 million were held in Common Shares, to cover its liabilities.
Incentive Compensation Plans The Company's 1989 Incentive Plan and 1995
Incentive Plan provide for the granting of stock options and other stock-based
awards to key employees of the Company. The 1989 Incentive Plan has 6,500,000
shares authorized and the 1995 Incentive Plan has 5,000,000 shares authorized.
Outside of the Incentive Plans, the Company registered 1,425,000 Common Shares
relating to stock options granted to key employees of the Company. The
nonqualified stock options granted are for periods up to ten years, become
exercisable at various dates not earlier than six months after the date of
grant, and remain exercisable for specified periods thereafter. All options
granted have an exercise price equal to the market value of the Common Shares on
the date of grant.
A summary of all stock option activity during the three years ended December 31
follows:
<TABLE>
<CAPTION>
1997 1996 1995
----------------------------- ----------------------------- -----------------------------
WEIGHTED WEIGHTED WEIGHTED
NUMBER OF AVERAGE NUMBER OF AVERAGE NUMBER OF AVERAGE
OPTIONS OUTSTANDING SHARES EXERCISE PRICE SHARES EXERCISE PRICE SHARES EXERCISE PRICE
<S> <C> <C> <C> <C> <C> <C>
Beginning of year 5,109,390 $ 28.09 4,943,324 $ 23.76 5,263,822 $ 19.49
Add (deduct):
Granted 726,889 69.82 852,989 47.52 888,725 38.27
Exercised (758,580) 17.44 (454,348) 14.89 (861,802) 11.54
Cancelled (108,735) 41.07 (232,575) 32.95 (347,421) 26.51
----------------------------- ----------------------------- -----------------------------
End of year 4,968,964 $ 35.52 5,109,390 $ 28.09 4,943,324 $ 23.76
============================= ============================= =============================
Exercisable, end of year 1,497,050 $ 15.53 1,561,428 $ 15.75 984,099 $ 12.61
============================= ============================= =============================
Available, end of year 5,054,407 5,672,561 6,292,975
========= ========= =========
</TABLE>
46
<PAGE> 89
The following options were outstanding or exercisable as of December 31, 1997:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
--------------------------------------------------- ----------------------------
WEIGHTED AVERAGE WEIGHTED WEIGHTED
RANGE OF NUMBER OF REMAINING AVERAGE NUMBER OF AVERAGE
EXERCISE PRICES SHARES CONTRACTUAL LIFE EXERCISE PRICE SHARES EXERCISE PRICE
<S> <C> <C> <C> <C> <C>
$ 9 - 20 1,440,741 3.15 years $ 14.74 1,440,741 $14.74
21 - 40 1,959,620 6.12 years 33.14 39,370 30.63
41 - 60 838,487 7.97 years 47.09 14,912 45.09
61 - 80 706,377 8.99 years 68.64 2,027 65.88
81 - 120 23,739 9.03 years 101.72 -- --
--------- ---------
$ 9 - 120 4,968,964 1,497,050
========= =========
</TABLE>
During 1996, the Company adopted the disclosure provisions of SFAS 123,
"Accounting for Stock-Based Compensation." SFAS 123 requires a fair-value based
method of accounting for stock-based compensation. To calculate the fair value
of the options awarded, the Company elected to use the Black-Scholes pricing
model which produced a value of 43.2% for 1997 awards, 41.4% for 1996 awards and
42.8% for 1995 awards. The following assumptions were used to derive the ratio:
a 7-year option term; an annualized volatility rate of .255 for 1997, .246 for
1996 and .275 for 1995; a risk-free rate of return of 6.63% for 1997, 6.69% for
1996 and 6.53% for 1995; and a dividend yield of .25% for 1997 and .5% for both
1996 and 1995. The Company elected to account for terminations when they occur
rather than include an attrition factor into its model.
If compensation cost had been measured based on the fair-value based accounting
method under SFAS 123, the following would have been disclosed for December 31:
<TABLE>
<CAPTION>
(millions-except per share amounts) 1997 1996 1995
PRO FORMA
<S> <C> <C> <C>
Net income $ 393.5 $ 310.3 $ 249.1
=========== =========== ==========
Earnings per share
Basic $ 5.46 $ 4.24 $ 3.35
Diluted 5.22 4.09 3.24
</TABLE>
The effect of applying SFAS 123 in the current year is not representative of the
effect on income for future years since each subsequent year will reflect
expense for additional years' vesting.
The amounts charged to income for incentive compensation plans, including
executive cash bonus programs for key members of management and a gainsharing
program for all other employees, were $85.8 million in 1997, $45.3 million in
1996 and $33.9 million in 1995.
8. DEBT
During 1997, bank borrowings of $1.2 million were outstanding for three days at
an average annual interest rate of 5.8%. Debt includes amounts the Company has
borrowed and contributed to the capital of its insurance subsidiaries or
borrowed for other long-term purposes.
Debt at December 31 consisted of:
<TABLE>
<CAPTION>
(millions) 1997 1996
----------------------- ----------------------
MARKET MARKET
COST VALUE COST VALUE
<S> <C> <C> <C> <C>
7.30% Notes, due 2006 (issued: $100.0, May 1996) $ 99.7 $ 105.3 $ 99.6 $ 101.7
6.60% Notes, due 2004 (issued: $200.0, January 1994) 198.9 200.7 198.8 197.1
7% Notes, due 2013 (issued: $150.0, October 1993) 148.4 154.4 148.3 144.3
8 3/4% Notes, due 1999 (issued: $30.0, May 1989) 29.7 30.9 29.5 31.6
10% Notes, due 2000 (issued: $150.0, December 1988) 149.6 164.6 149.6 167.8
10 1/8% Subordinated Notes, due 2000 (issued: $150.0, December 1988) 149.6 164.6 149.5 168.4
Other debt -- -- .4 .4
----------------------- ----------------------
$ 775.9 $ 820.5 $ 775.7 $ 811.3
======================= ======================
</TABLE>
47
<PAGE> 90
All debt is noncallable with interest payable semiannually.
In May 1990, the Company entered into a revolving credit arrangement with
National City Bank, which is reviewed by the bank annually. Under this
agreement, the Company had the right to borrow up to $50.0 million. In February
1994, the Company reduced this revolving credit arrangement to $20.0 million
and, in May 1997, further reduced it to $10.0 million. By selecting from
available credit options, the Company 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 percent per annum. The Company had no borrowings under this
arrangement at December 31, 1997 or 1996.
As of December 31, 1997, the Company was in compliance with its debt
covenants.
Aggregate principal payments on debt outstanding at December 31, 1997, are $0
for 1998, $30.0 million for 1999, $300.0 million for 2000, $0 for 2001 and 2002
and $450.0 million thereafter.
9. SEGMENT INFORMATION
The operating segments of the Company are classified into Insurance and Service.
Expense allocations are based on assumptions and estimates; stated segment
operating results would change if different methods were applied. The Company
does not allocate assets to segments.
