<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)
XXXXXXXXXXXXXXXX
(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 23, 1999
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 23, 1999, at 10:00 a.m., Cleveland time, for the following
purposes:
1. To fix the number of directors at twelve;
2. To elect five directors;
3. To approve The Progressive Corporation 1999 Executive Bonus 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 26, 1999,
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 19, 1999
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 23, 1999, 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, 1998, will first be sent to shareholders on or about March 22,
1999.
The close of business on February 26, 1999, 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 72,819,870 Common Shares,
each of which will be entitled to one vote.
ITEM 1: PROPOSAL TO FIX THE NUMBER OF DIRECTORS AT TWELVE
The Company's Code of Regulations provides that the number of directors
shall be fixed by the shareholders at no fewer than five or more than twelve.
The number of directors has been fixed at ten and there are currently ten
directors on the Board. The terms of six members of the Board will continue
after the meeting and the remaining four members are nominated herein for
election to the Board. The Board of Directors is proposing that the number of
directors be increased to twelve. The Board believes that Charles B. Chokel, who
was recently appointed the Company's Chief Executive Officer-Investments and
Capital Management, could make a significant contribution as a member of the
Board and, therefore, has nominated him as an additional director. If elected,
Mr. Chokel would be the eleventh director. The Board believes that it would be
desirable to fix the number of directors at twelve in order 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 another 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.
VOTE REQUIRED FOR APPROVAL
Under the Company's Code of Regulations, the affirmative vote of a majority
of the issued and outstanding Common Shares of the Company is required for
approval.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE FOR THIS
PROPOSAL.
1
<PAGE> 4
ITEM 2: ELECTION OF DIRECTORS
If Proposal 1 is adopted, the number of directors will be fixed at twelve.
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 of Milton N.
Allen, James E. Bennett III, Charles A. Davis and Paul B. Sigler as directors,
each to serve for a three-year term expiring at the 2002 Annual Meeting and, if
Proposal 1 is adopted, for the election of Mr. Chokel as a director to serve a
one-year term expiring at the 2000 Annual Meeting, and until their respective
successors are duly elected and qualified. If Proposal 1 is adopted, and the
five nominees named herein are elected as directors, one vacancy will remain on
the Board. If, by reason of death or other unexpected occurrence, any one or
more of the nominees herein 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. Proxies cannot be voted at the Annual Meeting for a
greater number of persons than the five 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.
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 Annual
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 five 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
or director has held the principal occupation indicated for more than the last
five years. The election of Mr. Chokel is contingent upon Proposal 1 being
approved. All other nominees are currently directors of the Company.
2
<PAGE> 5
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>
Charles B. Chokel (1) 45 Chief Executive Officer - Investments -- 2000
and Capital Management of the Company
since January 1999; Treasurer of the
Company from December 1994 to December
1998; Chief Financial Officer of the
Company prior to January 1999
Milton N. Allen (2) 71 Director of various companies 1978 2002
James E. Bennett III 55 Senior Executive Vice President, 1998 2002
KeyCorp, Cleveland, Ohio (banking)
since May 1998; Director and Senior
Partner, McKinsey & Company, Inc.,
Cleveland, Ohio (management consulting)
prior to May 1998
Charles A. Davis (3) 50 President and Chief Executive Officer, 1996 2002
Marsh & McLennan Capital, Inc., New
York, New York (global private equity
firm) since April 1998; Limited
Partner, Goldman Sachs Group L.P., New
York, New York (investment banking)
from December 1994 to April 1998;
General Partner, Goldman Sachs & Co.
prior to December 1994
Paul B. Sigler 65 Henry Ford II Professor, Yale 1981 2002
University and Investigator in the
Howard Hughes Medical Institute
</TABLE>
3
<PAGE> 6
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>
Stephen R. Hardis (4) 63 Chairman of the Board and Chief 1988 2000
Executive Officer, Eaton Corporation,
Cleveland, Ohio (manufacturing) since
January 1996 and September 1995,
respectively; Vice Chairman, Eaton
Corporation prior to January 1996;
Chief Financial and Administrative
Officer, Eaton Corporation prior to
September 1995
Janet Hill (5) 51 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 (6) 66 Consultant, New York, New York 1981 2000
B. Charles Ames (7) 73 Partner, Clayton, Dubilier & Rice, 1983 2001
Inc., New York, New York (investment
banking)
Peter B. Lewis (8) 65 President and Chairman of the Board; 1965 2001
Chief Executive Officer - Insurance
Operations of the Company since January
1999; Chief Executive Officer of the
Company prior to January 1999;
President, Chairman of the Board and
Chief Executive Officer of Progressive
Casualty Insurance Company
Donald B. Shackelford (9) 66 Chairman of the Board, Fifth Third Bank 1976 2001
of Central Ohio, Columbus, Ohio
(commercial bank), successor to State
Savings Bank
</TABLE>
- ---------------
(1) Mr. Chokel is also a director of The Plymouth Rock Company, a privately held
company in which the Company holds a 12.5% equity interest.
(2) Mr. Allen is also a director of ARD Inc. and Del Rio Investment Corporation,
which are privately held.
(3) Mr. Davis is also a director of Heilig-Meyers Company, Lechters, Inc. and
Media General, Inc., which are publicly held, and Merchants Bancshares, Inc.
and Seneca Insurance Company, Inc., which are privately held.
(4) Mr. Hardis is also a director of Nordson Corporation, Lexmark International,
Inc., KeyCorp and Marsh & McLennan Companies, all of which, as well as Eaton
Corporation, are publicly held.
(5) Ms. Hill is also a director of Wendy's International, Inc., Dean Foods
Company and the First Union Bank of Virginia, Maryland and the District of
Columbia, which are publicly held.
4
<PAGE> 7
(6) Mr. Matthews is also a director of Lechters, Inc., Toys "R" Us, Loehmann's,
Inc. and Finlay Fine Jewelry, Inc., which are publicly held.
(7) Mr. Ames is also a director of M.A. Hanna Company, Riverwood International,
Inc. and Lexmark International, Inc., which are publicly held, and Remington
Arms Co., which is privately held.
(8) 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.
(9) Mr. Shackelford is also a director of The Limited, Inc., Worthington Foods,
Inc., Intimate Brands, Inc. and Fifth Third Bancorp of Cincinnati, which are
publicly held.
During 1998, seven meetings of the Board of Directors were held and the
Board adopted resolutions by written action pursuant to Ohio corporation law on
one occasion. During 1998, Mr. James E. Bennett III, who is standing for
election, attended two of the three meetings of the Board of Directors held
while he was a member.
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 1998, the Executive Committee adopted resolutions by written action
pursuant to Ohio corporation law on seven occasions.
Messrs. Allen, Ames, Bennett, 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 1998.
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. During 1998, the Executive Compensation
Committee met four times and adopted resolutions by written action pursuant to
Ohio corporation law on four occasions.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Between December 1997 and February 1998, prior to becoming a director,
James E. Bennett, as a Senior Partner with McKinsey & Co., Inc., carried out for
the Board a consulting assignment on succession planning. The Company paid
McKinsey & Co., Inc. $138,000 for these professional services.
The Company is engaged in discussions with Peter B. Lewis regarding the
possible sale to Mr. Lewis of the Company's corporate airplane, a Canadair
Challenger 601-1A. In the proposed transac-
5
<PAGE> 8
tion, the airplane would be sold to Mr. Lewis at a price equal to the fair
market value thereof, as determined by an independent appraisal. Jet
Perspectives, Inc., an independent aircraft appraiser, has been selected to
determine the fair market value of the airplane. The net book value of the
airplane was $6.8 million as of February 15, 1999; the fair market value of the
airplane, as determined by Jet Perspectives, Inc., was $12.4 million on that
date. Operation of the airplane is supported by two pilots and a mechanic, who
will remain employees of a subsidiary of the Company if the sale occurs. Mr.
Lewis would reimburse the Company for the salaries and all other payroll costs
of such employees and would pay directly or reimburse the Company for all
operating and other costs that the Company incurs in connection with the
storage, maintenance, use and operation of the airplane. Following any such
sale, the Company would reimburse Mr. Lewis at the air charter rate for
comparable aircraft (currently estimated to be $3,567 per hour, based on the
average of the quotes obtained from three air charter companies selected by Jet
Perspectives, Inc.) for his use of the airplane on Company-related business or
as a member of the Board of Directors.
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.
6
<PAGE> 9
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, 1999, 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...................................... 9,532,525(2) 13.0%
6300 Wilson Mills Road
Mayfield Village, Ohio 44143
Ruane, Cunniff & Co., Inc........................... 9,417,931(3) 13.0%
767 Fifth Avenue
Suite 4701
New York, New York 10153-4798
FMR Corp............................................ 4,254,114(4) 5.9%
82 Devonshire Street
Boston, Massachusetts 02109
</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 14,436 Common Shares held for Mr. Lewis by a trustee under the
Company's Retirement Security Program, 476,900 Common Shares subject to
currently exercisable stock options, 1,808,372 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 529,200 Common Shares held by two limited
partnerships in which Mr. Lewis is a general partner. The amount does not
include 716,215 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, 1998, and it disclaims any beneficial
interest in such shares. Ruane, Cunniff & Co., Inc. has advised that it has
sole voting power as to 6,334,467 of these shares, no voting power as to the
balance of these shares, sole investment power as to 5,065,431 of these
shares and shared investment power as to 4,352,500 of these shares.
(4) The Common Shares are held in investment accounts maintained with FMR Corp.
or affiliates as of December 31, 1998. FMR Corp. has advised that it has
sole voting power as to 226,364 of these
7
<PAGE> 10
shares, no voting power as to the balance of these shares and sole
investment power as to all of these shares.
Security Ownership of Management. The following information is set forth
with respect to the Company's Common Shares beneficially owned as of January 31,
1999, 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 as of December 31, 1998:
<TABLE>
<CAPTION>
AMOUNT AND NATURE OF PERCENT
NAME BENEFICIAL OWNERSHIP(1) OF CLASS
---- ----------------------- --------
<S> <C> <C>
Milton N. Allen..................................... 35,891(2) *
B. Charles Ames..................................... 54,342(3) *
Alan R. Bauer....................................... 57,729(4) *
James E. Bennett III................................ 500 *
Charles B. Chokel................................... 104,097(5) *
Charles A. Davis.................................... 3,337(6) *
W. Thomas Forrester................................. 48,689(7) *
William H. Graves................................... 76,762(8) *
Stephen R. Hardis................................... 29,145(9) *
Janet Hill.......................................... 7,837(10) *
Daniel R. Lewis..................................... 198,261(11) *
Peter B. Lewis...................................... 9,532,525(12) 13.0%
Norman S. Matthews.................................. 33,538(13) *
Robert J. McMillan.................................. 107,464(14) *
Glenn M. Renwick.................................... 67,179(15) *
Donald B. Shackelford............................... 92,839(16) *
Paul B. Sigler...................................... 12,343(17) *
All 22 Executive Officers and Directors as a
Group............................................. 10,840,754(18) 14.7%
</TABLE>
- ---------------
* 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.
8
<PAGE> 11
(2) Includes 2,400 Common Shares owned by Mr. Allen's wife, as to which shares
he disclaims any beneficial interest, and 17,377 Common Shares subject to
currently exercisable stock options.
(3) Includes 29,337 Common Shares subject to currently exercisable stock
options.
(4) Includes 27,000 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 59,700 Common Shares subject to currently exercisable stock
options and 40,122 Common Shares held by Mr. Chokel as trustee of a family
trust.
(6) Consists of 3,337 Common Shares subject to currently exercisable stock
options.
(7) Includes 27,600 Common Shares subject to currently exercisable stock
options.
(8) Includes 49,100 Common Shares subject to currently exercisable stock
options.
(9) Includes 23,337 Common Shares subject to currently exercisable stock
options.
(10) Includes 7,337 Common Shares subject to currently exercisable stock
options.
(11) Includes 107,275 Common Shares owned by Mr. Daniel R. Lewis's wife, as to
which shares he disclaims any beneficial interest, and 63,500 Common Shares
subject to currently exercisable stock options.
(12) See footnote 2 on page 7.
(13) Includes 17,337 Common Shares subject to currently exercisable stock
options.
(14) Includes 74,500 Common Shares subject to currently exercisable stock
options.
(15) Includes 42,600 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 power but no voting power.
(16) Includes 29,337 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.
(17) Includes 11,337 Common Shares subject to currently exercisable stock
options.
(18) Includes 1,123,196 Common Shares subject to currently exercisable stock
options.
Section 16(a) Beneficial Ownership Reporting Compliance. A Form 4 reporting
the writing of 150 covered call option contracts by Robert J. McMillan during
April 1998 was filed 26 days late. The September 29, 1997 purchase of 409 shares
in the Executive Deferred Compensation Plan by Daniel R. Lewis was reported in a
Form 4 filed in January 1999. The December 18, 1997 purchase of 839 shares in
the Executive Deferred Compensation Plan by Moira A. Lardakis was reported in a
Form 4 filed in January 1999. The January 1, 1997 distribution of 8,376 shares
from the Directors Deferral Plan to Donald B. Shackelford was reported in a Form
4 filed in January 1999.
9
<PAGE> 12
EXECUTIVE COMPENSATION
The following information is set forth with respect to the Company's Chief
Executive Officer and the other seven most highly compensated executive
officers, each of whom was serving as an executive officer at December 31, 1998
(the "named executive officers"). The titles set forth below reflect positions
held at December 31, 1998.
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 1998 $800,000 $1,657,800 $243,405(2) 41,000 $ 8,220
Chairman, President 1997 830,769 1,949,234 141,976(2) 73,600 7,770
and Chief Executive Officer 1996 800,000 1,320,840 151,234(2) 108,200 7,635
Charles B. Chokel 1998 375,000 654,375 -- 17,500 7,888(4)
Treasurer and 1997 383,654 833,967 -- 28,200 16,378
Chief Financial Officer 1996 321,889 496,844 -- 36,000 15,949
William H. Graves 1998 333,077 604,535 -- 9,400 6,736
Claims Process 1997 325,385 581,161 -- 15,800 15,612
Leader 1996 294,231 414,159 -- 22,100 5,631
Glenn M. Renwick 1998 333,077 604,535 -- 9,400 6,852
Technology 1997 325,385 581,161 -- 15,800 15,462
Process Leader 1996 295,207 396,151 -- 22,100 12,818
Alan R. Bauer 1998 333,077 604,535 -- 9,400 7,536
International/ 1997 325,385 565,519 -- 15,800 35,136
Internet Officer 1996 294,231 384,736 -- 22,100 7,008
W. Thomas Forrester 1998 333,077 604,535 -- 9,400 5,860
Ownership 1997 325,385 565,519 -- 15,800 5,545
Process Leader 1996 294,240 394,558 -- 22,100 13,243
Robert J. McMillan 1998 333,077 604,535 -- 9,400 26,177(5)
Consumer Marketing 1997 325,385 565,519 -- 15,800 32,966
Process Leader 1996 298,149 389,860 -- 22,100 7,008
Daniel R. Lewis 1998 333,077 604,535 -- 9,400 6,847
Independent Agent 1997 317,575 551,945 -- 14,300 6,558
Process Leader 1996 235,655 191,116 -- 11,700 7,008
</TABLE>
- ---------------
(1) Includes bonus amounts, if any, deferred under The Progressive Corporation
Executive Deferred Compensation Plan.
(2) Other Annual Compensation includes $191,420, $108,124 and $117,001, in the
form of personal use of corporate aircraft in 1998, 1997 and 1996,
respectively.
(3) Except as otherwise disclosed, the reported amounts represent employer
contributions made during 1998 under the Company's Retirement Security
Program.
10
<PAGE> 13
(4) In addition to contributions made under the Company's Retirement Security
program, the reported amount includes a $337 anniversary award for 20 years
of employment with the Company.
(5) In addition to contributions made under the Company's Retirement Security
Program, the reported amount includes a $17,968 relocation bonus and a $305
anniversary award for 20 years of employment with the Company.
OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
- ------------------------------------------------------------------------ VALUE AT ASSUMED
NUMBER OF ANNUAL RATES OF STOCK
SECURITIES % OF TOTAL PRICE APPRECIATION
UNDERLYING OPTIONS FOR OPTION TERM
OPTIONS GRANTED TO EXERCISE -----------------------
GRANTED(1) EMPLOYEES PRICE EXPIRATION 5% 10%
NAME (#) IN 1998 ($/SHARE) DATE ($) ($)
---- ------------- ---------- --------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Peter B. Lewis 41,000 9.3% $124.00 12/31/07 $3,197,300 $8,102,587
Charles B. Chokel 17,500 4.0 124.00 12/31/07 1,364,701 3,458,421
William H. Graves 9,400 2.1 124.00 12/31/07 733,040 1,857,666
Glenn M. Renwick 9,400 2.1 124.00 12/31/07 733,040 1,857,666
Alan R. Bauer 9,400 2.1 124.00 12/31/07 733,040 1,857,666
W. Thomas Forrester 9,400 2.1 124.00 12/31/07 733,040 1,857,666
Robert J. McMillan 9,400 2.1 124.00 12/31/07 733,040 1,857,666
Daniel R. Lewis 9,400 2.1 124.00 12/31/07 733,040 1,857,666
</TABLE>
---------------------
(1) Options become exercisable January 1, 2003, subject to accelerated
vesting and a "cash-out" provision upon the occurrence of any "change
in control" of the Company or certain similar events described in both
the Company's 1989 Incentive Plan and the 1995 Incentive Plan.
11
<PAGE> 14
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF SECURITIES
UNDERLYING VALUE OF UNEXERCISED
UNEXERCISED OPTIONS IN-THE-MONEY
SHARES AT 12/31/98 OPTIONS AT 12/31/98
ACQUIRED VALUE (#) ($)
ON EXERCISE REALIZED EXERCISABLE/ EXERCISABLE/
NAME (#) ($) UNEXERCISABLE UNEXERCISABLE
---- ----------- ----------- ---------------------- --------------------------
<S> <C> <C> <C> <C> <C> <C>
Peter B. Lewis -- -- Exercisable 354,500 Exercisable $53,694,271
Unexercisable 438,400 Unexercisable 51,689,150
Charles B. Chokel -- -- Exercisable 28,000 Exercisable 4,146,756
Unexercisable 139,400 Unexercisable 15,841,000
William H. Graves 29,900 $3,380,437 Exercisable 32,000 Exercisable 4,776,931
Unexercisable 77,500 Unexercisable 8,808,513
Glenn M. Renwick -- -- Exercisable 25,100 Exercisable 3,720,230
Unexercisable 77,900 Unexercisable 8,863,863
Alan R. Bauer 63,000 6,289,756 Exercisable 9,700 Exercisable 1,355,575
Unexercisable 77,700 Unexercisable 8,836,188
W. Thomas Forrester -- -- Exercisable 10,100 Exercisable 1,411,475
Unexercisable 77,900 Unexercisable 8,863,863
Robert J. McMillan -- -- Exercisable 57,000 Exercisable 8,588,276
Unexercisable 82,900 Unexercisable 9,388,863
Daniel R. Lewis -- -- Exercisable 48,100 Exercisable 7,277,622
Unexercisable 62,300 Unexercisable 6,941,476
</TABLE>
12
<PAGE> 15
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 from January 1, 1989 through December 31, 1993.
Under the Pension Plan formula, participants accrue benefits 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 eight named executive officers are as follows: Mr.
Peter B. Lewis, $10,188; Mr. Chokel, $9,042; Mr. Graves, $8,020; Mr. Renwick,
$5,412; Mr. Bauer, $8,905; Mr. Forrester, $6,263; Mr. McMillan, $9,220; and Mr.
Daniel R. Lewis $4,945.
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 within 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 on
their behalf are included in "All Other Compensation" in the Summary
Compensation Table on page 10.
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 Separa-
13
<PAGE> 16
tion 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, upon his death. However, if any
director ceases to serve as such for any reason other than death, disability or
removal without 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 1998 Directors' Stock Option Plan
("Directors' Stock Plan"). The Directors' Stock Plan authorizes the issuance of
up to 200,000 Common Shares, subject to adjustment for stock
14
<PAGE> 17
splits and similar events. The option exercise price per Common Share equals the
fair market value of the Common Shares on the date of grant. 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 the death of a participating director, his stock options may
be exercised by his estate at any time during the one year period immediately
following the date of his death, to the extent then exercisable. During 1998,
the Company granted stock options under this plan of 1,337 shares each to eight
directors.
15
<PAGE> 18
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 (the
"Committee"). The Committee is comprised of four independent, non-employee
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 1998, the Company's executive compensation program was designed to base
compensation on corporate, business unit and/or 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.
16
<PAGE> 19
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 1998, Messrs. Peter B. Lewis and Chokel participated in the 1997
Executive Bonus Plan ("Executive Bonus Plan"). This Plan has been designed to
reward participants appropriately for current corporate and/or business unit
performance. Under the Executive Bonus Plan, a target annual bonus amount, which
varied by position, was established for each participant. In 1998, Mr. Lewis's
target annual bonus amount equaled 135% of salary; for Mr. Chokel, the target
was 125% of salary.
Awards under the 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
Lines segment (excluding Midland Financial Group, Inc.) and the commercial
vehicle business unit (collectively, the "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,
subject to a weighting factor to provide additional incentives to encourage
growth in specified product lines. The Investment Component compared the
performance of individual segments of the Company's investment portfolio against
the range of performance results achieved by selected groups 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% of the
target annual bonus amount, depending on the extent to which performance fell
short of or exceeded the designated goals.
17
<PAGE> 20
In 1998, all other officers and qualified employees (approximately 15,150)
of the Company, including Alan R. Bauer, W. Thomas Forrester, William H. Graves,
Daniel R. Lewis, Robert J. McMillan and Glenn M. Renwick, participated in the
Company's 1997 Gainsharing Plan ("Gainsharing Plan"). The Gainsharing Plan is
substantially similar to the Executive Bonus Plan, but does not include an
Investment Component. Under the 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.
Long-Term Incentive Component
In 1998, the executive compensation program included long-term incentives
through the grant of non-qualified 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 400
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 up to 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 1998, for the
Company's executive officers, these target award values ranged from 100-275% 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 1998, the pricing
model valued the stock options awarded to executive officers at $53.618 per
share, which is 43.24% of the per share exercise price of $124.00. The following
assumptions were used to derive the ratio: 10-year option term, .2587 annualized
volatility rate, 5.7% risk free rate of return and .21% dividend yield, and an
assumed annual attrition factor of 3% for each of the 5 years prior to vesting.
CHIEF EXECUTIVE OFFICER COMPENSATION
Peter B. Lewis, the Company's Chief Executive Officer, received cash
compensation in the amount of $2,457,800 for 1998, consisting of an annual
salary of $800,000 and an annual bonus award of $1,657,800, in addition to the
non-cash compensation disclosed in the Summary Compensation Table and related
footnotes on page 10. 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.
18
<PAGE> 21
Mr. Lewis's annual bonus target for 1998 was $1,080,000, 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 1998, 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 1998, the Company's Core Business
achieved a CR of 91.4, with 32% adjusted growth in net written premiums
(calculated by applying certain pre-established multipliers to encourage growth
in selected product categories), resulting in a performance score of 1.815 for
the Core Business Gainsharing Component. In addition, the Investment Component
score was .417 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 1.535. Mr. Lewis therefore earned
153.5% of target, or $1,657,800, as his annual bonus.
For the long-term incentive component of his compensation, on March 18,
1998, Mr. Lewis was awarded stock options to purchase 41,000 of the Company's
Common Shares at an exercise price of $124.00 per share. This award vests on
January 1, 2003, 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.
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.
19
<PAGE> 22
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 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.
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
20
<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 12/31/98)
<TABLE>
<CAPTION>
PGR S&P INDEX P/C GROUP
--- --------- ---------
<S> <C> <C> <C>
1993 100.00 100.00 100.00
1994 87.00 102.00 99.00
1995 122.00 140.00 139.00
1996 169.00 172.00 178.00
1997 302.00 230.00 274.00
1998 427.00 295.00 278.00
</TABLE>
*Assumes reinvestment of dividends.
Source: Value Line, Inc.
21
<PAGE> 24
ITEM 3: PROPOSAL TO APPROVE THE PROGRESSIVE CORPORATION
1999 EXECUTIVE BONUS PLAN
GENERAL
The Executive Compensation Committee of the Board of Directors (the
"Committee") approved and adopted The Progressive Corporation 1999 Executive
Bonus Plan (the "1999 Plan") on February 18, 1999, subject to approval by the
Company's shareholders. The description herein is a summary of the 1999 Plan.
The complete text of the 1999 Plan is filed as an exhibit to the Company's
Annual Report on Form 10-K for the calendar year ended December 31, 1998.
If approved by shareholders, the 1999 Plan will supersede and replace The
Progressive Corporation 1997 Executive Bonus Plan for 1999 and subsequent years.
The Company has designed an executive compensation program consisting of
the following three components: salary, annual bonus and equity-based incentives
in the form of stock options. The program is structured to reflect the market
for executive compensation and to promote both the achievement of corporate
goals and performance that is in the long-term interest of shareholders. While
stock options or other equity-based awards reflect the long-term value created
for shareholders, the annual bonus component focuses on current operating and
investment results. If approved by shareholders, the 1999 Plan will provide the
annual bonus component of total compensation for participants in that plan.
SHAREHOLDER APPROVAL REQUIREMENT
The 1999 Plan is being submitted to the Company's shareholders for approval
pursuant to the requirements of Section 162(m) of the Internal Revenue Code, as
amended (the "Code"). Section 162(m) limits to $1 million per year the deduction
allowed for Federal income tax purposes for compensation paid to a "covered
employee" of a public company ("Deduction Limit"). Under Section 162(m), the
term "covered employee" includes the chief executive officer and the four other
most highly compensated executive officers of the Company. The Deduction Limit
applies to compensation that does not qualify for any of the limited number of
exceptions provided for in Section 162(m).
Under Section 162(m), the Deduction Limit does not apply to compensation
paid under a plan that meets certain requirements for "performance-based
compensation." To qualify for this exception, the following requirements must be
met: (a) the compensation must be payable 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
under which the compensation will be paid must be disclosed to and approved by
shareholders before payment; and (d) the compensation committee must certify in
writing that the performance goals have been satisfied prior to payment.
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
22
<PAGE> 25
preserve the full deductibility of all compensation paid thereunder, to the
extent practicable. As a consequence, the Committee has directed that the 1999
Plan be submitted to the Company's shareholders for approval in accordance with
the requirements for the "performance-based compensation" exception to the
Deduction Limit. If approved by shareholders, the 1999 Plan will become
effective as of calendar year 1999 and compensation paid to "covered employees"
under the 1999 Plan will not be subject to the Deduction Limit. If the
shareholders fail to approve the 1999 Plan, it will not become effective.
However, if the shareholders fail to approve the 1999 Plan, the Committee may
consider adopting an alternative bonus program without shareholder approval,
even though some or all of the payments made thereunder may be subject to the
Deduction Limit, in order to maintain the competitiveness of the Company's
executive compensation program.
ADMINISTRATION
The 1999 Plan will be administered by the Committee, which consists of four
Board members, all of whom are "outside directors," as defined under Section
162(m). The Committee has full authority to determine the manner in which the
1999 Plan will operate, to interpret the provisions of the 1999 Plan and to make
all determinations thereunder. In addition, the Committee has authority to
adopt, amend and repeal such rules, guidelines, procedures and practices
governing the 1999 Plan as it shall, from time to time, deem advisable.
ELIGIBILITY FOR PARTICIPATION
Participation in the 1999 Plan is limited to executive officers of the
Company. The Committee has authority to select those executive officers who will
participate in the 1999 Plan. There are currently 13 executive officers of the
Company. Seven executive officers, Peter B. Lewis, Charles B. Chokel, W. Thomas
Forrester, Daniel R. Lewis, Robert J. McMillan, Glenn M. Renwick and Alan R.
Bauer have been selected to participate in the 1999 Plan for calendar year 1999.
The Committee may change the number and identity of Plan participants from year
to year.
PLAN OPERATION
The 1999 Plan has been designed to link a significant portion of a
participant's pay directly to the Company's operating or investment performance.
Annual bonuses paid under the Plan ("Annual Bonuses") will be determined by
application of the following formula:
Annual Bonus = Salary Paid X Target Percentage X Performance Factor
Salaries are established by the Committee no later than 90 days after
commencement of the Plan year and are determined by market analysis, based on
data reported in published national compensation surveys.
For each participant, a Target Percentage is assigned based on market data
and is intended to bring cash compensation to the high end of the market range
for comparable positions when specified
23
<PAGE> 26
performance goals are met. Total cash compensation can exceed the market range
if the specified performance goals are exceeded. For 1999, the Target
Percentages for the participants in the 1999 Plan are: 125% for Mr. Chokel, 135%
for Mr. Peter B. Lewis, 100% for Messrs. Bauer, Forrester, Daniel R. Lewis and
McMillan and 90% for Mr. Renwick. The Target Percentages are determined and may
be changed from year to year by the Committee, subject to the provisions of
Section 162(m) and the regulations promulgated thereunder, but may not exceed
150% for any participant.
Under the 1999 Plan, the performance of each participant during a given
Plan year will be measured by one or more of the following performance criteria:
a Core Business Growth and Profitability Component, a Business Segment
Performance Component, a Cost Structure Improvement Component and an Investment
Performance Component ("Bonus Components"). For each participant, an appropriate
combination of Bonus Components is selected based on the nature and scope of the
participant's assigned responsibilities.
The selected Bonus Components are assigned various weights by the
Committee, which may vary among participants and may be changed from year to
year by the Committee. The sum of the weighted performance scores for each of
the Bonus Components assigned to a given participant equals the Performance
Factor for that participant. The Performance Factor will equal 1.0 if specified
performance goals are met, and can vary from 0 to 2.0 based on actual
performance versus the pre-established objectives.
The Core Business Growth and Profitability Component measures overall
operating performance of the Company's Personal Lines segment (excluding Midland
Financial Group, Inc.) and the commercial vehicle business unit (collectively,
the "Core Business") for the Plan year. For purposes of this Bonus Component,
operating performance is measured by a Gainsharing Matrix, as established by the
Committee for the Plan year, which assigns a performance score to various
combinations of profitability and growth outcomes. Under the Gainsharing Matrix,
profitability is measured by the Gainsharing Combined Ratio and growth is
measured by the year-to-year change in net written premium.
The Gainsharing Combined Ratio is calculated using a formula under which
target combined ratios are established for each product within the Company's
Core Business ("Target CR's"). The Target CR's are then weighted based on the
net earned premium generated by each such product and combined to produce a
weighted Target CR. The actual combined ratio achieved by the Company's Core
Business for the Plan year is then compared to the weighted Target CR and the
result is used to compute the Gainsharing Combined Ratio. The Gainsharing
Combined Ratio is then plotted against the change in net written premium on the
Gainsharing Matrix to yield a performance score for the Core Business
Profitability and Growth Component. The Gainsharing Matrix, as well as the
profitability and growth targets, may be changed from year to year by the
Committee.