<TABLE>
<CAPTION>
For the years ended December 31, 1997 1996 1995
------------------------- ------------------------- ------------------------
PRETAX PRETAX PRETAX
REVENUES PROFIT (LOSS) REVENUES PROFIT (LOSS) REVENUES PROFIT (LOSS)
<S> <C> <C> <C> <C> <C> <C>
Insurance operations $ 4,189.5 $ 278.2 $ 3,199.3 $ 272.1 $ 2,727.2 $ 156.6
Service operations 45.3 1.4 46.2 4.3 38.9 8.7
------------------------- ------------------------- ------------------------
Total operations 4,234.8 279.6 3,245.5 276.4 2,766.1 165.3
Total investment income 373.4 373.4 232.9 232.9 245.8 245.8
Interest expense and other costs -- (74.5) -- (67.6) -- (65.2)
------------------------- ------------------------- ------------------------
$ 4,608.2 $ 578.5 $ 3,478.4 $ 441.7 $ 3,011.9 $ 345.9
========================= ========================= ========================
</TABLE>
10. FAIR VALUE OF FINANCIAL INSTRUMENTS
Information about specific valuation techniques and related fair value detail is
provided in Note 1--Reporting and Accounting Policies, Note 2 -- Investments and
Note 8-- Debt. Pursuant to SFAS 119, the cost and market value of the financial
instruments as of December 31 are summarized as follows:
<TABLE>
<CAPTION>
(millions) 1997 1996
------------------------- -------------------------
MARKET MARKET
COST VALUE COST VALUE
<S> <C> <C> <C> <C>
Investments:
Available-for-sale: fixed maturities $3,836.8 $3,891.4 $3,384.1 $3,409.2
preferred stocks 333.9 348.8 333.8 341.6
common stocks 501.9 620.8 458.9 540.1
Short-term investments 409.4 409.4 159.7 159.7
Debt (775.9) (820.5) (775.7) (811.3)
</TABLE>
11. LITIGATION
The Company is named as defendant in various lawsuits generally relating to its
insurance operations. Numerous legal actions arise from claims made under
insurance policies issued by the subsidiaries or in connection with previous
reinsurance agreements. These actions were considered by the Company in
establishing its loss and loss adjustment expense reserves. The Company believes
that the ultimate disposition of these and other pending lawsuits will not
materially impact the Company's financial position, cash flows or results of
operations.
12. CONTRACTUAL COMMITMENTS
The Company has operating lease commitments and service agreements with terms
greater than one year for equipment, office space and telecommunications
services, some with options to renew at the end of the contract periods. The
minimum commitments under such noncancelable leases and service contracts at
December 31, 1997 are as follows (in millions): 1998--$36.2; 1999--$21.6;
2000--$13.2; 2001--$6.6; 2002--$3.8; and thereafter--$1.1. Total expense
incurred by the Company for such purposes for 1997, 1996 and 1995 was $83.3
million, $57.5 million and $51.3 million, respectively.
48
<PAGE> 91
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
The consolidated financial statements and the related notes on pages 36 through
48, together with the supplemental information on pages 53 through 59, should be
read in conjunction with the following discussion of the consolidated financial
condition and results of operations.
Financial Condition The Progressive Corporation is a holding company and does
not have any revenue producing operations of its own. It receives cash through
borrowings, equity sales, subsidiary dividends and other transactions, and may
use the proceeds to contribute to the capital of its insurance subsidiaries in
order to support premium growth, to repurchase its Common Shares and other
outstanding securities, to retire its outstanding indebtedness, and for other
business purposes. During 1997, the Company repurchased 30,193 of its Common
Shares at a total cost of $2.9 million to offset obligations under various
employee benefit plans.
During the three-year period ended December 31, 1997, the Company repurchased
1.0 million of its Common Shares at a total cost of $44.8 million (average
$43.37 per share), .3 million of its 9 3/8% Serial Preferred Shares, Series A,
at a total cost of $8.3 million (average $25.62 per share) and redeemed its
remaining Preferred Shares at a total cost of $82.1 million ($25.00 per share).
The Company also sold $100.0 million of Notes. During the same period, The
Progressive Corporation received $50.8 million from its subsidiaries, net of
capital contributions made to these subsidiaries. The regulatory restrictions on
subsidiary dividends are described in Note 3 to the financial statements.
The Company has substantial capital resources and is unaware of any trends,
events or circumstances that are reasonably likely to affect its capital
resources in a material way. The Company also has available a $10.0 million
revolving credit agreement. With its 27% debt to capital ratio, management
believes the Company has sufficient borrowing capacity and other capital
resources to support current and anticipated growth.
The Company's insurance operations create liquidity by collecting and
investing premiums from new and renewal business in advance of paying claims.
For the three years ended December 31, 1997, operations generated a positive
cash flow of $1,917.5 million, and cash flow is expected to be positive in both
the short-term and reasonably foreseeable future. The Company's substantial
investment portfolio is highly liquid, consisting almost entirely of readily
marketable securities.
In March 1997, the Company acquired Midland Financial Group, Inc. by
purchasing all of Midland's outstanding stock for about $50 million in cash.
Midland underwrites and markets nonstandard private passenger automobile
insurance through approximately 3,700 independent agents across 11 states,
primarily in the southern and western United States. During 1997, Midland wrote
$66.1 million of net premiums written.
Total capital expenditures for the three years ended December 31, 1997,
aggregated $196.0 million. During 1997, the Company made substantial investments
in property and equipment to support its infrastructure. In December 1997, the
Company purchased approximately 72 acres in Tampa, Florida to construct a
three-building regional call center. It is estimated that, when completed, this
facility will consist of approximately 307,000 square feet of space. The cost of
the project is currently estimated at $42.0 million and $8.3 million has been
paid as of December 31, 1997. The project is scheduled to be completed by the
end of 1998. In addition, in November 1997, the Company purchased 91 acres in
Mayfield Village, Ohio to construct an office complex, near the site of its
current corporate headquarters. This office complex is part of a five-year
cooperative effort with Mayfield Village to develop over 300 acres --
Progressive would serve as the anchor corporate user with additional business
users and recreational facilities on the site. The Company plans to construct
three buildings containing a total of approximately 485,000 square feet, in
1998, and could build up to three additional buildings, containing about 500,000
square feet in total, in the future. The first phase of this project is
estimated to cost $63.5 million. As of December 31, 1997, $5.3 million has been
paid. The construction projects will be funded through operating cash flows or
the issuance of new debt securities.