The Business Segment Performance Component measures the performance of a
designated Business Segment in terms of any one or more of the following
criteria selected by the Committee: profitability (measured by the combined
ratio, weighted combined ratio, return on equity or return on revenue), growth
(measured by net written premium, earned premium or revenues) or operating
24
<PAGE> 27
effectiveness (measured by systems availability or timeliness of response). A
Business Segment may consist of a distribution channel, business unit, product,
function, process or other business category, such as new or renewal business.
The Committee may designate one or more Business Segment Performance Components
for an individual participant for any Plan year and, for each such Component,
will select the applicable criteria by which performance will be measured, the
goals or range of goals to be achieved and the performance scores that will
result from various levels of performance. The applicable performance criteria,
related goals and resulting performance scores may be set forth in a Business
Segment Performance Matrix or other format approved by the Committee. Business
Segment Performance Components, performance criteria, goals and resulting
performance scores may vary among participants and may be changed from year to
year by the Committee.
The Cost Structure Improvement Component measures success in achieving cost
structure improvement for the Core Business, as a whole, or for an assigned
Business Segment, if applicable. Results are reflected in a Cost Structure
Improvement Score. For purposes of computing the Cost Structure Improvement
Score, cost structure improvement is measured by comparing the sum of the GAAP
Underwriting Expense Ratio ("Underwriting Expense Ratio") and Loss Adjustment
Expense Ratio ("LAE Ratio") achieved for the Plan year (collectively, "Actual
Expense Ratio") against defined expense objectives for that year, as established
by or under the direction of the Committee ("Target Expense Ratio"). The Target
Expense Ratio, including its individual components, may vary by Business Segment
and/or for the Core Business as a whole, and may be changed from year to year by
or under the direction of the Committee.
The Investment Performance Component measures overall performance of the
Company's investment activities. Initially, investment results for the
individual segments of the Company's investment portfolio are compared against
pre-established benchmarks. The resulting performance scores for the various
segments are weighted by the amounts invested from time to time in each of the
respective segments and the weighted performance scores are combined to produce
an Investment Performance Score that reflects the overall investment performance
of the portfolio. Segment classifications and benchmarks may be changed from
year to year by the Committee.
The Annual Bonus payable to any participant under the 1999 Plan for any
Plan year may not exceed $3,000,000.
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For 1999, the maximum amount of benefits that may be paid under the 1999
Plan to the named executive officers who have been selected to participate in
the Plan, and to all participating executive officers as a group, are as
follows:
NEW PLAN BENEFITS
THE PROGRESSIVE CORPORATION 1999 EXECUTIVE BONUS PLAN
<TABLE>
<CAPTION>
MAXIMUM BENEFIT
NAME AND POSITION FOR 1999 ($)
----------------- ---------------
<S> <C>
Peter B. Lewis
Chairman, President and CEO - Insurance Operations........ $2,160,000
Charles B. Chokel
CEO - Investments and Capital Management.................. 1,000,000
W. Thomas Forrester
Treasurer and Chief Financial Officer..................... 750,000
Daniel R. Lewis
Independent Agent Distribution Leader..................... 750,000
Robert J. McMillan
Direct Distribution Leader................................ 750,000
Glenn M. Renwick
Chief Information Officer................................. 720,000
Alan R. Bauer
Internet Distribution Leader.............................. 700,000
Executive Group,
consisting of seven participants.......................... $6,830,000
</TABLE>
AMENDMENTS AND TERMINATION
The Committee, in its sole discretion, may terminate, amend or revise the
1999 Plan, in whole or in part, at any time; provided that any amendment or
revision to the Plan which requires shareholder approval pursuant to Section
162(m) of the Code shall be subject to approval by the Company's shareholders.
The Committee, without shareholder approval, may modify or change the Target
Percentages and the selection, mix and relative weighting of Bonus Components
for any participant, and the performance targets, benchmarks or other
measurements and resulting scores for any Bonus Component, and may select the
executive officers who will participate in the Plan from year to year.
OTHER MATERIAL PROVISIONS
Actual performance results achieved for any Plan year, as used to calculate
the performance score achieved for each of the applicable Bonus Components, must
be certified by the Committee prior to
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payment of the Annual Bonus. The Annual Bonus for any Plan year will be paid to
participants as soon as practicable after the Committee has certified
performance results for the Plan year, but no later than the March 15
immediately following the end of the Plan year.
Unless otherwise determined by the Committee, in order to be entitled to
receive an Annual Bonus for any Plan year, the participant must be employed by
the Company on the date designated for the payment thereof. Annual Bonus
payments will be net of any legally required deductions for federal, state and
local taxes and other items.
Any participant in the 1999 Plan who is then eligible to participate in The
Progressive Corporation Executive Deferred Compensation Plan (the "Deferred
Plan") may elect to defer receipt of all or a portion of his or her Annual Bonus
under the 1999 Plan under and in accordance with the provisions of the Deferral
Plan.
The right to an Annual Bonus may not be transferred, assigned or encumbered
by any participant.
The 1999 Plan has been adopted, and will be effective, as of January 1,
1999, subject to shareholder approval. If approved by shareholders, the 1999
Plan will be effective for 1999 and for each calendar year thereafter unless and
until otherwise determined by the Committee.
FEDERAL INCOME TAX CONSEQUENCES OF THE 1999 PLAN
The Company is not entitled to deduct annual compensation in excess of $1
million paid to any "covered employee" for Federal income tax purposes unless
such compensation meets the requirements for "performance-based compensation,"
as specified in Section 162(m) of the Code and the regulations promulgated
thereunder. To meet such requirements, the compensation must be payable because
of the attainment of objective performance goals established by a compensation
committee of the board of directors that is comprised solely of two or more
"outside directors" and approved by the shareholders after disclosure to them of
the material terms of the performance goals under which compensation is payable
under the plan. Further, before payment, the compensation committee must certify
in writing that the performance goals have been satisfied.
The 1999 Plan was established by the Committee, which is comprised solely
of four "outside directors," and is being submitted to shareholders for
approval. If the shareholders approve the 1999 Plan and the Committee
subsequently certifies the attainment of the performance goals applicable to any
Plan participant who is a "covered employee," the Company's deduction of
payments of performance-based compensation made to such participant under the
Plan will not be subject to the Deduction Limit.
VOTE REQUIRED FOR APPROVAL
The affirmative vote of a majority of the Company's Common Shares voting on
this proposal (including abstentions), provided the total number of votes cast
represents a majority of the outstanding Common Shares, is required for
approval. Broker non-votes are not counted as voting.
THE BOARD OF DIRECTORS RECOMMENDS THAT THE SHAREHOLDERS VOTE FOR THIS
PROPOSAL.
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INDEPENDENT ACCOUNTANTS
At the meeting of the Board of Directors of the Company held on February
19, 1999, the Board selected PricewaterhouseCoopers LLP to serve as the
independent accountants for the Company and its subsidiaries for 1999.
Representatives of PricewaterhouseCoopers LLP 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 2000 Annual
Meeting of Shareholders for inclusion in the proxy statement and form of proxy
relating to that meeting may do so in accordance with Securities and Exchange
Commission Rule 14a-8 and 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 22, 1999. For
those shareholder proposals which are not submitted in accordance with Rule
14a-8, the proxies designated by the Board may exercise their discretionary
voting authority, without any discussion of the proposal in the Company's proxy
materials, with respect to any proposal which is received by the Company after
February 5, 2000.
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 proposal to fix the number of directors at twelve will be adopted if
approved by the affirmative vote of a majority of the Company's outstanding
Common Shares. Abstentions and broker non-votes, which are included in the
number of shares outstanding, but not as affirmative votes, will have the same
effect as a vote against this proposal.
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 approve The Progressive Corporation 1999 Executive Bonus
Plan will be adopted if approved by the affirmative vote of the majority of the
Common Shares voting on the proposal (treating as voting all ballots marked as
abstentions), provided a majority of the outstanding Common Shares are voted on
the proposal. Broker non-votes are not counted as voting.
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,
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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) FOR the proposal to fix the number of directors at twelve; (b) to
elect the five nominees named under "Election of Directors" above and (c) FOR
the proposal to approve The Progressive Corporation 1999 Executive Bonus 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.
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 1998 (OTHER THAN CERTAIN EXHIBITS) AND A COPY OF
THE PROGRESSIVE CORPORATION 1999 EXECUTIVE BONUS PLAN. REQUESTS FOR SUCH
DOCUMENTS 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 19, 1999
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THE PROGRESSIVE CORPORATION
PROXY SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS FOR THE ANNUAL
MEETING OF SHAREHOLDERS
The undersigned hereby appoints W. Thomas Forrester, 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 23, 1999, 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. Proposal to fix the number of directors at twelve.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
2. [ ] WITH or [ ] WITHOUT authority to vote (except as marked to the
contrary below) for the election as directors of all five
nominees listed below.
Milton N. Allen, James E. Bennett III, Charles B. Chokel,
Charles A. Davis and Paul B. Sigler
(INSTRUCTION: To withhold authority to vote for any individual
nominee, print that nominee's name on the space
provided below.)
----------------------------------------------------------------------
3. Proposal to approve The Progressive Corporation 1999 Executive
Bonus 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 2 ABOVE AND TO APPROVE
THE PROPOSALS DESCRIBED IN ITEMS 1 AND 3 ABOVE.
Receipt of Notice of Annual Meeting of Shareholders and the related
Proxy Statement dated March 19, 1999, is hereby acknowledged.
Date: , 1999
-----------------------
----------------------------------
----------------------------------
----------------------------------
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.
<PAGE> 33
Exhibit 13
----------------------------
About the Art
----------------------------
Each year, Progressive commissions an artist or a group of artists to create a
body of work for our Annual Report which is inspired by a Progressive theme.
This year, our inspiration is the American passion for car travel and the
culture born from it. The artist is photographer Stephen Frailey. Stephen works
by collaging found images to create new meaning from their juxtaposition.
Frailey's work will become part of Progressive's growing collection of
contemporary art.
ENTER
05 1998 Financial Highlights 15 Letter to Shareholders
06 Vision, Core Values and Objectives 33 Financial Review
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----------------------------
About Progressive
----------------------------
The Progressive insurance organization began business in 1937. Progressive
Casualty Insurance Company was founded in 1956 to be among the first specialty
underwriters of nonstandard auto insurance. The Progressive Corporation, an
insurance holding company formed in 1965, owns 82 subsidiaries and has one
mutual insurance company affiliate. The companies provide personal automobile
insurance and other specialty property-casualty insurance and related services
throughout the United States and Canada.
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- ----------------------------
1998 Financial Highlights
- ----------------------------
<TABLE>
<CAPTION>
(millions-except per share amounts) AVERAGE ANNUAL COMPOUNDED
RATE OF INCREASE (DECREASE)
---------------------------
5-YEAR 10-YEAR
1998 1997 % CHANGE 1994-1998 1989-1998
FOR THE YEAR
<S> <C> <C> <C> <C> <C>
Direct premiums written $ 5,451.3 $ 4,825.2 13% 23% 15%
Net premiums written 5,299.7 4,665.1 14 24 15
Net premiums earned 4,948.0 4,189.5 18 24 15
Total revenues 5,292.4 4,608.2 15 22 15
Operating income 449.3 336.0 34 18 17
Net income 456.7 400.0 14 11 16
Per share:(1)
Operating income 6.01 4.46 35 18 19
Net income 6.11 5.31 15 11 17
Underwriting margin(2) 8.4% 6.6% 8 7
AT YEAR-END
Consolidated shareholders' equity $ 2,557.1 $ 2,135.9 20 21 20
Common Shares outstanding 72.5 72.3 -- -- (1)
Book value per share $ 35.27 $ 29.54 19 23 21
Market capitalization $ 12,279.7 $ 8,667.0 42 33 35
Return on average shareholders' equity(2) 19.3% 20.9% 21 22
STOCK PRICE APPRECIATION(3) 1-YEAR 5-YEAR 10-YEAR
Progressive 41.6% 33.6% 37.2%
S&P 500 28.5% 24.0% 19.1%
</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.
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--------------------------------------
Vision, Core Values and Objectives
--------------------------------------
ART HERE
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
cost-effectively and profitably reducing the human trauma and economic costs of
auto accidents and other mishaps, and by building a recognized, trusted,
admired, business-generating brand. We seek to earn a superior return on equity
and to provide a positive environment which attracts quality people who develop
and achieve ambitious growth plans.
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-----------------
CORE VALUES
-----------------
Progressive's Core Values are pragmatic statements of what works best for us in
the real world. They govern our decisions and behavior. We want them understood
and embraced by all Progressive people. Growth and change provide new
perspective, requiring regular refinement of Core Values.
INTEGRITY We revere honesty. We adhere to high ethical standards, report
promptly and 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 communicate clearly 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. We teach and
encourage our people to improve performance and to reduce the costs of what they
do for customers. We base their 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. Expanding
profits reflect our customers' and claimants' increasingly positive view of
Progressive. We value all people's well-being and strive to give back to our
communities.
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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 1.6% in 1998, and averaged 2.4% over the past
five years and 3.1% over the past ten years). Return on equity was 19.3% in
1998, and averaged 20.9% over the past five years and 21.8% over the past ten
years.
PROFITABILITY Progressive is driven by the goal of producing a 4% underwriting
profit over the entire retention period of a policyholder. Overall, we had an
underwriting profit of 8.4% in 1998, 8.0% for the past five years and 6.5% for
the past ten years. Estimated industry results for the personal auto insurance
market were underwriting gains of .3% in 1998 and underwriting losses of .5% and
2.5%, 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 13.6% in 1998, 23.8% compounded annually over the past five years and
15.3% over the past ten years. Net premiums written in the personal auto
insurance market for the same periods grew 3.9%, 4.8% and 5.4%.
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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, 1998, with a market value of
$1,302,000, for a 26.8% compounded annual return, compared to the 9.5% return
achieved by investors in the Standard & Poor's 500 during the same period. In
addition, the shareholder received dividends of $1,922 in 1998, bringing total
dividends received to $18,266 since the shares were purchased.
In the ten years since December 31, 1988, Progressive shareholders have
realized compounded annual returns of 37.2%, compared to 19.1% for the S&P 500.
In the five years since December 31, 1993, Progressive shareholders' returns
were 33.6%, compared to 24.0% for the S&P 500. In 1998, the returns were 41.6%
on Progressive shares and 28.5% on the S&P 500.
- ----------------------------------------
1998 OBJECTIVES AND ACCOMPLISHMENTS
- ----------------------------------------
<TABLE>
<CAPTION>
LAST LAST
1998 5 YEARS 10 YEARS
<S> <C> <C> <C>
RETURN ON SHAREHOLDERS' EQUITY
Objective 16.6% 17.4% 18.1%
Accomplishment 19.3 20.9 21.8
UNDERWRITING PROFIT (LOSS)
Objective 4.0 4.0 4.0
Accomplishment 8.4 8.0 6.5
Industry-Personal Auto Insurance Market .3 (.5) (2.5)
GROWTH (ANNUALIZED)
Objective 16.6 17.4 18.1
Accomplishment 13.6 23.8 15.3
Industry-Personal Auto Insurance Market 3.9 4.8 5.4
</TABLE>
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The repurchase of Progressive stock is another way the Company increases
shareholder value. Over the years, when we have had adequate capital and
Progressive's stock was attractively priced, we have repurchased our shares.