In July 1995, the Company began converting its computer systems to be year
2000 compliant (e.g. to recognize the difference between '99 and '00 as one year
instead of negative 99 years). The Company has evaluated internal production
systems, hardware and software products, facilities implications, and
interactions with business partners in relation to year 2000 issues. As of
December 31, 1997, the Company has completed approximately 70% of its efforts to
bring the production systems in compliance, with substantially all production
systems expected to be compliant by the end of 1998. The total cost to modify
these existing production systems, which include both internal and external
costs of programming, coding and testing, is estimated to be $6.4 million, of
which $3.1 million has been expensed as of December 31, 1997. The Company is
also in the process of replacing some of its systems during 1998 with new
systems which, in addition to being year 2000 compliant, will add increased
functionality to the Company. The total cost of these systems, which include
both internal and external costs, is estimated to be $4.8 million, and the
projects are expected to be substantially complete by the end of 1998. As of
December 31, 1997, $2.4 million has been expensed for these systems. All costs
are being funded through operating cash flow. The Company continually evaluates
computer hardware and software upgrades and, therefore, many of the costs to
replace existing items with year 2000 compliant upgrades are not likely to be
incremental costs to the Company. It is estimated that the majority of these
upgrades will be completed in 1998. During 1998, the Company will continue to
contact its business partners (e.g. agents, banks, credit bureaus, motor vehicle
departments, rating agencies, etc.) to determine their status of compliance and
to assess the impact of noncompliance to the Company. The Company believes that
it is taking the necessary measures to mitigate issues that may arise relating
to the year 2000. During 1998, the Company will develop contingency plans
relating to year 2000 compliance issues, either internal or external, that
cannot be guaranteed to be timely completed. To the extent any additional issues
arise, the Company will evaluate the impact on its financial condition, cash
flows and results of operations and, if material, make the necessary
disclosures.
The Progressive Corporation and Subsisiaries
49
<PAGE> 92
Investments The Company invests in fixed-maturity, equity and short-term
securities. The Company's investment strategy recognizes its need to maintain
capital adequate to support its insurance operations. The Company evaluates the
risk/reward trade-offs of investment opportunities, measuring their effects on
stability, diversity, overall quality and liquidity of the investment portfolio.
The majority of the portfolio is invested in high-grade, fixed-maturity
securities, of which short- and intermediate-term securities represented
$4,024.9 million, or 76.4%, at the end of 1997, compared to $3,275.6 million, or
73.6%, at the end of 1996. Long-term investment-grade securities, including
greater than 10-year expected principal paydowns, were $143.4 million, or 2.7%,
at the end of 1997, compared to $187.5 million, or 4.2%, at the end of 1996.
Non-investment-grade fixed-maturity securities were $132.5 million, or 2.5%, at
the end of 1997, compared $105.8 million, or 2.4%, at the end of 1996, and offer
the Company higher returns and added diversification without a significant
adverse effect on the stability and quality of the investment portfolio as a
whole. Non-investment-grade securities may involve greater risks often related
to creditworthiness, solvency and relative liquidity of the secondary trading
market. The duration of the fixed-income portfolio was 3.3 years at December 31,
1997, compared to 3.2 years at December 31, 1996.
A portion of the investment portfolio was invested in marketable equity
securities. Common stocks represented $620.8 million, or 11.8% of the portfolio,
at the end of 1997, compared to $540.1 million, or 12.1%, a year earlier.
Foreign equities, which may include stock index futures and foreign currency
forwards, comprised $106.0 million of the common stock portfolio at the end of
1997, and $149.5 million at the end of 1996. As of December 31, 1997, the
Company's Japanese equity holdings represented 1.5% of the common stock
portfolio. The remainder of the equity portfolio of $348.8 million, or 6.6%, at
the end of 1997, compared to $341.6 million, or 7.7%, at the end of 1996, was
comprised of over 80% of fixed-rate preferred stocks with mechanisms that are
expected to provide an opportunity to liquidate at par.
As of December 31, 1997, the Company's portfolio had $188.4 million in
unrealized gains, compared to $114.1 million a year earlier. This increase in
value was the result of increased stock prices as the S&P 500 index rose from
740.7 to 970.4 and decreased interest rate levels as evidenced by the .3%
decrease in the 3-year treasury note.
The weighted average fully taxable equivalent book yield of the portfolio was
6.6%, 6.7% and 6.9% for the years ended December 31, 1997, 1996 and 1995,
respectively.
As of December 31, 1997, the Company held $1,520.0 million of asset-backed
securities, which represented 28.8% of the total investment portfolio. The
portfolio included collateralized mortgage obligations (CMO) and commercial
mortgage-backed obligations (CMB) totaling $283.2 million and $776.7 million,
respectively. The remainder of the asset-backed portfolio was invested primarily
in auto loan and other asset-backed securities. As of December 31, 1997, the CMO
portfolio included busted planned amortization class bonds and sequential bonds
representing 94.1% of the CMO portfolio ($266.4 million) with an average life of
3.0 years, and planned amortization class bonds representing 5.9% of the CMO
portfolio ($16.8 million) with an average life of .5 years. At December 31,
1997, the CMO portfolio had a weighted average Moody's or Standard & Poor's
rating of AAA and the CMB portfolio had an average life of 7.4 years and a
weighted average Moody's or Standard & Poor's rating of AA. At December 31,
1997, the CMO and CMB portfolios had unrealized gains of $1.6 million and $14.0
million, respectively. The single largest unrealized loss in any individual CMO
security was $.2 million and in any CMB security was $1.1 million, at December
31, 1997. The CMB portfolio includes $149.6 million of CMB interest-only
certificates, which had an average life of 6.9 years and a weighted average
Moody's or Standard & Poor's rating of AAA at December 31, 1997. Both the CMO
and CMB portfolios are highly liquid with readily available quotes and contain
no residual interests. During 1997, the Company sold $178.4 million (proceeds of
$200.8 million) of non-investment-grade CMB securities to a third- party
purchaser. The purchaser subsequently transferred the securities to a trust as
collateral in a resecuritized debt offering. The transaction was accounted for
as a sale under Statement of Financial Accounting Standards (SFAS) 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities," resulting in a net gain of $22.4 million. A bankruptcy remote
subsidiary of the Company acquired $22.8 million (market value of $25.9 million)
of the resecuritized debt. This portion of the transaction was not accounted for
as a sale in accordance with SFAS 125.
Investments in the Company's portfolio have varying degrees of risk. The
primary market risk exposure to the fixed-income portfolio is interest rate
risk, which is limited by managing duration to a defined range of 1.8 to 5
years. The distribution of maturities and convexity are monitored on a regular
basis. Common stocks and similar investments, which generally have greater risk
and volatility of market value, are limited to a target of 15%, with a range of
0 to 25%. Market values, along with industry and sector concentrations of common
stocks and similar investments, are monitored daily. Exposure to foreign
currency exchange risk is limited by Company restrictions and is monitored
regularly. Exposures are evaluated individually and as a whole, considering the
effects of cross correlation. For the quantitative market risk disclosures, see
page 54. The Company regularly examines its portfolio for evidence of
impairment. In such cases, changes in market value are evaluated to determine
the extent to which such changes are attributable to: (i) interest rates, (ii)
market-related factors other than interest rates and (iii) financial conditions,
business prospects and other fundamental factors specific to the issuer.
Declines attributable to issuer fundamentals are reviewed in further detail.
Available evidence is considered to estimate the realizable value of the
investment. When a security in the Company's investment portfolio has a decline
in market value which is other than temporary, the Company is required by
generally accepted accounting principles (GAAP) to reduce the carrying value of
such security to its net realizable value.
Derivative instruments are primarily used to manage the risks and enhance the
returns of the available-for-sale portfolio. This is accomplished
50
<PAGE> 93
by modifying the basis, duration, interest rate or foreign currency
characteristics of the portfolio or hedged securities. Derivative instruments
may also be used for trading purposes. During 1997, net activity in the trading
portfolio was not material to the Company's financial position, cash flows and
results of operations. Net cash requirements of derivative instruments are
limited to changes in market values which may vary based upon changes in
interest rates and other factors. Exposure to credit risk is limited to the
carrying value; collateral is not required to support the credit risk. The
Company has stringent restrictions on the amount of open positions in the
trading portfolios, limiting exposure to levels management deems acceptable. At
December 31, 1997, trading positions had a net market value of $1.1 million; at
December 31, 1996, there were no trading positions.
Results of Operations Operating income, which excludes net realized gains and
losses from security sales and one-time items, was $336.0 million, or $4.46 per
share, in 1997, $309.1 million, or $4.12 per share, in 1996 and $220.1 million,
or $2.85 per share, in 1995. The GAAP combined ratio was 93.4 in 1997, 91.5 in
1996 and 94.3 in 1995.
Direct premiums written increased 33% to $4,825.2 million in 1997, compared to
$3,638.4 million in 1996 and $3,068.9 million in 1995. Net premiums written
increased 36% to $4,665.1 million in 1997, compared to $3,441.7 million in 1996
and $2,912.8 million in 1995. The difference between direct and net premiums
written is largely attributable to premiums written under state-mandated
involuntary Commercial Auto Insurance Procedures (CAIP), for which the Company
retains no indemnity risk, of $78.4 million in 1997, $99.5 million in 1996 and
$105.4 million in 1995. The Company provided policy and claim processing
services to 27 state CAIPs in 1997 and 1996, compared to 28 in 1995. Premiums
earned, which are a function of the amount of premiums written in the current
and prior periods, increased 31% in 1997, compared to 17% in 1996 and 24% in
1995.
In the Company's core business units, which write insurance for private
passenger automobiles, recreational vehicles and small fleets of commercial
vehicles, net premiums written grew 33%, 19% and 21% in 1997, 1996 and 1995,
respectively, reflecting an increase in unit sales driven by the Company's
competitive rates. The Company decreased rates an average of .9% in 1997,
compared to rate increases of 2.5% and 6.5% in 1996 and 1995, respectively. The
Company continues to write, through multiple distribution methods, standard and
preferred risks, which represented between 20% and 25% of total 1997 core
business volume. In 1997, the Company used rating criteria based partially upon
consumer financial responsibility. This approach has been approved by numerous
regulators and is in use in the 31 states that represent 80% of the core
business units' volume; the Company expects to complete rollout of this approach
into the remaining states where it can be offered in 1998. The Company believes
that its use of financial responsibility in auto insurance rating produces a
more accurate distribution of losses among consumers and, therefore, produces
more accurate pricing resulting in lower rates for most consumers. In addition,
in order to encourage writing more standard and preferred risks and to improve
customer retention, the Company in 1996 adjusted its contingent cash incentive
compensation program for employees to reflect the increase in value created by
adding new customers. The Company believes that growing the numbers of
policyholders, particularly standard and preferred risks with their higher
retention rates, builds intrinsic value because renewals are more profitable
than first year business. The drive to add customers faster resulted in more
spending to promote the Progressive brand and to hire and develop more claim
adjusters and customer service representatives, and the Company expects this to
continue at least in the near term. These costs, along with lower margins on
first year business, are likely to bring profit margins more in line with the
Company's objective of achieving a 4% underwriting profit margin over the entire
retention period of an insured. In 1997, the core business units generated an
underwriting profit margin of 7%, compared to 8% in 1996 and 5% in 1995.
Claim costs, the Company's most significant expense, represent actual payments
made and changes in estimated future payments to be made to or on behalf of its
policyholders, including expenses required to settle claims and losses. These
costs include a loss estimate for future assignments and assessments, based on
current business, under state-mandated involuntary automobile programs. Claims
costs are influenced by inflation and loss severity and frequency, the impact of
which is mitigated by adequate pricing. Increases in the rate of inflation
increase loss payments, which are made after premiums are established.
Accordingly, anticipated rates of inflation are taken into account when the
Company establishes premium rates and loss reserves. Claim costs, expressed as a
percentage of premiums earned, were 71% in 1997, compared to 70% in 1996 and 71%
in 1995.
The Company writes directors and officers and other professional liability
coverage for community banks and credit unions and, therefore, could potentially
be exposed to liability for errors made by these institutions relating to the
year 2000 conversion. To minimize its risk, in October 1997, the Company began
including year 2000 exclusions in all new and renewal policies for commercial
banks (representing approximately 70% of all policies written since that date)
which have multi-year terms that extend beyond December 31, 1999. The Company is
not currently aware of any other company in the industry that is including such
exclusion provisions or increasing their premiums to cover potential exposure on
year 2000 compliance issues. As a regulated industry, financial institutions are
under pressure from government regulatory agencies and other interested parties
to ensure they achieve readiness for the year 2000. The Company is monitoring
its customers' compliance efforts and believes that substantially all such
customers are pursuing plans to achieve year 2000 compliance. It is currently
unknown whether the financial institutions will be able to completely avoid
errors relating to year 2000 compliance and the Company is unable to predict to
what extent such financial institutions will incur losses as a result of
noncompliance and whether their directors and officers will be subject to
individual liability for such noncompliance. At December 31, 1997, approximately
200 professional liability policies, or about 17% of all policies, do not
contain year 2000 exclusion provisions and extend into
51
<PAGE> 94
the year 2000. In the event of a claim, applicable factual and coverage issues
would have to be resolved. Based on information currently available and
management's best estimate, the Company does not believe that it will incur any
costs that will have a material impact on the Company's financial condition,
cash flows or results of operations.
Because the Company is primarily an insurer of motor vehicles, it
has limited exposure for environmental, product and general liability claims.
The Company has established reserves for these exposures, in amounts which it
believes to be adequate based on information currently known by it. Management
does not believe that these claims will have a material impact on the Company's
liquidity, financial condition, cash flows or results of operations.
Policy acquisition and other underwriting expenses as a percentage of premiums
earned were 23% in 1997, compared to 22% in 1996 and 23% in 1995. In 1997, the
Company incurred additional expenses to support its infrastructure and to hire
and train people in anticipation of growth. The Company also introduced its
advertising campaign to 13 states during 1997, bringing the total number of
states where the Company advertises to 19 (40 markets).
Recurring investment income (interest and dividends) increased 22% to $274.9
million in 1997, compared to $225.8 million in 1996 and $199.1 million in 1995,
primarily due to an increase in the size of the investment portfolio. Net
realized gains on security sales were $98.5 million in 1997, $7.1 million in
1996 and $46.7 million in 1995. Investment expenses were $9.9 million in 1997,
compared to $6.1 million in 1996 and $8.1 million in 1995; in 1997, the Company
purchased a new portfolio management system and incurred expenses related to the
sale of the commercial mortgage-backed securities.
Safe Harbor statement under the Private Securities Litigation Reform Act of
1995: Except for historical information, the matters discussed in this annual
report 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.