Since 1971, we spent $613.7 million repurchasing our shares, at an average cost
of $7.44 per share. During 1998, we repurchased 404,079 Common Shares, including
11,079 Common Shares repurchased to offset obligations under various employee
benefit plans.
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-----------------------------------
Letter to Shareholders
-----------------------------------
For 34 years, writing annually to shareholders has been my way to describe
Progressive's achievements and aspirations, and to explain our current
performance and prospects. I try to do it in a way that lets anyone interested
in Progressive understand the value of and reasons for what Progressive does.
Since 1965, Progressive has grown faster and more profitably than other auto
insurers. By 1988, we were the largest, fastest-growing, most-profitable insurer
specializing in high-risk auto insurance sold by Independent Insurance Agents.
This was achieved by Progressive's smart and creative people working hard to
serve auto insurance consumers better than competitors. In 1988, California
consumer activists turned their constituents' rage against escalating auto
insurance costs into laws and regulations that threatened auto insurance as a
free-enterprise activity. Progressive's strategic response has been to create a
new value proposition with redefined service, distribution and product that
enhances consumers' auto insurance experience.
Today, we offer auto insurance to every licensed driver, selling many ways while
innovating in claims, technology, pricing and consumer brand building. We first
changed claim service so we could respond to most claims within a few hours of
their being reported, any time, any day. Next, we made all services available 24
hours a day, 7 days a week and developed rates for all licensed owners and
drivers. Then we distributed in the many different ways consumers wanted to
buy-in person from Independent Agents, by telephone through 1 800 AUTO PRO(R)
or online at progressive.com. Another innovation was offering competitor premium
comparisons. We use a combination of television, direct mail and other media to
urge consumers to consider Progressive's unique combination of price and
service. As important as Independent Agents continue to be to Progressive, we no
longer depend solely on them choosing us for their nonstandard risks.
Progressive seeks to be consumers' #1 choice for auto insurance.
Progressive's Personal Lines net premiums written of $4.9 billion (93% of
Progressive's total net premiums written) were 4.0% of the industry's U.S.
personal lines insurance premiums, making Progressive the 5th largest U.S. auto
insurer. We had another year of excellent financial performance in 1998,
notwithstanding the aggressive competition in auto insurance history.
Progressive's underwriting profit margin was 8.4% (industry was .3%), compared
to 6.6% in 1997.
Although proud of our achievements, all Progressive people understand that
our customers, agents, partners and shareholders care only about what we WILL do
for them-no matter what we have already done for them. Competitors are imitating
Progressive's consumer-focused innovations. Industry-wide auto insurance service
is generally better. Auto insurance premiums are stable or declining due to
continuing trends with respect to safer cars and roads, the impaired driving
crackdown, better law enforcement and insurers operating more efficiently.
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Because auto insurance rates are based on history, and because experience
steadily improves, we are in the midst of the most profitable period in 20
years. There is an explosion in consumer advertising for auto insurance. Many
insurers are increasing producer incentives and many more are reducing rates.
Soon operating margins may shrink and be negative for the industry as a whole.
These circumstances historically have energized Progressive's great people to
focus their knowledge, creativity and effort to serve our customers even better
and more efficiently, to achieve our profit and growth aspirations.
To become consumers' #1 choice for auto insurance, Progressive seeks to provide
a competitive price for all drivers AND to produce at least a 4% underwriting
profit over the total time a person is insured by Progressive. We seek customers
for life and are more focused on retaining customers longer. To do this, and to
attract new customers, we will promote our brand based on Progressive's unique
customer proposition. We "kicked off" 1999 brand building by sponsoring the
Super Bowl(TM) XXXIII Halftime Show and by introducing new commercials featuring
E.T. as spokesterrestrial for Progressive's commitment to reduce the trauma and
costs of accidents by reducing their frequency and severity.
Customer focus has driven Progressive's innovation over the past decade. We
will work hard in 1999 to expand and improve the ways in which consumers become
Progressive customers and will foreclose no distribution option. We know that
costs must continue to come down for us to accomplish our vision and achieve our
financial objectives. We continue to improve claim operations, trying to reduce
claim costs faster than competitors. We continue to work hard to eliminate work
and simplify processes, obtain economies of
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ART HERE
scale, and reduce cycle times and costs, thereby improving customer satisfaction
and lowering customer cost. We regularly measure more activities more precisely
to understand them better and to improve performance.
We refine the definition and delivery of Immediate Response(R) claims
service as we gain greater understanding of customer/claimant needs.
Progressive's Immediate Response Vehicles (painted white with PROGRESSIVE
emblazoned in blue on the side) travel America's streets providing the help and
counseling people need when they are unfortunate enough to have an auto mishap
and reinforcing the defining service standard only available from us.
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-----------------------
OUR ORGANIZATION
-----------------------
More customers and changing business processes require the talent and energy of
people who are better trained, harder working and better paid. How we train,
motivate, evaluate and compensate our people and how we organize are critical to
Progressive's success. Auto insurance differs greatly by community because
regulations differ by state and because traffic, law enforcement, cultural
attitudes, insurance agents, medical services and auto repair facilities differ
by community. Our matrix organization enables Progressive to meet varied local
conditions under a cohesive set of policies that ensure consistency and control,
while sustaining experimentation and excitement.
Progressive's 44 State and Community Managers actually run the business in
their state(s). State Managers are measured and paid based on profit and growth
in their state(s) or region. They manage claims, distribution, advertising
budgets, price levels, agent development, regulation and community relations for
their state. State Managers decide their state(s) organization, including
appointing Community Managers with responsibilities similar to their own for a
large part of the state.
State Managers report to members of the "Policy Team" which in 1999 includes
two CEOs (Insurance Operations, Investments and Capital Management), four
Distribution Leaders (Independent Agent, 1 800 AUTO PRO(R), progressive.com,
Strategic Alliances), Chief Pricing/Product Officer, Chief Claim Officer, Chief
Financial Officer, Chief Information Officer, Chief Human Resources Officer and
Chief Communications Officer. The Distribution Leaders are challenged to develop
and manage product offerings and customer service processes tailored to the
unique requirements of customers who discover and select Progressive through
different distribution modes.
Progressive's organization is like a growing cell inhabited by nearly 16,000
people, many soaring from team to team and task to task. The sphere's skin is
kept taut by straight lines between people which define the relationship of the
people connected by them (e.g. boss, former boss, direct report, former direct
report, relative, etc.). These relationships change constantly, responding to
business and personal needs. We eliminate organization confusion by being clear
and current about performance objectives, standards, measurements and rewards
for each team and each person. We help our people understand how their good work
enhances our customers' well-being, our shareholders' value, our agents'
prosperity, our partners' profits and their personal opportunities.
Objectives are regularly reviewed and renegotiated. Performance against
objectives is regularly and completely reported on and monitored. The whole
process is validated and reinforced by Progressive's performance-based employee
incentive compensation program, which paid $85.8 million for 1997 and $107.5
million for 1998. Progressive stays flexible by having people expect the
organization, their objectives and the Gainsharing formula to change regularly.
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---------------------------------
PERSONAL LINES BUSINESS
---------------------------------
Ninety-three percent of Progressive's net premiums written is insurance for
private passenger automobiles, motorcycles and recreational vehicles. Net
premiums written for the Personal Lines business was $4,922.3 million, 15% more
than the $4,288.8 million in 1997. The underwriting profit margin was 7.9%,
compared to 6.3% in 1997. In 1998, we celebrated a milestone in our motorcycle
product expansion by taking over market share leadership from State Farm.
PRODUCT STRATEGY-COMPETITIVE RATES FOR ALL RISK PROFILES In 1997, we reported
that introducing financial responsibility as an auto insurance rating factor
would result in more competitive rates for many consumers. In 1998, we used
financial responsibility in 43 states and began to refine and improve our
product design. We expect product design and pricing methods to evolve
constantly, based on our developing understanding of loss data, work flows,
market conditions and technology, as well as consumer acceptance of our brand as
an insurer for all drivers. We introduced the next generation of product design
in mid-1998 and expect to have it in markets representing 80% of premium by
April 1999. Early results suggest we are attracting more drivers from all risk
profiles and retaining them longer.
BRAND STRATEGY - BE PROGRESSIVE In 1998, we expanded Progressive's brand
promotion and the service and price proposition it stands for by introducing
our television advertising in 43 additional markets, bringing the total number
of markets in which we regularly advertise to 83. We expanded our national
fleet of distinctively marked Immediate Response Vehicles, increased our
visibility in the Independent Agency channel with prominent Progressive
Authorized Independent Agent signs and significantly increased advertising
related to our Internet site, all aimed at substantially increasing awareness
of Progressive, what we offer, and what it means to BE PROGRESSIVE.
Customers evaluate our brand by the experiences we provide them. We measure
customer satisfaction and our performance with a combination of surveys,
customer response requests, phone monitoring and mystery shopping. Delivering
superior service depends on hiring superb people and training them all very
well. During 1998, we successfully hired and trained over 3,800 people
companywide, including claim representatives, policy service representatives,
sales representatives, and technology and management staff, and provided ongoing
training to several thousand employees across each service experience. We employ
a variety of techniques including aptitude simulations before hiring, coaching/
mentoring programs, team quality and productivity objectives, and
performance-based promotion to develop and empower exceptional people and
deliver consistently good customer experiences.
MARKETING STRATEGY-MANY WAYS TO BUY To accommodate consumer preferences, we
offer our products through more than 30,000 Independent Insurance Agents, by
calling 1 800 AUTO PRO(R) or by visiting our Web site, progressive.com. We are
the market leader in selling auto insurance through Independent Agents and seek
ever stronger ties between us and Independent Agents and their customers. In
1998, there was considerable development in agent systems to greatly improve
Agents' ability to quote accurately, to retrieve policyholder information, to
receive rate and software updates electronically, to eliminate paper and to use
the Internet to communicate with us.
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Our fastest growing distribution channel is 1 800 AUTO PRO(R), making
Progressive a leading direct writer of auto insurance. To support growth, we
expanded to five call center locations in 1998 and focused on sales
effectiveness training, measurement and call center management. Progressive is
the market leader in selling auto insurance on the Internet. Consumers can
comparison shop online for auto insurance in 47 states and can actually buy
online in 23 states plus the District of Columbia. In 1998, we introduced
"Personal Progressive," an online Internet-based system providing consumers
access to their own policy information and allowing them to process certain
changes and premium payments.
In 1998, our Strategic Alliances channel surpassed 200 active alliances with
companies that influence their constituents to buy Progressive's products. Our
expanded and improved product and offering rates for all drivers greatly expand
the opportunities for direct and affinity marketing programs aimed at all risks
to be sold through these long-term, exclusive alliances.
Midland Financial Group, acquired in 1997, underwrites and markets
nonstandard private passenger auto insurance, under the Midland name, through
Independent Agents in 11 southeastern and western states.
In 1999, because different distribution channels and the customer sets they
attract present different business opportunities and challenges, each channel
will be led by a Policy Team member. We seek to maximize the opportunities
within each distribution channel, while maintaining both the integrity of brand
experience for all customers and the ability to leverage our service and
technology infrastructures. However our customers decide to buy, we want them to
understand and benefit from the following Progressive service offerings.
SERVICE STRATEGY-WHEN AND WHERE YOU WANT IT Assistance after an accident or
other loss is Progressive's most important service. We implore our customers to
call 1-800-274-4499 immediately after any incident. Twenty-four hours a day, 7
days a week, Progressive people take claim report telephone calls, obtain the
relevant information, authorize emergency measures and dispatch Progressive
claim representatives to meet customers as quickly as possible, usually within
hours.
AROUND-THE-CLOCK SERVICE. Consumers want to do business when it's convenient for
them, so we operate 24 hours a day, 7 days a week, providing insurance sales and
policy change assistance, as well as the critically important Immediate
Response(R) claims service. Our customers come to depend on this level of
service, which we support by continuous real-time monitoring of internal systems
performance, threatening weather and other natural disasters. This approach
allows us immediately to reconfigure voice and data networks and to activate
disaster response teams when required.
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------------------------
OTHER BUSINESSES
------------------------
The Company's other lines of business include writing insurance for small fleets
of commercial vehicles, collateral protection and loan tracking for auto lenders
and financial institutions, directors' and officers' liability and fidelity
coverage for American Bankers Association member community banks and independent
credit unions, and providing related claims, underwriting and system services.
Revenues in these businesses were $405 million in 1998, compared to $402 million
last year. Pretax operating profit was $62 million, compared to $37 million last
year, up 68%, and return on revenue was 15.3%, compared to 9.2% in 1997. Most of
these businesses are in markets that are declining in size.
---------------------------------------
INVESTMENTS AND CAPITAL MANAGEMENT
---------------------------------------
Progressive employs a conservative approach to investments and capital
management, intended to ensure that there is sufficient capital to support all
the insurance premium that we can profitably write. Our objectives are to
finance growth internally, to sustain an A or better senior debt rating, to have
lower debt cost than peer companies and to repurchase stock cost-effectively.
Progressive's senior debt was rated A+ and A2 by S&P and Moody's, respectively,
at year-end 1998 and our debt to debt plus capital ratio was 23.3%. During 1998,
we repurchased 393,000 shares at an average cost per share of $104. We filed a
shelf registration to issue $300 million of senior debt intended to replace $300
million of debt expiring at year-end 2000.
Asset allocation considers the capital we have in excess of that required to
support premiums planned over the next three years, anticipated liquidity needs
and our analysis of the expected risks and returns on various assets. At
year-end 1998, $4,532.9 million, 79.9% of our total invested assets, was
investment-grade, fixed-maturity securities, compared to $4,168.3 million in
1997, 79.1%. Non-investment-grade fixed-maturity securities were $128.0 million,
2.3% of total invested assets, compared to $132.5 million in 1997, 2.5%. The
portfolio's duration was 2.8 years at year-end 1998, in the middle of our target
range.
Common stocks were $636.9 million, 11.2% of total invested assets, compared
to $620.8 million and 11.8% at year-end 1997. Our 3.7% total return
underperformed the S&P 500's 28.5% because we overweighted smaller
capitalization "value style" companies and foreign equities.
Included in our non-investment-grade fixed-maturity securities and our common
stock portfolio are $299.6 million, 5.3%, of other risk assets. Other risk
assets include such items as high yield and distressed debt, private equities
and warrants, and mezzanine investments. No individual security in the other
risk asset portfolio comprised more than one percent of Progressive's total
investment portfolio. Our total return on the average amount invested in this
asset class in 1998 was (4.4)%.
In 1998, Progressive earned $221.3 million of investment income after tax,
compared to $205.3 million in 1997. Realized gains were $11.4 million in 1998,
compared to $98.5 million in 1997. As of year-end 1998, there were $174.3
million in unrealized gains, compared to $188.4 million at year-end 1997. The
weighted average fully taxable equivalent book yield of the portfolio was 6.3%
in 1998, compared to 6.6% in 1997.
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---------------
RISKS
---------------
LEGISLATIVE AND REGULATORY Highly complex regulation becomes more ambiguous in a
technology-driven economy and compliance with the variety of state regulatory
systems becomes more difficult. As Progressive innovates and grows, our
"cutting-edge" programs increase the risk of regulatory scrutiny. The constant
attention of the plaintiff bar to the insurance industry increases the risk of
added liabilities not contemplated when premiums were set.
ADVERTISED BRAND Heightened consumer awareness of the Progressive brand requires
ever higher performance standards. We regularly monitor consumer reaction to our
advertising and assess their service delivery expectations. We continually seek
ways to exceed consumer expectations in innovative and low-cost ways.
UNPREDICTABLE UNDERWRITING MARGIN AND GROWTH RATE Our goal is to achieve a 4%
underwriting profit over the entire retention period of a policyholder and we
monitor closely to ensure rates are adjusted promptly and adequately. However,
we cannot predict with precision the timing and pace of changes in underwriting
margins, retention or the rate of growth.
HOMEOWNERS INSURANCE Because many consumers buy auto and homeowners insurance
together, we plan to test offer a homeowners product in 1999, expanding
thereafter based on what we learn from the tests. Inexperience exposes us to
underwriting losses. Broad implementation could create underserved market issues
and aggregate exposures requiring precise measurement and conservative
management.
COMPETITOR RESPONSE Competitors notice Progressive's profitability and growth
and then attempt to copy our approach to improving auto insurance consumers'
experience. We cannot predict whether or when competitive tactics will influence
our profitability and growth, and/or if their attempts to attract our excellent
people will succeed. We constantly monitor competitors and improve our products
and services to keep them among the industry's best.
Y2K Between 1995 and 1998, nearly 100% of our system applications were
remediated. Critical applications are being tested in our Year 2000 Time Warp
Lab, an autonomous production environment simulating year 2000 operating time
frames. We are well under way in ensuring that mainframe computers, servers,
personal computers, operating systems, desktop applications and
telecommunications hardware and software are compliant. We have completed
contingency plans for all of our business processes and are assessing and
testing key business partners' readiness. During 1999, we will continue to test,
refine and challenge all our preparations. Nonetheless, Progressive, like other
well-prepared institutions, is subject to Y2K risks we cannot anticipate,
eliminate or quantify.
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----------------------
THE FUTURE
----------------------
In 1998, I turned 65 and recovered from an illness. It became clear that
managing a smooth CEO succession that left people confident about Progressive's
future would be the best thing I could do for the organization I am so proud of
and care so much about. On January 1, 1999, Progressive's CEO responsibility was
divided so that we now have a CEO-Insurance Operations and a CEO-Investments and
Capital Management. Chuck Chokel, formerly CFO, became CEO-Investments and
Capital Management and I remain CEO-Insurance Operations. In 1998, we also
codified the Board structure, composition and protocols that resulted in
clarifying the role of Chairman of the Board, as distinct from the CEO. I remain
Chairman of the Board. There are no plans now to appoint a new CEO-Insurance
Operations. However, I am delighted to have a structure in place that allows it
and will permit me to contribute.
Progressive leads a wave of change in the United States' system for dealing
with auto accident injuries and property damage. We reduce auto accident
victims' trauma and cost. We are being rewarded for leadership and commitment.
Our success so far encourages us to expand at a pace that tests our ability to
provide the service we aspire to deliver.
We begin 1999 as we have begun all other years-excited, respectful of the
challenges implicit in our objectives and strategy, humbled by our failures,
proud of having responded to them and comfortable 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.
We see a future that is brighter than ever.
We deeply appreciate the customers we are privileged to serve. Thank you for
your business. Thanks to the more than 30,000 Independent Insurance Agents who
did business with Progressive in 1998. We are grateful for our shareholders'
continued confidence. To the 15,735 men and women who make Progressive a great
company, thanks for all your contributions in 1998 and for the promise you bring
to our future.
Joy, Love and Peace
/s/ Peter Lewis
Peter B. Lewis
Chairman, President and Chief Executive Officer-
Insurance Operations
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------------------------------------
1998 Financial Review
------------------------------------
34 Consolidated Financial Statements
48 Management's Discussion and Analysis
52 Ten Year Summaries
56 Quantitative Market Risk Disclosures
58 Analysis of Loss and LAE Development
58 Direct Premiums Written by State
59 Quarterly Financial and Common Share Data
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---------------------------------------
Consolidated Statements of Income
---------------------------------------
(millions-except per share amounts)
<TABLE>
<CAPTION>
For the years ended December 31, 1998 1997 1996
<S> <C> <C> <C>
NET PREMIUMS WRITTEN $ 5,299.7 $ 4,665.1 $ 3,441.7
=====================================
REVENUES
Premiums earned $ 4,948.0 $ 4,189.5 $ 3,199.3
Investment income 294.8 274.9 225.8
Net realized gains on security sales 11.4 98.5 7.1
Service revenues 38.2 45.3 46.2
- ---------------------------------------------------------------------------------------------------------
Total revenues 5,292.4 4,608.2 3,478.4
- ---------------------------------------------------------------------------------------------------------
EXPENSES
Losses and loss adjustment expenses 3,376.3 2,967.5 2,236.1
Policy acquisition costs 659.9 607.8 482.6
Other underwriting expenses 495.8 336.0 208.5
Investment expenses 7.4 9.9 6.1
Service expenses 30.8 43.9 41.9
Interest expense 61.1 64.6 61.5
- ---------------------------------------------------------------------------------------------------------
Total expenses 4,631.3 4,029.7 3,036.7
- ---------------------------------------------------------------------------------------------------------
NET INCOME
Income before income taxes 661.1 578.5 441.7
Provision for income taxes 204.4 178.5 128.0
- ---------------------------------------------------------------------------------------------------------
Net income $ 456.7 $ 400.0 $ 313.7
=====================================
COMPUTATION OF EARNINGS PER SHARE
Net income $ 456.7 $ 400.0 $ 313.7
Less: Preferred Share dividends -- -- (3.5)
Excess Preferred Share liquidation price over cost basis -- -- (2.9)
- ---------------------------------------------------------------------------------------------------------
Income available to common shareholders $ 456.7 $ 400.0 $ 307.3
=====================================
Basic:
Average shares outstanding 72.5 72.0 71.6
=====================================
Per share $ 6.30 $ 5.56 $ 4.29
=====================================
Diluted:
Average shares outstanding 72.5 72.0 71.6
Net effect of dilutive stock options 2.2 3.3 2.6
- ---------------------------------------------------------------------------------------------------------
Total equivalent shares 74.7 75.3 74.2
=====================================
Per share $ 6.11 $ 5.31 $ 4.14
=====================================
</TABLE>
See notes to consolidated financial statements.
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--------------------------------------
Consolidated Balance Sheets
--------------------------------------
(millions)
<TABLE>
<CAPTION>
December 31, 1998 1997
<S> <C> <C>
ASSETS
Investments:
Available-for-sale:
Fixed maturities, at market (amortized cost: $4,171.6 and $3,836.8) $ 4,219.0 $ 3,891.4
Equity securities, at market:
Preferred stocks (cost: $374.3 and $333.9) 376.5 348.8
Common stocks (cost: $512.2 and $501.9) 636.9 620.8
Short-term investments, at amortized cost (market: $441.9 and $409.4) 441.9 409.4
- -----------------------------------------------------------------------------------------------------------
Total investments 5,674.3 5,270.4
Cash 18.6 23.3
Accrued investment income 53.1 44.3
Premiums receivable, net of allowance for doubtful accounts of $34.0 and $32.4 1,456.2 1,160.8
Reinsurance recoverables 281.0 317.5
Prepaid reinsurance premiums 77.7 79.8
Deferred acquisition costs 299.1 259.6
Income taxes 192.9 116.5
Property and equipment, net of accumulated depreciation of $194.1 and $158.3 376.2 260.4
Other assets 34.0 27.0
- -----------------------------------------------------------------------------------------------------------
Total assets $ 8,463.1 $ 7,559.6
=========================
LIABILITIES AND SHAREHOLDERS' EQUITY
Unearned premiums $ 2,329.7 $ 1,980.1
Loss and loss adjustment expense reserves 2,188.6 2,146.6
Policy cancellation reserve 29.1 34.7
Accounts payable and accrued expenses 582.0 486.4
Debt 776.6 775.9
- -----------------------------------------------------------------------------------------------------------
Total liabilities 5,906.0 5,423.7
- -----------------------------------------------------------------------------------------------------------
Shareholders' equity:
Common Shares, $1.00 par value (authorized 300.0, issued 83.1,
including treasury shares of 10.6 and 10.8) 72.5 72.3
Paid-in capital 448.3 412.8
Accumulated other comprehensive income:
Net unrealized appreciation on investment securities 113.3 122.3
Other (9.6) (6.3)
Retained earnings 1,932.6 1,534.8
- -----------------------------------------------------------------------------------------------------------
Total shareholders' equity 2,557.1 2,135.9
- -----------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 8,463.1 $ 7,559.6
=========================
</TABLE>
See notes to consolidated financial statements.
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-----------------------------------------------------------------------
Consolidated Statements of Changes in Shareholders' Equity
-----------------------------------------------------------------------
(millions-except per share amounts)
<TABLE>
<CAPTION>
For the years ended December 31, 1998 1997 1996
--------------------- --------------------- ---------------------
<S> <C> <C> <C> <C> <C> <C>
RETAINED EARNINGS
Balance, Beginning of year $ 1,534.8 $ 1,155.2 $ 899.8
Net income 456.7 $ 456.7 400.0 $ 400.0 313.7 $ 313.7
------- ------- -------
Cash dividends on Preferred Shares
(9 3/8% annually) -- -- (3.2)
Cash dividends on Common Shares ($.25, $.24
and $.23 per share) (18.1) (17.3) (16.4)
Treasury shares purchased: Common Shares (39.8) (2.7) (35.5)
Preferred Shares -- -- (.3)
Preferred Shares redeemed -- -- (2.9)
Other, net (1.0) (.4) --
- ------------------------------------------------------------------------------- --------------------- ---------------------
Balance, End of year $ 1,932.6 $ 1,534.8 $ 1,155.2
- ------------------------------------------------------------------------------- --------------------- ---------------------
ACCUMULATED OTHER COMPREHENSIVE
INCOME, NET OF TAX
Balance, Beginning of year $ 116.0 $ 68.4 $ 45.5
Change in unrealized appreciation (depreciation) (9.0) 48.3 22.9
Other (3.3) (.7) --
------- ------- -------
Other comprehensive income (loss) (12.3) (12.3) 47.6 47.6 22.9 22.9
- ------------------------------------------------------------------------------- --------------------- ---------------------
Balance, End of year $ 103.7 $ 116.0 $ 68.4
- ------------------------------------------------------------------------------- --------------------- ---------------------
COMPREHENSIVE INCOME $ 444.4 $ 447.6 $ 336.6
======= ======= =======
PREFERRED SHARES, NO PAR VALUE
Balance, Beginning of year $ -- $ -- $ 83.6
Redemption of shares -- -- (77.9)
Treasury shares purchased-cost basis -- -- (5.7)
- ------------------------------------------------------------------------------- --------------------- ---------------------
Balance, End of year $ -- $ -- $ --
- ------------------------------------------------------------------------------- --------------------- ---------------------
COMMON SHARES, $1.00 PAR VALUE
Balance, Beginning of year $ 72.3 $ 71.5 $ 72.1
Stock options exercised .6 .8 .4
Treasury shares purchased (.4) -- (1.0)
- ------------------------------------------------------------------------------- --------------------- ---------------------
Balance, End of year $ 72.5 $ 72.3 $ 71.5
- ------------------------------------------------------------------------------- --------------------- ---------------------
PAID-IN CAPITAL
Balance, Beginning of year $ 412.8 $ 381.8 $ 374.8
Stock options exercised 10.9 13.3 6.5
Tax benefits on stock options exercised 25.6 17.6 5.9
Treasury shares purchased (2.4) (.2) (5.4)
Other 1.4 .3 --
- ------------------------------------------------------------------------------- --------------------- ---------------------
Balance, End of year $ 448.3 $ 412.8 $ 381.8
- ------------------------------------------------------------------------------- --------------------- ---------------------
TOTAL SHAREHOLDERS' EQUITY $ 2,557.1 $ 2,135.9 $ 1,676.9
========== ========== ==========
</TABLE>
There are 20.0 million Serial Preferred Shares authorized. In May 1991, the
Company sold 4.0 million 9 3/8% 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.
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---------------------------------------------
Consolidated Statements of Cash Flows
---------------------------------------------
(millions)
<TABLE>
<CAPTION>
For the years ended December 31, 1998 1997 1996
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 456.7 $ 400.0 $ 313.7
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 56.1 36.6 23.8
Net realized gains on security sales (11.4) (98.5) (7.1)
Changes in:
Unearned premiums 349.6 442.3 257.7
Loss and loss adjustment expense reserves 42.0 204.6 190.1
Accounts payable and accrued expenses 76.7 49.9 50.1
Policy cancellation reserve (5.6) (8.6) 2.5
Prepaid reinsurance premiums 2.1 33.3 (15.3)
Reinsurance recoverables 36.5 62.7 28.1
Premiums receivable (295.4) (310.9) (170.9)
Deferred acquisition costs (39.5) (52.7) (18.2)
Income taxes (71.3) (67.8) (16.3)
Other, net 21.5 43.8 14.0
- --------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 618.0 734.7 652.2
- --------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases:
Available-for-sale: fixed maturities (3,998.8) (6,764.3) (4,447.2)
equity securities (942.9) (658.2) (725.3)
Sales:
Available-for-sale: fixed maturities 3,210.2 5,840.0 3,306.3
equity securities 774.3 581.7 537.7
Maturities, paydowns, calls and other:
Available-for-sale: fixed maturities 419.9 578.0 465.7
equity securities 126.0 125.4 62.5
Net (purchases) sales of short-term investments (32.5) (248.6) 143.1
(Receivable) payable on securities 18.9 (2.0) 76.3
Purchases of property and equipment (174.2) (121.9) (35.8)
Purchase of subsidiary, net of cash acquired -- (48.0) --
- --------------------------------------------------------------------------------------------------------------
Net cash used in investing activities (599.1) (717.9) (616.7)
- --------------------------------------------------------------------------------------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from exercise of stock options 11.5 14.1 6.9
Tax benefits from exercise of stock options 25.6 17.6 5.9
Redemption of Preferred Shares -- -- (80.8)
Proceeds from debt -- -- 99.6
Payments of debt -- (20.4) (.4)
Dividends paid to shareholders (18.1) (17.3) (19.6)
Acquisition of treasury shares (42.6) (2.9) (47.9)
- --------------------------------------------------------------------------------------------------------------
Net cash used in financing activities (23.6) (8.9) (36.3)
- --------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash (4.7) 7.9 (.8)
Cash, Beginning of year 23.3 15.4 16.2
- --------------------------------------------------------------------------------------------------------------
Cash, End of year $ 18.6 $ 23.3 $ 15.4
=================================================
</TABLE>
See notes to consolidated financial statements.
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----------------------------------------------
Notes to Consolidated Financial Statements
----------------------------------------------
December 31, 1998, 1997 and 1996
01 REPORTING AND ACCOUNTING POLICIES
NATURE OF OPERATIONS The Progressive Corporation, an insurance holding company
formed in 1965, owns 82 subsidiaries and has one mutual insurance company
affiliate. The companies provide personal automobile insurance and other
specialty property-casualty insurance and related services throughout 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 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 $17.9 million,
of which $6.3 million remains. In the opinion of management, there is no present
indication of diminished value in this amount.
INVESTMENTS 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, reported in accumulated other comprehensive income. 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 accumulated other comprehensive
income. Changes in value due to foreign currency exchange are limited by foreign
currency hedges; unhedged amounts are not material and changes in value are
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 or results of operations. The Company had no
trading securities at December 31, 1998 and 1997.
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 purposes and hedge positions.