52
<PAGE> 95
ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSES (LAE) DEVELOPMENT
(not covered by report of independent accountants)
<TABLE>
<CAPTION>
(millions)
For the years ended
December 31, 1987 1988 1989 1990 1991 1992 1993 19943 1995 1996 1997
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loss and LAE
reserves(1) $ 471.0 $ 651.0 $ 748.6 $ 791.6 $ 861.5 $ 956.4 $1,012.4 $1,098.7 $1,314.4 $1,532.9 $1,867.5
Re-estimated
reserves as of:
One year later 446.6 610.3 685.4 748.8 810.0 857.9 869.9 1,042.1 1,208.6 1,429.6
Two years later 422.2 573.4 677.9 726.5 771.9 765.5 837.8 991.7 1,149.5
Three years later 402.4 581.3 668.6 712.7 718.7 737.4 811.3 961.2
Four years later 403.9 575.1 667.1 683.7 700.1 725.2 794.6
Five years later 399.6 578.4 654.7 666.3 695.1 717.3
Six years later 400.2 582.2 647.1 664.8 692.6
Seven years later 408.5 574.3 645.7 664.5
Eight years later 408.1 574.4 645.4
Nine years later 407.8 575.0
Ten years later 408.5
Cumulative redundancy $ 62.5 $ 76.0 $ 103.2 $ 127.1 $ 168.9 $ 239.1 $ 217.8 $ 137.5 $ 164.9 $ 103.3
Percentage(2) 13.3 11.7 13.8 16.1 19.6 25.0 21.5 12.5 12.6 6.7
</TABLE>
The chart represents the development of the property-casualty loss and LAE
reserves for 1987 through 1996. The reserves are re-estimated based on
experience as of the end of each succeeding year and are increased or decreased
as more information becomes known about the frequency and severity of claims for
individual years. The cumulative redundancy represents the aggregate change in
the estimates over all prior years.
(1) Represents loss and LAE reserves net of reinsurance recoverables on unpaid
losses at the balance sheet date.
(2) Cumulative redundancy / loss and LAE reserves.
(3) In 1994, based on a review of its total loss reserves, the Company
eliminated its $71.0 million "supplemental reserve."
- --------------------------------------------------------------------------------
DIRECT PREMIUMS WRITTEN BY STATE
(not covered by report of independent accountants)
<TABLE>
<CAPTION>
(millions) 1997 1996 1995 1994 1993
------------------ ------------------ ------------------ ------------------ -----------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Florida $ 663.0 13.7% $ 467.4 12.9% $ 421.9 13.7% $ 369.9 14.0% $ 265.6 13.5%
Texas 509.4 10.6 349.9 9.6 313.2 10.2 246.4 9.3 146.6 7.4
New York 446.3 9.2 358.0 9.8 225.6 7.4 195.2 7.4 170.4 8.7
Ohio 404.3 8.4 340.8 9.4 284.1 9.3 232.0 8.8 175.9 8.9
California 291.7 6.0 171.6 4.7 126.6 4.1 126.8 4.8 80.2 4.1
Georgia 261.9 5.4 212.1 5.8 155.1 5.1 129.7 4.9 120.0 6.1
Pennsylvania 248.3 5.1 201.3 5.5 184.9 6.0 161.2 6.1 113.0 5.8
All other 2,000.3 41.6 1,537.3 42.3 1,357.5 44.2 1,183.9 44.7 894.7 45.5
------------------ ------------------ ------------------ ------------------ -----------------
Total $ 4,825.2 100.0% $ 3,638.4 100.0% $ 3,068.9 100.0% $ 2,645.1 100.0% $ 1,966.4 100.0%
================== ================== ================== ================== ==================
</TABLE>
The Progressive Corporation and Subsidiaries
53
<PAGE> 96
QUANTITATIVE MARKET RISK DISCLOSURES
(not covered by report of independent accountants)
Quantitative market risk disclosures are only presented for market risk
categories when risk is considered material. Materiality is determined based on
the fair value of the financial instruments at December 31, 1997, and the
potential for near term losses from reasonably possible near term changes in
market rates or prices.
OTHER THAN TRADING FINANCIAL INSTRUMENTS
Financial instruments subject to interest rate risk as of December 31, 1997
were:
<TABLE>
<CAPTION>
(millions) market value
-------------------------------------------------------------------
-200 bps -100 bps +100 bps +200 bps
CHANGE CHANGE ACTUAL CHANGE CHANGE
<S> <C> <C> <C> <C> <C>
U.S. government obligations $ 1,000.9 $ 959.2 $ 919.6 $ 881.2 $ 846.9
State and local government obligations 1,322.5 1,297.4 1,264.2 1,230.0 1,197.0
Asset-backed securities 1,635.7 1,581.4 1,520.1 1,471.7 1,414.9
Other debt securities 197.1 192.4 187.6 183.1 178.7
Preferred stocks 374.3 361.2 348.8 336.9 325.4
Short-term investments 409.4 409.4 409.4 409.4 409.4
Forward positions-liabilities (2.2) (1.1) (0.1) .8 1.7
-------------------------------------------------------------------
$ 4,937.7 $ 4,799.9 $ 4,649.6 $ 4,513.1 $ 4,374.0
====================================================================
</TABLE>
Exposure to risk is represented in terms of changes in fair value due to
selected hypothetical movements in market rates. Bonds and preferred stocks are
individually priced to yield to the worst case scenario. State and local
government obligations, including lease deals and super sinkers, are assumed to
hold their prepayment patterns. Asset-backed securities are priced assuming deal
specific prepayment scenarios, considering the deal structure, prepayment
penalties, yield maintenance agreements and the underlying collateral. Over 80%
of the preferred stocks have mechanisms that are expected to provide an
opportunity to liquidate at par.
Financial instruments subject to equity market risk as of December 31, 1997
were:
<TABLE>
<CAPTION>
(millions) HYPOTHETICAL
MARKET CHANGES
-------------------------
MARKET
VALUE +10% -10%
<S> <C> <C> <C>
Common stocks $ 620.8 $ 675.8 $ 565.8
</TABLE>
The model represents the estimated value of the Company's common stock portfolio
given a + (-) 10% change in the market, based on the common stock portfolio's
weighted average beta of .84. The beta is derived from recent historical
experience, using the S&P 500 as the market surrogate. The historical
relationship of the common stock portfolio's beta to the S&P 500 is not
necessarily indicative of future correlation, as individual company or industry
factors may effect price movement. Betas are not available for all securities.
In such cases, the change in market value reflects a direct + (-) 10% change;
the number of securities without betas is less than 25%. The common stock
portfolio includes stock index futures with a market value of $.8 million.
Financial instruments subject to foreign currency risk as of December 31, 1997
were:
<TABLE>
<CAPTION>
(millions) MARKET NOTIONAL HYPOTHETICAL
VALUE VALUE GAIN (LOSS)
<S> <C> <C>
Canadian debt investments $ 58.5 N/A $ 5.8
Foreign equity investments 121.0 N/A 12.1
Foreign currency forwards-assets (0.7) 50.9 5.1
Foreign currency forwards-liabilities 1.7 (67.2) (6.7)
----------- ----------
$ 180.5 $ 16.3
=========== ==========
</TABLE>
N/A = not applicable; notional value pertains only to derivative instruments.