Derivative positions used for risk management are evaluated as to their
effectiveness to modify the Company's risk characteristics and enhance the
yields of the available-for-sale portfolios. 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 other
comprehensive income 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 instruments entered into for the
purpose of hedging anticipated transactions are deferred and amortized over the
life of the hedged transaction, beginning at the inception of the transaction.
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. Hedges that no
longer qualify for hedge accounting due to lack of correlation are reclassified
to derivative instruments held or issued for purposes other than trading and
used for risk management purposes. Those instruments held or issued for trading
purposes are carried at market value and include derivatives held or issued for
the specific purpose of generating 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 or results of
operations; gains or losses during the year were recognized in the
available-for-sale portfolio. See Note 4-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 and include write downs on available-for-sale
securities considered to have other than temporary declines in market value.
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. The Company
early adopted the accounting treatment required by Statement of Position (SOP)
98-1, "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use," and, as a result, capitalized $19.4 million, or $.17 per share,
of computer software costs incurred during the year ended December 31, 1998.
3
8
<PAGE> 71
As of December 31, 1998, the Company had contractual commitments related to the
Company's construction projects in Tampa, Florida and Mayfield Village, Ohio
totalling $99.0 million, of which $55.5 million had been paid through 1998.
Total interest capitalized related to the Company's construction projects and
capitalized computer software costs was $3.5 million in 1998.
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% 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 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.
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 7-Reinsurance for further discussion). The remaining reinsurance arises
from the Company seeking to reduce its loss exposure in its auto and non-auto
businesses and to build its strategic alliance relationships. Prepaid
reinsurance premiums are recognized on a pro rata basis over the period of risk.
EARNINGS PER SHARE 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 $235.9 million, $166.9 million and $121.5 million
in 1998, 1997 and 1996, respectively. Total interest paid was $63.8 million for
both 1998 and 1997 and $60.3 million for 1996.
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 1998, the Financial Accounting Standards Board
issued SFAS 133, "Accounting for Derivative Instruments and Hedging Activities,"
which standardizes the accounting for derivative instruments and requires that
all derivatives be recognized at fair value on the balance sheet. Changes in
fair value are recorded in current period earnings or in other comprehensive
income if the derivative transaction is a qualified cash flow hedge. The
statement is effective for fiscal years beginning after June 15, 1999. At
December 31, 1998, the Company estimates that the net effect of all derivative
transactions would not be significant. The Company held an anticipatory debt
issuance hedge at December 31, 1998, that, under SFAS 133, would have been
recorded as a $7.2 million loss, net of tax, to other comprehensive income.
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 1998 presentation.
02 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.
03 CONTRACTUAL COMMITMENTS
The Company has operating lease commitments, licensing and service agreements
with terms greater than one year, some with options to renew at the end of the
contract periods. The minimum commitments under such noncancelable contracts at
December 31, 1998 are as follows (in millions): 1999-$61.6; 2000-$51.6;
2001-$34.4; 2002-$10.3; 2003-$6.0; and thereafter-$.9. Total expense incurred by
the Company for such purposes for 1998, 1997 and 1996 was $93.1 million, $83.3
million and $57.5 million, respectively.
3
9
<PAGE> 72
04 INVESTMENTS
The components of pretax investment income and net realized gains on security
sales for the periods ended December 31 were:
(millions)
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Available-for-sale: fixed maturities $ 233.9 $ 219.1 $ 183.9
equity securities 34.1 24.6 27.7
Short-term investments 26.8 31.2 14.2
- --------------------------------------------------------------------------------------
Investment income 294.8 274.9 225.8
- --------------------------------------------------------------------------------------
Gross realized gains:
Available-for-sale: fixed maturities 34.6 56.9 23.9
equity securities 159.1 121.4 39.7
Short-term investments .2 -- --
Gross realized losses:
Available-for-sale: fixed maturities (37.1) (36.9) (29.6)
equity securities (145.4) (42.9) (26.9)
- --------------------------------------------------------------------------------------
Net realized gains on security sales 11.4 98.5 7.1
- --------------------------------------------------------------------------------------
$ 306.2 $ 373.4 $ 232.9
======================================
</TABLE>
During 1998, the Company realized losses of $32.2 million related to write downs
on investment securities considered to have other than temporary declines in
market value and a $9.2 million net realized loss on an anticipatory hedge.
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
<S> <C> <C> <C> <C>
1998
Available-for-sale:
U.S. government obligations $ 610.8 $ 4.1 $ (.4) $ 614.5
State and local government obligations 1,649.0 44.9 (.3) 1,693.6
Foreign government obligations 52.9 .4 -- 53.3
Corporate debt securities 315.5 4.5 (1.8) 318.2
Asset-backed securities 1,491.4 19.8 (24.3) 1,486.9
Other debt securities 52.0 .7 (.2) 52.5
- ------------------------------------------------------------------------------------------------------------
4,171.6 74.4 (27.0) 4,219.0
Preferred stocks 374.3 14.0 (11.8) 376.5
Common stocks 512.2 144.3 (19.6) 636.9
Short-term investments 441.9 -- -- 441.9
- ------------------------------------------------------------------------------------------------------------
$ 5,500.0 $ 232.7 $ (58.4) $ 5,674.3
===========================================================
1997
Available-for-sale:
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
===========================================================
</TABLE>
4
0
<PAGE> 73
The composition of fixed maturities by maturity at December 31, 1998 was:
<TABLE>
<CAPTION>
(millions) MARKET
COST VALUE
<S> <C> <C>
Less than one year $ 368.2 $ 371.7
One to five years 2,602.9 2,639.3
Five to ten years 1,049.5 1,068.9
Ten years or greater 151.0 139.1
- ------------------------------------------------------------------------------
$ 4,171.6 $ 4,219.0
================================
</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, 1998, bonds in the principal amount of $67.9 million were on
deposit with various regulatory agencies to meet statutory requirements.
Securities with a market value of $2.4 million were held at December 31, 1998,
by a bankruptcy remote subsidiary and are not available to the general creditors
of the Company.
The components of derivative financial instruments held or issued for purposes
other than trading at December 31 were:
<TABLE>
<CAPTION>
(millions)
MARKET VALUE/ CONTRACT/
CARRYING VALUE AT NOTIONAL VALUE AT
DECEMBER 31, DECEMBER 31,
1998 1997 1998 1997
----------------- ----------------
<S> <C> <C> <C> <C>
Forward and future positions:
Assets $ 2.8 $ .8 $ 30.9 $ 13.7
Liabilities -- (.1) -- 13.4
Anticipatory debt issuance hedge:
Short futures position 4.4 -- 203.7 --
Interest rate swap hedge (11.0) -- 150.0 --
Foreign currency forward and future positions:
Assets -- (.7) -- 50.9
Liabilities (.5) 1.7 31.8 67.2
- -------------------------------------------------------------------------------------
$ (4.3) $1.7 $416.4 $145.2
================= ================
</TABLE>
Derivative instruments classified as held or issued for purposes other than
trading are used to manage the Company's 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,
hedged securities or hedged cash flows. The anticipatory debt issuance hedges
were entered into to hedge against possible rises in interest rates prior to the
issuance of debt under the Company's outstanding $300 million shelf
registration, which is intended to replace debt expiring December 2000. The
interest rate swap hedge performed as expected and is recorded as a deferred
asset under SFAS 80, "Accounting for Futures Contracts," as a qualified hedge.
Gains or losses on the hedge are deferred and will be recognized into income as
adjustments to interest expense upon the issuance of the debt. The short futures
position, driven by changing economic conditions, did not meet the established
criteria for hedging correlation and was discontinued as a hedge, recognizing a
net realized loss of $9.2 million in 1998. The Company continues to hold the
short futures position for risk management of the anticipated debt offering.
Derivative instruments may also be used for trading purposes. The Company had
net losses of $1.2 million (gross gains of $9.9 million; gross losses of $11.1
million) during 1998 and net losses of $.7 million (gross gains of $9.9 million;
gross losses of $10.6 million) during 1997 in the trading portfolio; these
losses 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, 1998, the
Company had short trading positions in foreign currency and treasury forwards
with net market values of $(.4) million and notional values of $31.5 million;
the average market values for long and short positions in 1998 were $(.2)
million and $.5 million, respectively. 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.
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, 1998, the Company had open investment funding commitments
of $56.0 million. The Company had no uncollateralized lines or letters of credit
as of December 31, 1998 or 1997.
4
1
<PAGE> 74
05 STATUTORY FINANCIAL INFORMATION
At December 31, 1998, $245.7 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 1998, the insurance and other subsidiaries paid aggregate cash
dividends of $151.0 million to the parent company. Based on the dividend laws
currently in effect, the insurance subsidiaries may pay aggregate dividends of
$274.2 million in 1999 without prior approval from regulatory authorities.
Statutory policyholders' surplus was $2,029.9 million and $1,722.9 million at
December 31, 1998 and 1997, respectively. Statutory net income was $331.5
million, $274.7 million and $277.9 million for the years ended December 31,
1998, 1997 and 1996, 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 (NAIC) 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.
In 1998, the NAIC adopted the Codification of Statutory Accounting Principles
guidance which will replace the current NAIC Annual Statement Instructions and
Accounting Practices and Procedures manual as the NAIC's primary guidance on
statutory accounting. The Codification provides guidance for areas where
statutory accounting has been silent and changes current statutory accounting in
some areas. The implementation date established by the NAIC is January 1, 2001;
however, the effective date will be specified by each insurance company's state
of domicile. The Company is currently evaluating the potential effect of the
Codification guidance, but does not expect it to have a material impact on the
Company's statutory surplus.
06 LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES
Activity in the loss and loss adjustment expense reserves, prepared in
accordance with GAAP, is summarized as follows:
(millions)
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Balance at January 1 $ 2,146.6 $ 1,800.6 $ 1,610.5
Less reinsurance recoverables on unpaid losses 279.1 267.7 296.1
- -------------------------------------------------------------------------------------------
Net balance at January 1 1,867.5 1,532.9 1,314.4
- -------------------------------------------------------------------------------------------
Net reserves of subsidiary purchased -- 82.2 --
- -------------------------------------------------------------------------------------------
Incurred related to:
Current year 3,560.5 3,070.8 2,341.9
Prior years (184.2) (103.3) (105.8)
- -------------------------------------------------------------------------------------------
Total incurred 3,376.3 2,967.5 2,236.1
- -------------------------------------------------------------------------------------------
Paid related to:
Current year 2,376.0 1,971.5 1,424.7
Prior years 922.0 743.6 592.9
- -------------------------------------------------------------------------------------------
Total paid 3,298.0 2,715.1 2,017.6
- -------------------------------------------------------------------------------------------
Net balance at December 31 1,945.8 1,867.5 1,532.9
Plus reinsurance recoverables on unpaid losses 242.8 279.1 267.7
- -------------------------------------------------------------------------------------------
Balance at December 31 $ 2,188.6 $ 2,146.6 $ 1,800.6
======================================
</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.
07 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, 1998 and 1997, 36% and 44%, respectively, of the "prepaid
reinsurance premiums" and 56% and 60%, respectively, of the "reinsurance
recoverables" relate to CAIP, for which the Company retains no indemnity risk.
4
2
<PAGE> 75
The effect of reinsurance on premiums written and earned as of December 31 was
as follows:
<TABLE>
<CAPTION>
(millions)
1998 1997 1996
------------------------ ------------------------ ------------------------
Written Earned Written Earned Written Earned
<S> <C> <C> <C> <C> <C> <C>
Direct premiums $ 5,451.3 $ 5,100.5 $ 4,825.2 $ 4,382.9 $ 3,638.4 $ 3,380.7
Assumed -- -- -- -- 3.8 3.8
Ceded (151.6) (152.5) (160.1) (193.4) (200.5) (185.2)
- ----------------------------------------------------------------------------------------------------
Net premiums $ 5,299.7 $ 4,948.0 $ 4,665.1 $ 4,189.5 $ 3,441.7 $ 3,199.3
======================== ======================== ========================
</TABLE>
Losses and loss adjustment expenses are net of reinsurance ceded of $131.9
million in 1998, $150.8 million in 1997 and $117.3 million in 1996.
08 INCOME TAXES
Significant components of the Company's income tax provision were as follows:
(millions)
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
Current tax provision $ 237.1 $ 241.6 $ 163.9
Deferred tax benefit (32.7) (63.1) (35.9)
- -------------------------------------------------------------------------
Total income tax provision $ 204.4 $ 178.5 $ 128.0
=================================
</TABLE>
The provision for income taxes in the accompanying consolidated statements of
income differed from the statutory rate as follows:
(millions)
<TABLE>
<CAPTION>
1998 1997 1996
---------------- ---------------- ----------------
<S> <C> <C> <C>
Income before income taxes $ 661.1 $ 578.5 $ 441.7
======== ======== ========
Tax at statutory rate $ 231.4 35% $ 202.5 35% $ 154.6 35%
Tax effect of:
Exempt interest income (23.1) (3) (19.6) (3) (21.1) (5)
Dividends received deduction (6.6) (1) (7.0) (1) (7.7) (2)
Other items, net 2.7 -- 2.6 -- 2.2 1
- --------------------------------------------------------------------------------------------------------
$ 204.4 31% $ 178.5 31% $ 128.0 29%
================ ================ ================
</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, 1998 and
1997, the components of the net deferred tax assets were as follows:
(millions)
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Deferred tax assets:
Unearned premiums reserve $ 161.2 $ 132.1
Non-deductible accruals 43.1 37.0
Derivative financial instruments 4.4 6.9
Capitalized expenditures 10.9 12.7
Loss reserves 109.5 93.8
Other 14.3 12.3
Deferred tax liabilities:
Deferred acquisition costs (104.7) (88.7)
Unrealized gains (61.0) (66.1)
- -----------------------------------------------------------
Net deferred tax assets $ 177.7 $ 140.0
====================
</TABLE>
The Company is able to demonstrate that the benefit of its deferred tax assets
is fully realizable.
4
3
<PAGE> 76
09 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 $6.5 million in 1998, $5.1
million in 1997 and $4.2 million in 1996.
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 $9.9 million in 1998, $7.3 million in 1997 and $5.8 million
in 1996.
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; 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, 1998, the Company had a pension asset of $3.5 million, compared
to $2.0 million in 1997 and a pension liability of $1.2 million in 1996. The
Company recognized income of $.1 million in both 1998 and 1997, and $0 in 1996.
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 $1.8 million at December 31, 1998, compared to $1.5 million in 1997.
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 $.7 million in
1998, $.2 million in 1997 and $.4 million in 1996. 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, 1998 and 1997, the trust
held assets of $14.6 million and $6.4 million, respectively, of which $3.9
million and $1.4 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.