The Progressive Corporation and Subsidiaries
54
<PAGE> 97
The foreign equity portfolio, which may include stock index futures, foreign
currency forwards and foreign preferred stocks, is comprised of numerous
currencies, none of which are individually material. Therefore, sensitivity
results are presented by class of financial instrument. The model calculates a
gain or loss in market value if the U.S. dollar depreciates by 10% to the
respective currency. The model does not attempt to reflect the correlation of
multiple currencies to changes in the U.S. dollar. At December 31, 1997, the
Company did not have any cross currency exposures.
TRADING FINANCIAL INSTRUMENTS
At December 31, 1997, the Company had short trading positions with a market
value of $1.1 million. Exposure to loss from open trading positions is not
material individually or in the aggregate. The Company did not have any trading
securities as of December 31, 1997.
- --------------------------------------------------------------------------------
QUARTERLY FINANCIAL AND COMMON SHARE DATA
(not covered by report of independent accountants)
<TABLE>
<CAPTION>
(millions-except per share amounts)
NET INCOME OPERATING INCOME(1) STOCK PRICE(4)
---------------------- ---------------------- ------------------------------------
OPERATING PER PER RATE OF DIVIDENDS
QUARTER REVENUES TOTAL(2) SHARE(3) TOTAL SHARE(3) HIGH-LOW CLOSE RETURN(5) PER SHARE
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1997
1 $ 905.7 $ 76.5 $ 1.02 $ 78.6 $ 1.05 $ 73 5/8 - 63 7/8 $ 63 7/8 $ .060
2 1,020.9 102.1 1.36 82.8 1.10 87 3/8 - 61 1/2 87 .060
3 1,090.1 116.2 1.54 89.3 1.18 111 7/8 - 86 1/2 107 1/8 .060
4 1,218.1 105.3 1.39 85.3 1.13 120 7/8 - 99 119 7/8 .060
---------- ---------------------- ---------------------- ------------------------------------ --------
$ 4,234.8 $ 400.0 $ 5.31 $ 336.0 $ 4.46 $120 7/8 - 61 1/2 $ 1197/8 78.4% $ .240
========== ====================== ====================== ==================================== ========
1996
1 $ 741.4 $ 63.3 $ .82 $ 60.2 $ .78 $ 51 1/4 - 43 1/2 $ 44 5/8 $ .055
2 794.9 78.4 1.01 78.5 1.05 48 7/8 - 40 3/8 46 1/4 .055
3 840.3 80.3 1.08 82.5 1.11 58 1/2 - 43 1/8 57 1/4 .060
4 868.9 91.7 1.23 87.9 1.18 72 1/4 - 55 3/8 67 3/8 .060
---------- ---------------------- ---------------------- ------------------------------------ --------
$ 3,245.5 $ 313.7 $ 4.14 $ 309.1 $ 4.12 $ 72 1/4 - 40 3/8 $ 67 3/8 38.5% $ .230
========== ====================== ====================== ==================================== ========
1995
1 $ 633.6 $ 60.7 $ .79 $ 50.7 $ .66 $ 42 1/8 - 34 3/4 $ 40 5/8 $ .055
2 687.4 60.8 .79 46.4 .60 41 7/8 - 37 1/8 38 3/8 .055
3 719.0 62.5 .81 59.0 .77 48 - 37 3/4 44 3/4 .055
4 726.1 66.5 .86 64.0 .83 49 1/2 - 41 1/2 48 7/8 .055
---------- ---------------------- ---------------------- ------------------------------------ --------
$ 2,766.1 $ 250.5 $ 3.26 $ 220.1 $ 2.85 $ 49 1/2 - 34 3/4 $ 48 7/8 40.4% $ .220
========== ====================== ====================== ==================================== ========
</TABLE>
(1) Represents net income less realized gains and losses on security sales and
one-time items.
(2) The sum may not equal the total due to rounding in the individual periods.
Each period is properly stated.
(3) Presented on a diluted basis. The sum may not equal the total because the
average equivalent shares differ in the periods. In 1997, the Company
adopted SFAS 128, "Earnings Per Share," and, as a result, restated prior
periods per share amounts, if applicable. See Note 1-Reporting and
Accounting Policies for further discussion.
(4) Prices as reported on the consolidated transaction reporting system. The
Company's Common Shares are listed on the New York Stock Exchange.
(5) Represents annual rate of return, including quarterly dividend reinvestment.
The Progressive Corporation and Subsisiaries
55
<PAGE> 98
TEN YEAR SUMMARY-FINANCIAL HIGHLIGHTS
(not covered by report of independent accountants)
<TABLE>
<CAPTION>
(millions-except per share amounts and number of people employed)
1997 1996
<S> <C> <C>
INSURANCE COMPANIES SELECTED FINANCIAL INFORMATION
AND OPERATING STATISTICS-STATUTORY BASIS
Reserves:
Loss and loss adjustment expense(1) $ 1,867.5 $ 1,532.9
Unearned premiums 1,901.9 1,382.9
Policyholders' surplus(1) 1,725.3 1,292.4
Ratios:
Net premiums written to policyholders' surplus 2.7 2.7
Loss and loss adjustment expense reserves to policyholders' surplus 1.1 1.2
Loss and loss adjustment expense 71.1 70.2
Underwriting expense 20.7 19.8
---------- ----------
Statutory combined ratio 91.8 90.0
SELECTED CONSOLIDATED FINANCIAL INFORMATION-GAAP BASIS
Total revenues $ 4,608.2 $ 3,478.4
Total assets 7,559.6 6,183.9
Total shareholders' equity(2) 2,135.9 1,676.9
Common Shares outstanding 72.3 71.5
Common Share price
High $120 7/8 $72 1/4
Low 61 1/2 40 3/8
Close(3) 119 7/8 67 3/8
Market capitalization
Book value per Common Share(2) $ 29.54 $ 23.45
Return on average common shareholders' equity(4) 20.9% 20.5%
Debt outstanding $ 775.9 $ 775.7
Ratio of debt to capital 27% 32%
GAAP underwriting margin(2) 6.6 8.5
Number of people employed 14,126 9,557
</TABLE>
(1) During 1994, the Company began accruing salvage and subrogation
recoverables.
(2) In 1994, the $71.0 million "supplemental reserve" was eliminated, increasing
book value per share $.65, underwriting profit margin 3.2% and shareholders'
equity $46.2 million.
(3) Represents the closing price at December 31.
(4) Net income minus preferred share dividends / average common shareholders'
equity.
All share and per share amounts were adjusted for the December 1992, 3 for 1
stock split.
The Progressive Corporation and Subsidiaries
56
<PAGE> 99
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991 1990 1989 1988
<S> <C> <C> <C> <C> <C> <C> <C>
$ 1,314.4 $ 1,100.2 $ 1,053.7 $ 994.7 $ 901.7 $ 827.4 $ 787.7 $ 685.5
1,140.4 954.8 688.9 538.5 513.6 474.1 467.6 505.0
1,055.1 945.1 701.9 658.3 676.7 636.7 578.1 495.0
2.8 2.6 2.6 2.2 2.0 1.9 2.0 2.6
1.2 1.2 1.5 1.5 1.3 1.3 1.4 1.4
71.6 64.2 62.6 68.3 65.7 62.1 65.9 62.9
21.4 22.4 25.4 29.8 33.5 31.1 31.4 33.2
----------- ----------- ------------ ------------ ------------ ------------ ----------- ----------
93.0 86.6 88.0 98.1 99.2 93.2 97.3 96.1
$ 3,011.9 $ 2,415.3 $ 1,954.8 $ 1,738.9 $ 1,493.1 $ 1,376.2 $ 1,392.7 $ 1,355.8
5,352.5 4,675.1 4,011.3 3,440.9 3,317.2 2,912.4 2,643.7 2,316.3
1,475.8 1,151.9 997.9 629.0 465.7 408.5 435.2 417.2
72.1 71.2 72.1 67.1 63.3 69.3 76.2 80.7
$ 49 1/2 $ 40 1/2 $ 46 1/8 $ 29 3/8 $ 20 5/8 $ 18 3/4 $ 14 1/2 $ 10 3/4
34 3/4 27 3/4 26 5/8 14 3/4 15 11 7 1/2 7 1/4
48 7/8 35 40 1/2 29 1/8 18 17 1/8 127/8 7 5/8
$ 3,523.9 $ 2,492.0 $ 2,920.1 $ 1,954.3 $ 1,139.4 $ 1,186.8 $ 981.1 $ 615.3
$ 19.31 $ 14.97 $ 12.62 $ 7.94 $ 5.83 $ 5.89 $ 5.71 $ 5.17
19.6% 27.4% 36.0% 34.7% 6.7% 21.5% 17.4% 25.9%
$ 675.9 $ 675.6 $ 477.1 $ 568.5 $ 644.0 $ 644.4 $ 645.9 $ 479.2
31% 37% 32% 47% 58% 61% 60% 53%
5.7 11.5 10.7 3.5 (3.7) 1.0 (1.2) 2.9
8,025 7,544 6,101 5,591 6,918 6,370 6,049 5,854
</TABLE>
57
<PAGE> 100
TEN YEAR SUMMARY-GAAP CONSOLIDATED OPERATING RESULTS
(not covered by report of independent accountants)
<TABLE>
<CAPTION>
(millions-except per share amounts)
1997 1996
<S> <C> <C>
Direct premiums written:
Personal lines $ 4,355.9 $ 3,165.4
Commercial lines 469.3 473.0
------------ ------------
Total direct premiums written 4,825.2 3,638.4
Reinsurance assumed -- 3.8
Reinsurance ceded (160.1) (200.5)
------------ ------------
Net premiums written 4,665.1 3,441.7
Net change in unearned premiums reserve(1) (475.6) (242.4)
------------ ------------
Premiums earned 4,189.5 3,199.3
------------ ------------
Expenses:
Losses and loss adjustment expenses(2) 2,967.5 2,236.1
Policy acquisition costs 607.8 482.6
Other underwriting expenses 336.0 208.5
------------ ------------
Total underwriting expenses 3,911.3 2,927.2
Underwriting profit (loss) before taxes 278.2 272.1
Provision (benefit) for income taxes 97.4 95.2
------------ ------------
Underwriting profit (loss) after taxes 180.8 176.9
Service operations profit (loss) after taxes .9 2.8
------------ ------------
181.7 179.7
Investment income after taxes 205.3 175.6
Net realized gains (losses) on security sales after taxes 64.0 4.6
Interest expense after taxes (42.0) (40.0)
Proposition 103 reserve reduction after taxes -- --
Non-recurring items after taxes -- --
Other expenses after taxes(3) (9.0) (6.2)
------------ ------------
Income before tax adjustments and cumulative
effect of accounting change 400.0 313.7
Tax adjustments(4) -- --
Cumulative effect of accounting change(5) -- --
------------ ------------
Net income $ 400.0 $ 313.7
============ ============
Per share(6)
Net income(2) $ 5.31 $ 4.14
Dividends .240 .230
Average equivalent shares
Basic 72.0 71.6
Diluted 75.3 74.2
</TABLE>
(1) Amount represents change in unearned premiums reserve less change in prepaid
reinsurance premiums.
(2) In 1994, the "supplemental reserve" was eliminated, resulting in a one-time
decrease to losses and loss adjustment expenses of $71.0 million, or $.62
per share.
(3) Reflects investment expenses after taxes and other tax adjustments.
(4) 1991 reflects a deferred tax asset write-down and 1990 reflects a fresh
start tax benefit.
(5) Reflects adoption of SFAS 109, "Accounting for Income Taxes."
(6) Presented on a diluted basis. In 1997, the Company adopted SFAS 128,
"Earnings Per Share," and, as a result, restated prior periods per share
amounts, if applicable. See Note 1-Reporting and Accounting Policies for
further discussion.
All share and per share amounts were adjusted for the December 1992, 3 for 1
stock split.