In addition to the Incentive Plans, the Company registered 1,425,000 and 650,000
Common Shares relating to stock options granted to key employees and directors
of the Company, respectively. 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 employee stock option activity during the three years ended
December 31 follows:
<TABLE>
<CAPTION>
1998 1997 1996
-------------------------- --------------------------- ---------------------------
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 4,968,964 $ 35.52 5,109,390 $ 28.09 4,943,324 $ 23.76
Add (deduct):
Granted 441,210 124.61 726,889 69.82 852,989 47.52
Exercised (641,013) 16.99 (758,580) 17.44 (454,348) 14.89
Cancelled (63,350) 61.03 (108,735) 41.07 (232,575) 32.95
- ------------------------------------------------------------- --------------------------- ---------------------------
End of year 4,705,811 $ 46.07 4,968,964 $ 35.52 5,109,390 $ 28.09
========================== =========================== ===========================
Exercisable, end of year 1,342,801 $ 20.26 1,497,050 $ 15.53 1,561,428 $ 15.75
========================== =========================== ===========================
Available, end of year 4,676,547 5,054,407 5,672,561
========= ========= =========
</TABLE>
4
4
<PAGE> 77
The following employee options were outstanding or exercisable as of December
31, 1998:
<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 - 20 923,070 2.41 years $ 15.31 923,070 $ 15.31
21 - 40 1,817,028 5.17 years 33.32 393,928 29.83
41 - 60 818,637 6.98 years 47.17 19,687 44.97
61 - 80 694,752 7.99 years 68.64 5,527 67.14
81 - 120 29,239 8.25 years 104.08 589 114.19
121 - 161 423,085 9.01 years 124.83 - -
- -----------------------------------------------------------------------------------------------
$ 9 - 161 4,705,811 1,342,801
========= =========
</TABLE>
Under SFAS 123, the Company uses the Black-Scholes pricing model to calculate
the fair value of the options awarded, including 138,696 options awarded to
directors. This model produced a value of 40.6% for 1998 awards, 43.2% for 1997
awards and 41.4% for 1996 awards. The following assumptions were used to derive
the ratio: a 7-year option term; an annualized volatility rate of .259 for 1998,
.255 for 1997 and .246 for 1996; a risk-free rate of return of 5.49% for 1998,
6.63% for 1997 and 6.69% for 1996; and a dividend yield of .20% for 1998, .25%
for 1997 and .5% for 1996. 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:
(millions-except per share amounts)
<TABLE>
<CAPTION>
1998 1997 1996
<S> <C> <C> <C>
PRO FORMA
Net income $447.3 $393.5 $310.3
=================================
Earnings per share
Basic $ 6.17 $ 5.46 $ 4.24
Diluted 6.00 5.22 4.09
</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 $107.5 million in 1998, $85.8 million in
1997 and $45.3 million in 1996.
10 DEBT
During 1998, there were no bank borrowings outstanding. 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:
(millions)
<TABLE>
<CAPTION>
1998 1997
------------------- -------------------
MARKET MARKET
COST VALUE COST VALUE
<S> <C> <C> <C> <C>
7.30% Notes, due 2006 (issued: $100.0, May 1996) $ 99.7 $ 109.5 $ 99.7 $ 105.3
6.60% Notes, due 2004 (issued: $200.0, January 1994) 199.1 199.4 198.9 200.7
7% Notes, due 2013 (issued: $150.0, October 1993) 148.4 157.2 148.4 154.4
8 3/4% Notes, due 1999 (issued: $30.0, May 1989) 29.9 30.4 29.7 30.9
10% Notes, due 2000 (issued: $150.0, December 1988) 149.8 162.7 149.6 164.6
10 1/8% Subordinated Notes, due 2000 (issued: $150.0, December 1988) 149.7 162.4 149.6 164.6
- ------------------------------------------------------------------------------------------------------------------
$ 776.6 $ 821.6 $ 775.9 $ 820.5
=================== ===================
</TABLE>
All debt is noncallable with interest payable semiannually.
4
5
<PAGE> 78
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 has the right to borrow up 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, 1998 or 1997.
In addition, the Company may issue from time to time, in one or more
transactions, up to $300 million of its debt securities under an outstanding
shelf registration, which became effective in 1998.
Aggregate principal payments on debt outstanding at December 31, 1998, are
$30.0 million for 1999, $300.0 million for 2000, $0 for 2001, 2002 and 2003, and
$450.0 million thereafter.
11 SEGMENT INFORMATION
During 1998, the Company adopted SFAS 131, "Disclosures about Segments of an
Enterprise and Related Information," which requires companies to report
financial and descriptive information about their reportable operating segments.
The Company writes personal automobile and other specialty property-casualty
insurance and related services throughout the United States and Canada. The
Company's Personal Lines business is predominantly auto insurance and is
organized by states. The Company's 44 state/community managers are located in or
near the market served. These managers are measured and paid based on profit and
growth in their state(s)/community and manage claims, distribution, advertising,
budgets, price levels, agent development, regulation and community relations for
their area. The Canadian business unit's revenues are less than 1% of the
Company's consolidated revenues.
The Company's other lines of business include insurance for commercial
vehicles, lenders' collateral protection, directors' and officers' liability and
related services, including processing business for involuntary plans and claim
services to fleet owners and other insurance companies. The other businesses
accounted for less than 8% of the Company's consolidated revenues. All revenues
are generated from external customers and the Company does not have a reliance
on any major customer.
The Company evaluates segment profitability based on pretax operating profit.
Expense allocations are based on certain assumptions and estimates; stated
segment operating results would change if different methods were applied. The
Company does not allocate assets, investment income, interest expense or income
taxes to operating segments. In addition, the Company does not separately
identify depreciation and amortization expense by segment and such disclosure
would be impracticable. Companywide depreciation and amortization expense was
$56.1 million in 1998, $36.6 million in 1997 and $23.8 million in 1996. The
accounting policies of the operating segments are the same as those described in
Note 1-Reporting and Accounting Policies.
<TABLE>
<CAPTION>
For the years ended December 31, 1998 1997 1996
(millions) --------------------- --------------------- ----------------------
PRETAX PRETAX PRETAX
REVENUES PROFIT (LOSS) REVENUES PROFIT (LOSS) REVENUES PROFIT (LOSS)
<S> <C> <C> <C> <C> <C> <C>
Personal Lines(1) $ 4,580.7 $ 361.3 $ 3,832.7 $ 243.0 $ 2,916.0 $ 230.8
Other 405.5 62.1 402.1 36.6 329.5 45.6
Investments(2) 306.2 298.8 373.4 363.5 232.9 226.8
Interest Expense -- (61.1) -- (64.6) -- (61.5)
- ----------------------------------------------------- ----------------------- ---------------------
$ 5,292.4 $ 661.1 $ 4,608.2 $ 578.5 $ 3,478.4 $ 441.7
======================= ======================= =====================
</TABLE>
(1)94% of the Personal Lines segment is personal automobile insurance.
(2)Revenues represent recurring investment income and net realized gains/losses
on security sales; pretax profit is net of investment expenses.
12 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 4-Investments and
Note 10-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) 1998 1997
--------------------- -----------------------
MARKET MARKET
COST VALUE COST VALUE
<S> <C> <C> <C> <C>
Investments:
Available-for-sale: fixed maturities $4,171.6 $4,219.0 $3,836.8 $3,891.4
preferred stocks 374.3 376.5 333.9 348.8
common stocks 512.2 636.9 501.9 620.8
Short-term investments 441.9 441.9 409.4 409.4
Debt (776.6) (821.6) (775.9) (820.5)
</TABLE>
4
6
<PAGE> 79
13 OTHER COMPREHENSIVE INCOME
During 1998, the Company adopted SFAS 130, "Reporting Comprehensive Income,"
which requires disclosure of comprehensive income and its components in the
financial statements. The components of other comprehensive income (loss) for
the years ended December 31 were as follows:
<TABLE>
<CAPTION>
(millions)
1998 1997 1996
----------------------------- ---------------------------- ---------------------------
TAX TAX TAX
(PROVISION) AFTER (PROVISION) AFTER (PROVISION) AFTER
PRETAX BENEFIT TAX PRETAX BENEFIT TAX PRETAX BENEFIT TAX
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Unrealized gains (losses)
arising during period:(1)
Available-for-sale:
fixed maturities $ 2.8 $ (1.0) $ 1.8 $ 29.5 $ (10.3) $ 19.2 $ (18.3) $ 6.4 (11.9)
equity securities 64.3 (22.5) 41.8 44.8 (15.7) 29.1 53.7 (18.9) 34.8
Reclassification adjustment:(2)
Available-for-sale:
fixed maturities (10.0) 3.5 (6.5)
equity securities (71.2) 25.1 (46.1)
- ---------------------------------------------------------------------------------------------------------------------------------
Net unrealized gains (losses) (14.1) 5.1 (9.0) 74.3 (26.0) 48.3 35.4 (12.5) 22.9
Other(3) (3.3) -- (3.3) -- (.7) (.7) -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Other comprehensive
income (loss) $ (17.4) $ 5.1 $ (12.3) $ 74.3 $ (26.7) $ 47.6 $ 35.4 $ (12.5) $ 22.9
============================= ============================ ===========================
</TABLE>
(1)Amounts for 1997 and 1996 reflect changes in net unrealized gains (losses).
(2)Represents adjustments for gains (losses) realized in net income;
reclassification adjustments for prior years are not available.
(3)Other includes foreign currency translation adjustments, which have no tax
effect, and minimum pension liability, which is taxed at the statutory rate.
14 SUBSEQUENT EVENT
On March 1, 1999, the Company issued $300 million of 6 5/8% Senior Notes due
March 1, 2029, under a shelf registration statement filed with the Securities
and Exchange Commission in 1998. The Company may redeem all or part of the Notes
at any time, subject to a "make whole" provision. There are no sinking fund
requirements. The Notes were priced at 98.768% to yield 6.721% to maturity.
Interest is payable semiannually on March 1 and September 1, beginning September
1, 1999. Net proceeds to the Company of $293.7 million are intended to be used,
together with other available funds, to retire certain of the Company's current
outstanding debt upon its maturity.
------------------------------------------
Report of PricewaterhouseCoopers LLP,
Independent Accountants
------------------------------------------
TO THE BOARD OF DIRECTORS AND SHAREHOLDERS, THE PROGRESSIVE CORPORATION:
In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of income, changes in shareholders' equity and cash
flows present fairly, in all material respects, the financial position of The
Progressive Corporation and subsidiaries at December 31, 1998 and 1997, and the
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1998, in conformity with generally accepted
accounting principles. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with generally accepted auditing standards which
require that we plan and perform the audits 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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for the opinion expressed above.
/s/ PricewaterhouseCoopers LLP
Cleveland, Ohio
January 25, 1999 (March 1, 1999 as to Note 14)
4
7
<PAGE> 80
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
The consolidated financial statements and the related notes on pages 34 through
47, together with the supplemental information on pages 52 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, to pay dividends
and for other business purposes.
During 1998, the Company repurchased 404,079 of its Common Shares at a
total cost of $42.6 million (average $105.28 per share), including 11,079 Common
Shares repurchased to satisfy obligations under the Company's benefit plans.
During the three-year period ended December 31, 1998, the Company repurchased
1.4 million of its Common Shares at a total cost of $87.4 million (average
$60.75 per share), .2 million of its 9 3/8% Serial Preferred Shares, Series A,
at a total cost of $6.0 million (average $25.60 per share) and redeemed its
remaining Preferred Shares at a total cost of $82.1 million ($25.00 per share).
The Company also sold $100.0 million of Notes. During the same period, The
Progressive Corporation made $1.1 million of capital contributions to its
subsidiaries, net of dividends received from these subsidiaries. The regulatory
restrictions on subsidiary dividends are described in Note 5 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. In March 1999, the Company issued $300 million of
6 5/8% Senior Notes due 2029 under an outstanding shelf registration, which
became effective in 1998. The net proceeds of $293.7 million are intended to
replace current outstanding debt upon its maturity. The Company also has
available a $10.0 million revolving credit agreement. With its current 29% debt
to capital ratio, management believes the Company has sufficient borrowing
capacity and other capital resources to support current and anticipated growth.
The Company's insurance operations create liquidity by collecting and
investing premiums from new and renewal business in advance of paying claims.
For the three years ended December 31, 1998, operations generated positive cash
flows of $2,004.9 million, and cash flows are expected to be positive in both
the short-term and reasonably foreseeable future. The Company's substantial
investment portfolio is highly liquid, consisting almost entirely of readily
marketable securities.
In March 1997, the Company acquired Midland Financial Group, Inc. for about
$50 million in cash. Midland underwrites and markets nonstandard private
passenger automobile insurance through Independent Agents across 11 states,
primarily in the southeastern and western United States.
Total capital expenditures for the three years ended December 31, 1998,
aggregated $331.9 million. In December 1997, the Company purchased approximately
72 acres in Tampa, Florida to construct a three-building, 307,000 square foot,
regional call center. The cost of the project is currently estimated at $45.2
million; $41.3 million has been paid as of December 31, 1998. The first two
buildings were completed during 1998. The third building was completed in
February 1999. In addition, in November 1997, the Company purchased 91 acres in
Mayfield Village, Ohio to construct an office complex, near the site of its
current corporate headquarters. This office complex is part of a five-year
cooperative effort with Mayfield Village to develop over 300 acres. Progressive
will serve as the anchor corporate user with additional business users and
recreational facilities on the site. The Company is constructing three buildings
containing a total of approximately 443,000 square feet on the site and could
build up to two additional buildings, containing about 500,000 square feet in
total, in the future. The first three buildings are expected to be completed
during 1999 and are estimated to cost $68.3 million. As of December 31, 1998,
$28.7 million has been paid. The construction projects are being funded through
operating cash flows.
INVESTMENTS The Company invests in fixed-maturity, equity and short-term
securities. The Company's investment strategy recognizes its need to maintain
capital adequate to support its insurance operations. The Company evaluates the
risk/reward tradeoffs of investment opportunities, measuring their effects on
stability, diversity, overall quality and liquidity of the investment portfolio.
The majority of the portfolio is invested in high-grade, fixed-maturity
securities, of which short-and intermediate-term securities represented $4,439.4
million, or 78.3%, at the end of 1998, compared to $4,024.9 million, or 76.4%,
at the end of 1997. Long-term investment-grade securities, including those
principal paydowns from asset-backed securities that are greater than 10 years,
were $93.5 million, or 1.6%, at the end of 1998, compared to $143.4 million, or
2.7%, at the end of 1997. Non-investment-grade fixed-maturity securities were
$128.0 million, or 2.3%, at the end of 1998, compared to $132.5 million, or
2.5%, at the end of 1997, and offer the Company higher returns and added
diversification without a significant adverse effect on the stability and
quality of the investment portfolio as a whole. Non-investment-grade securities
may involve greater risks often related to creditworthiness, solvency and
relative liquidity of the secondary trading market. The duration of the
fixed-income portfolio was 2.8 years at December 31, 1998, compared to 3.3 years
at December 31, 1997.
A portion of the investment portfolio is invested in marketable equity
securities. Common stocks represented $636.9 million, or 11.2%, of the
portfolio, at the end of 1998, compared to $620.8 million, or 11.8%, a year
earlier. The majority of the common stock portfolio is invested in domestic
equities traded on nationally recognized securities exchanges. In addition, the
Company invests in foreign equities, which may include stock index futures and
foreign currency forwards, which comprised $130.7 million of the common stock
portfolio at the end of 1998, compared to $106.0 million last year, and
partnership investments, which comprised $63.7 million of the common stock
portfolio at the end of 1998, compared to $31.8 million last year. Preferred
stocks represented $376.5 million, or 6.6%, of the portfolio at the end of 1998,
compared to $348.8 million, or 6.6%, a year earlier, and was comprised of over
72% of fixed-rate preferred stocks with mechanisms that are expected to provide
an opportunity to liquidate at par.
As of December 31, 1998, the Company's portfolio had $174.3 million in
unrealized gains, compared to $188.4 million in 1997. This decrease in value was
the result of widening credit spreads on all non-treasury related products and
the Company's underperformance relative to the S&P 500, due to overweighting in
smaller capitalization value stocks.
48
<PAGE> 81
The weighted average fully taxable equivalent book yield of the portfolio was
6.3%, 6.6% and 6.7% for the years ended December 31, 1998, 1997 and 1996,
respectively.