The Progressive Corpoarion and Subsidiaries
58
<PAGE> 101
<TABLE>
<CAPTION>
1995 1994 1993 1992 1991 1990 1989 1988
<S> <C> <C> <C> <C> <C> <C> <C>
$ 2,644.6 $ 2,181.7 $ 1,548.9 $ 1,214.6 $ 1,047.4 $ 876.0 $ 800.1 $ 817.0
424.3 463.4 417.5 422.2 489.4 482.8 487.0 521.0
----------- ----------- ------------ ------------ ------------ ------------ ----------- ----------
3,068.9 2,645.1 1,966.4 1,636.8 1,536.8 1,358.8 1,287.1 1,338.0
.1 2.9 9.2 4.3 .1 .1 7.2 9.4
(156.2) (190.8) (156.4) (189.9) (212.3) (162.6) (134.0) (72.4)
----------- ----------- ------------ ------------ ------------ ------------ ----------- ----------
2,912.8 2,457.2 1,819.2 1,451.2 1,324.6 1,196.3 1,160.3 1,275.0
(185.6) (266.1) (150.5) (25.1) (37.7) (5.1) 36.2 (59.6)
----------- ----------- ------------ ------------ ------------ ------------ ----------- ----------
2,727.2 2,191.1 1,668.7 1,426.1 1,286.9 1,191.2 1,196.5 1,215.4
----------- ----------- ------------ ------------ ------------ ------------ ----------- ----------
1,943.8 1,397.3 1,028.0 930.9 858.0 762.9 799.3 752.0
459.6 391.5 311.6 304.1 313.7 292.7 296.7 321.3
167.2 150.8 151.3 141.5 162.1 123.7 114.9 106.6
----------- ----------- ------------ ------------ ------------ ------------ ----------- ----------
2,570.6 1,939.6 1,490.9 1,376.5 1,333.8 1,179.3 1,210.9 1,179.9
----------- ----------- ------------ ------------ ------------ ------------ ----------- ----------
156.6 251.5 177.8 49.6 (46.9) 11.9 (14.4) 35.5
54.8 88.0 62.2 16.9 (15.9) 4.0 (2.9) 10.0
----------- ----------- ------------ ------------ ------------ ------------ ----------- ----------
101.8 163.5 115.6 32.7 (31.0) 7.9 (11.5) 25.5
5.6 6.5 4.4 (2.8) (1.4) 2.8 2.5 (1.3)
----------- ----------- ------------ ------------ ------------ ------------ ----------- ----------
107.4 170.0 120.0 29.9 (32.4) 10.7 (9.0) 24.2
156.2 131.2 107.1 110.4 121.1 126.4 135.3 91.3
30.4 15.5 70.1 9.6 4.9 (8.4) (.4) 12.3
(37.1) (35.9) (25.8) (29.4) (31.6) (32.0) (32.5) (10.5)
-- -- -- 70.0 -- -- -- --
-- -- (2.6) (42.6) -- -- -- --
(6.4) (6.5) (1.5) (8.3) (14.9) (13.2) (15.4) (9.2)
----------- ----------- ------------ ------------ ------------ ------------ ----------- ----------
250.5 274.3 267.3 139.6 47.1 83.5 78.0 108.1
-- -- -- -- (14.2) 9.9 -- --
-- -- -- 14.2 -- -- -- --
----------- ----------- ------------ ------------ ------------ ------------ ----------- ----------
$ 250.5 $ 274.3 $ 267.3 $ 153.8 $ 32.9 $ 93.4 $ 78.0 $ 108.1
=========== =========== ============ ============ ============ ============ =========== ==========
$ 3.26 $ 3.59 $ 3.59 $ 2.08 $ .41 $ 1.20 $ .94 $ 1.23
.220 .210 .200 .191 .172 .160 .147 .133
71.8 71.6 69.3 60.7 65.4 72.3 79.5 84.0
74.2 74.0 71.8 70.9 66.6 81.9 88.8 90.9
</TABLE>
59
<PAGE> 102
<TABLE>
<S> <C> <C>
DIRECTORS POLICY TEAM ANNUAL MEETING
Milton N. Allen(1),(2) Alan R. Bauer The Annual Meeting of Shareholders will be held at the offices of
Director, Charles B. Chokel The Progressive Corporation, 6671 Beta Drive, Mayfield Village, Ohio
various corporations Allan W. Ditchfield 44143 on April 24, 1998, at 10:00 a.m. There were 4,093 shareholders
W. Thomas Forrester of record on December 31, 1997.
B. Charles Ames(1) William H. Graves
Principal, Moira A. Lardakis PRINCIPAL OFFICE
Clayton, Dubilier & Rice, Inc. Daniel R. Lewis
(investment banking) Peter B. Lewis The principal office of The Progressive Corporation is at 6300
Robert J. McMillan Wilson Mills Road, Mayfield Village, Ohio 44143
Charles A. Davis(1) Glenn M. Renwick World Wide Web address: http://www.progressive.com
Limited Partner, David M. Schneider
Goldman Sachs Group L.P. Tiona M. Thompson TOLL-FREE TELEPHONE NUMBERS
(investment banking) Robert T. Williams
For assistance after an accident or to report a loss, 24 hours a
Stephen R. Hardis(1),(2) day, 7 days a week, call: 1-800-274-4499
Chairman of the Board and Chief GENERAL AND
Executive Officer, COMMUNITY MANAGERS For Progressive's smart new way to shop for auto insurance,
Eaton Corporation available 24 hours a day, 7 days a week, call: 1 800 AUTO PRO(R)
(manufacturing) Jeffrey W. Adler (1-800-288-6776)
Juan C. Andrade
Janet Hill(3) Mark H. Arnell For 24 Hour Policy Service, call: 1-800-888-7764
Vice President, John A. Barbagallo
Alexander & Associates, Inc. Russell H. Beaty COUNSEL
(management consulting) and Jose R. Benitez
President, Charles C. Boucherle Baker & Hostetler, Cleveland, Ohio
Staubach Alexander Hill, LLC Alan D. Brannan
(commercial real estate consulting) Gerald E. Combs TRANSFER AGENT AND REGISTRAR
William J. Conner
Peter B. Lewis(2) James C. Daues If you have questions about a specific stock ownership account,
Chairman of the Board, President John M. Davies write or call: Corporate Trust Customer Service, National City Bank,
and Chief Executive Officer Brian C. Domeck 1900 East Ninth Street, Cleveland, Ohio 44114. Phone: 1-800-622-6757
Brian J. Dwyer
Norman S. Matthews(3) Steven B. Gellen COMMON SHARES
Consultant, James F. Gerstner
formerly President, Meryl S. Golden The Progressive Corporation's Common Shares (symbol PGR) are traded
Federated Department Stores, Inc. Robin A. Harbage on the New York Stock Exchange. Dividends are customarily paid on
(retailing) Thomas H. Hollyer the last day of each quarter.
Richard A. Hutchinson
Donald B. Shackelford(3) Steven W. Jones INTERIM REPORTING The Progressive Corporation no longer distributes
Chairman, Thomas A. King quarterly shareholders' reports. To hear the text of the latest
State Savings Bank Jeffrey J. Knauff earnings release, receive key financial information for the past
(savings bank) James L. Lloyd several quarters, receive dividend and other information, or request
Timothy M. Madden copies of public documents, shareholders can call 1-800-879-PROG.
Dr. Paul B. Sigler(3) Eric W. Neely This toll-free shareholder services line is available 24 hours a
Professor, Yale University Mark D. Niehaus day, 7 days a week. Such information is also available from the
and Investigator, Brian J. Passell Company's inter-net site: http://www.progressive.com
Howard Hughes Medical Institute Anthony P. Pavia, Jr.
(medical research and education) Victor Politzi INVESTOR RELATIONS
David L. Pratt
Michael J. Randall Any shareholder wishing to receive public financial information on
CORPORATE OFFICERS Chris C. Rebillot the Company may write or call: The Progressive Corporation, Investor
Gerald A. Rett Relations, 6300 Wilson Mills Road, Box W33, Mayfield Village, Ohio
Peter B. Lewis, Chairman, Robert J. Rose 44143. Phone: 440-446-2851
President and David L. Roush
Chief Executive Officer John P. Sauerland
Michael D. Sieger
David M. Schneider, Secretary Brian A. Silva
David J. Skove
Charles B. Chokel, Treasurer Michele A. Strub-Heer
Julia Clark Sweeney
Gregory J. Trapp
(1) Audit Committee member Richard H. Watts
Jeffrey G. West
(2) Executive Committee member Gerald I. Wilson
David W. Young
(3) Executive Compensation Scott W. Ziegler
Committee member
</TABLE>
60
<PAGE> 103
(C) 1998 The Progressive Corporation
Design: Nesnadny + Schwartz, Cleveland + New York + Toronto
Printing: Fortran Printing, Cleveland
[Recycle Logo]
Printed on Recycled Paper
<PAGE> 104
[PROGRESSIVE CORPORATION LOGO]
The Progressive Corporation
6300 Wilson Mills Road
Mayfield Village, Ohio 44143
www.progressive.com
440.461.5000