As of December 31, 1998, the Company held $1,486.9 million of asset-backed
securities, which represented 26.2% of the total investment portfolio. The
asset-backed portfolio included collateralized mortgage obligations (CMO) and
commercial mortgage-backed obligations (CMB) totaling $325.3 million and $728.9
million, respectively. The remainder of the asset-backed portfolio was invested
primarily in auto loan and other asset-backed securities. As of December 31,
1998, the CMO portfolio primarily included sequential bonds, representing 90.3%
of the CMO portfolio ($293.7 million) with an average life of 3.6 years. At
December 31, 1998, the CMO portfolio had a weighted average Moody's or Standard
& Poor's rating of AAA and the CMB portfolio had an average life of 6.1 years
and a weighted average Moody's or Standard & Poor's rating of AA. At December
31, 1998, the CMO and CMB portfolios had unrealized gains/(losses) of $.1
million and $(8.2) million, respectively. The single largest unrealized loss in
any individual CMO security was $.9 million and in any CMB security was $5.4
million, at December 31, 1998. The CMB portfolio includes $132.5 million of CMB
interest-only certificates, which had an average life of 6.6 years and a
weighted average Moody's or Standard & Poor's rating of AAA at December 31,
1998. Both the CMO and CMB portfolios are highly liquid with readily available
quotes and contain no residual interests. During 1997, the Company sold $178.4
million (proceeds of $200.8 million) of non-investment-grade CMB securities to
a third-party purchaser. The purchaser subsequently transferred the securities
to a trust as collateral in a resecuritized debt offering. The transaction was
accounted for as a sale under Statement of Financial Accounting Standards
(SFAS) 125, "Accounting for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities," resulting in a net gain of $22.4 million. A
bankruptcy remote subsidiary of the Company acquired $22.8 million of the
resecuritized debt, which was subsequently sold in 1998 for a net gain of $3.5
million. This portion of the transaction was not accounted for as a sale in
1997 in accordance with SFAS 125.
Investments in the Company's portfolio have varying degrees of risk. The
primary market risk exposure to the fixed-income portfolio is interest rate
risk, which is limited by managing duration to a defined range of 1.8 to 5
years. The distribution of maturities and convexity are monitored on a regular
basis. Common stocks and similar investments, which generally have greater risk
and volatility of market value, are limited to a target of 15%, with a range of
0 to 25%. Market values, along with industry and sector concentrations of common
stocks and similar investments, are monitored daily. Exposure to foreign
currency exchange risk is limited by Company restrictions and is monitored
regularly. Exposures are evaluated individually and as a whole, considering the
effects of cross correlation. For the quantitative market risk disclosures, see
page 56. The Company regularly examines its portfolio for evidence of
impairment. In such cases, changes in market value are evaluated to determine
the extent to which such changes are attributable to: (i) interest rates, (ii)
market-related factors other than interest rates and (iii) financial conditions,
business prospects and other fundamental factors specific to the issuer.
Declines attributable to issuer fundamentals are reviewed in further detail.
Available evidence is considered to estimate the realizable value of the
investment. When a security in the Company's investment portfolio has a decline
in market value which is other than temporary, the Company is required by
generally accepted accounting principles (GAAP) to reduce the carrying value of
such security to its net realizable value. In 1998, the Company wrote down $32.2
million, including $20.8 million in two securities in emerging markets driven by
changing economic conditions.
Included in our non-investment-grade fixed-maturity securities and our
common stock portfolios are $299.6 million of other risk assets. Other risk
assets include such items as high yield and distressed debt, private equities
and warrants, mezzanine investments, and securities in emerging markets. No
individual security in the other risk asset portfolio comprised more than one
percent of Progressive's total investment portfolio. The total return on the
average amount invested in this asset class in 1998 was (4.4)% with a total net
unrealized gain of $4.7 million at December 31, 1998. The single largest
unrealized loss in any individual other risk asset security was $5.4 million.
Derivative instruments are primarily used to manage the risks and enhance
the returns of the available-for-sale portfolio. This is accomplished by
modifying the basis, duration, interest rate or foreign currency characteristics
of the portfolio, hedged securities or hedged cash flows. During 1998, the
Company entered into two transactions, an interest rate swap hedge and a short
futures position, to hedge against possible rises in interest rates prior to the
issuance of debt under the $300 million shelf registration. The interest rate
swap hedge performed as expected and is recorded as an $11.0 million deferred
asset under SFAS 80, "Accounting for Futures Contracts," as a qualified hedge.
The short futures position, driven by changing economic conditions, did not meet
the established criteria for hedging correlation and was discontinued as a
hedge, recognizing a net realized loss of $9.2 million in 1998. The Company
continues to hold the short futures position for risk management of the
anticipated debt offering. Derivative instruments may also be used for trading
purposes. During 1998, net activity in the trading portfolio was not material to
the Company's financial position, cash flows or results of operations. Net cash
requirements of derivative instruments are limited to changes in market values
which may vary based upon changes in interest rates and other factors. Exposure
to credit risk is limited to the carrying value; collateral is not required to
support the credit risk. The Company has stringent restrictions on the amount of
open positions in the trading portfolios, limiting exposure to defined levels.
At December 31, 1998, trading positions had a net market value of $(.4) million;
at December 31, 1997, the net market value was $1.1 million.
RESULTS OF OPERATIONS Operating income, which excludes net realized gains and
losses from security sales and one-time items, was $449.3 million, or $6.01 per
share, in 1998, $336.0 million, or $4.46 per share, in 1997 and $309.1 million,
or $4.12 per share, in 1996. The GAAP combined ratio was 91.6 in 1998, 93.4 in
1997 and 91.5 in 1996.
Direct premiums written increased 13% to $5,451.3 million in 1998, compared
to $4,825.2 million in 1997 and $3,638.4 million in 1996. Net premiums written
increased 14% to $5,299.7 million in 1998, compared to $4,665.1 million in 1997
and $3,441.7 million in 1996. The difference between direct and net premiums
written is partially attributable to premiums written under state-mandated
involuntary Commercial Auto Insurance Procedures (CAIP), for which the Company
retains no indemnity risk, of $60.7 million in 1998, $78.4 million in 1997 and
$99.5 million in 1996. The Company provided policy and claim processing services
to 27 state CAIPs in all three years. Premiums earned, which are a
49
<PAGE> 82
function of the amount of premiums written in the current and prior periods,
increased 18% in 1998, compared to 31% in 1997 and 17% in 1996.
Net premiums written in the Company's Personal Lines, which write insurance
for private passenger automobiles and recreational vehicles, grew 15%, 36% and
20% in 1998, 1997 and 1996, respectively, primarily reflecting an increase in
unit sales. The slower growth in 1998 is a result of intensified competition in
the auto insurance market. Many of the Company's competitors reduced rates,
increased advertising, entered new states, expanded their distribution channels,
entered the nonstandard auto insurance market and increased agents'
compensation. The Company expects continued growth in 1999 despite increased
competition. The Company decreased rates an average of 5.3% in 1998, compared to
rate decreases of .9% in 1997 and rate increases of 2.5% in 1996. The Company
continues to write through multiple distribution methods, including Independent
Agents, Direct (via 1 800 AUTO PRO(R) and progressive.com) and through
Strategic Alliances. In 1998, the Direct distribution channel represented
between 10% and 15% of the Personal Lines volume, compared to between 5% and 10%
in 1997 and less than 5% in 1996. The sales generated via the Internet
represented approximately 2% of the Direct business net premiums written in
1998. The Company also writes through its Strategic Alliances channel, which
includes alliances with other insurance companies, employers, affinity groups
and national brokerage agencies. The Strategic Alliances channel represented
between 5% and 10% of the Personal Lines premiums in all three years. The
remainder of the Personal Lines premiums are written through a network of over
30,000 Independent Insurance Agents. Through these multiple distribution
channels, the Company continues to write standard and preferred risks, which
represented between 30% and 35% of total 1998 Personal Lines volume, compared to
between 20% and 25% in 1997 and between 10% and 15% in 1996, as well as its
traditional nonstandard auto products.
In 1997, the Company began using rating criteria based partially on
consumer financial responsibility. This approach is in use in 43 states that
represent 91% of the Personal Lines volume. The Company expects product design
and pricing methods to evolve constantly, based on the developing understanding
of loss data, work flows, market conditions and technology, as well as consumer
acceptance of the Progressive brand as an insurer for all drivers. The Company
introduced the next generation of product design in mid-1998 and expects to have
it in markets representing 80% of premium by April 1999. Early results suggest
that the Company is attracting drivers from all risk profiles and retaining them
longer. The Company believes that growing the numbers of policyholders,
particularly standard and preferred risks with their higher retention rates,
builds intrinsic value because renewals are more profitable than first year
business. The drive to add customers faster resulted in more spending to promote
the Progressive brand and to hire and develop more claim adjusters and customer
service representatives, and the Company expects this to continue at least in
the near term. These costs, along with lower margins on first year business, are
expected to bring profit margins more in line with the Company's objective of
achieving a 4% underwriting profit margin over the entire retention period of a
policyholder. In 1998, Personal Lines generated an underwriting profit margin of
8%, compared to 6% in 1997 and 8% in 1996.
The Company's other lines of business include writing insurance for small
fleets of commercial vehicles, collateral protection and loan tracking for auto
lenders and financial institutions, directors' and officers' liability and
fidelity coverage for American Bankers Association member community banks and
independent credit unions, and providing related claim, underwriting and system
services. Revenues in these businesses were $405 million in 1998, compared to
$402 million in 1997 and $330 million in 1996. Pretax operating profit was $62
million in 1998, compared to $37 million in 1997 and $46 million in 1996. Most
of these businesses are in markets that are declining in size.
Claim costs, the Company's most significant expense, represent actual
payments made and changes in estimated future payments to be made to or on
behalf of its policyholders, including expenses required to settle claims and
losses. These costs include a loss estimate for future assignments and
assessments, based on current business, under state-mandated involuntary
automobile programs. Claim costs are influenced by inflation and loss severity
and frequency, the impact of which is mitigated by adequate pricing. Increases
in the rate of inflation increase loss payments, which are made after premiums
are established. Accordingly, anticipated rates of inflation are taken into
account when the Company establishes premium rates and loss reserves. Claim
costs, expressed as a percentage of premiums earned, were 68% in 1998, compared
to 71% in 1997 and 70% in 1996. In recent years, the industry has had favorable
loss experience driven by continuing trends with respect to safer cars and
roads, the impaired driving crackdown, better law enforcement and insurers
operating more efficiently.
The Company writes directors and officers and other professional liability
coverage for community banks and credit unions and, therefore, could potentially
be exposed to liability for errors made by these institutions relating to the
year 2000 conversion. To minimize its risk, from October 1997 through May 1998,
the Company included year 2000 exclusions in all new and renewal policies for
commercial banks which have multi-year terms that extend beyond December 31,
1999. This placed the Company at a competitive disadvantage since few of its
competitors included similar exclusions. The Company has obtained additional
reinsurance to limit its potential exposure to about 7% of the average policy
limits in the event any of the insured directors or officers are held liable for
year 2000 noncompliance by their financial institutions. In light of this
additional reinsurance contract, which reduced the Company's net exposure by 68%
and covers all of the Company's inforce directors and officers insurance
business, in June 1998, the Company stopped including year 2000 exclusions in
its multi-year policies. Additionally, the Company has begun to selectively
remove previously issued year 2000 exclusions. As a regulated industry,
financial institutions are under pressure from government regulatory agencies
and other interested parties to ensure they achieve readiness for the year 2000.
The Company is monitoring its customers' compliance efforts and believes that
substantially all such customers are pursuing plans to achieve year 2000
compliance. It is currently unknown whether these financial institutions will be
able to completely avoid errors relating to year 2000 compliance and the Company
is unable to predict to what extent such financial institutions will incur
losses as a result of noncompliance and whether their directors and officers
will be subject to individual liability for such noncompliance. In the event of
a claim, applicable factual and coverage issues would have to be resolved. Based
on information currently available and management's best estimate, the Company
does not believe that any losses resulting from this exposure will have a
material impact on the Company's liquidity, financial condition, cash flows or
results of operations.
Because the Company is primarily an insurer of motor vehicles, it has
limited exposure for environmental, product and general liability claims. The
Company has established reserves for these exposures, in amounts which it
believes to be adequate based on information currently known by it. Management
does not believe that these claims will have a material impact on the Company's
liquidity, financial condition, cash flows or results of operations.
Policy acquisition and other underwriting expenses as a percentage of
premiums earned were 23% in 1998 and 1997 and 22% in 1996. During 1998, the
Company expanded its television advertising
50
<PAGE> 83
campaign on a national level. The Company also introduced its local advertising
campaign to 14 more states during 1998, bringing the total number of states in
which the Company advertises to 32 plus Washington D.C. (83 markets).
Recurring investment income (interest and dividends) increased 7% to $294.8
million in 1998, compared to $274.9 million in 1997 and $225.8 million in 1996,
primarily due to an increase in the size of the investment portfolio. Net
realized gains on security sales were $11.4 million in 1998, $98.5 million in
1997 and $7.1 million in 1996. Investment expenses were $7.4 million in 1998,
compared to $9.9 million in 1997 and $6.1 million in 1996; in 1997, the Company
purchased a new portfolio management system and incurred expenses related to the
sale of the commercial mortgage-backed securities.
YEAR 2000 COMPLIANCE The year 2000 problem exists because many computer programs
only use the last two digits to refer to a year and could recognize "00" as 1900
instead of 2000. If not corrected, many computer and other microchip supported
applications could fail or create erroneous results. The extent of the potential
impact is still unknown but could affect the global economy. In response to this
issue, the Company has evaluated its applications and operating software
(including its claims reporting, financial reporting, policy issuance, policy
maintenance and other internal production systems), hardware and software
products, and third-party data exchanges and business relationships, and is in
the process of evaluating its end user computing activities and facilities
implications (including public utility services), and has established a
dedicated, tenured project team responsible for overseeing progress on the
Company's compliance program and periodically reporting to management.
The Company began converting its applications software to be year 2000
compliant in July 1995 and, as a result, has been able to avoid redeploying
significant resources or deferring other important projects to specifically
address the year 2000 issues. During the first quarter 1998, the Company
retained independent consultants to determine its state of readiness. Although
some additional areas of focus were identified, the consultants noted that the
Company was adequately addressing its critical internal systems and issues. As
of December 31, 1998, the Company has completed approximately 94% of its efforts
to bring its applications software in compliance. Testing of critical
applications is being accomplished through the use of a special systems
environment known as a "Time Warp Lab," which mimics the Company's production
environment. As a final test of year 2000 readiness, after conversion and year
2000 certification, critical applications are run in the Time Warp Lab while
systems clocks turn over from 1999 to 2000 and beyond. The total cost to modify
these existing production systems, which includes both internal and external
costs of programming, coding and testing, is estimated to be $8.0 million, of
which $7.1 million had been expensed through December 31, 1998. The Company also
replaced some of its systems during 1998. In addition to being year 2000
compliant, these new systems added increased functionality to the Company. The
total cost of these systems, which include both internal and external costs, is
estimated to be $4.8 million, and the majority of the projects were completed in
1998, with remaining parallel testing scheduled during the first quarter 1999.
As of December 31, 1998, $4.7 million had been paid for these systems. All costs
are being funded through operating cash flows. In addition, the Company has
identified approximately 330 third parties with which data is exchanged. All
critical data exchanges are being tested for compliance. Although dependent on
business partners' testing schedules, testing of critical data exchanges is
expected to be completed by the end of the second quarter 1999.
The Company continually evaluates computer hardware and software upgrades
for enhancements and, therefore, many of the costs to replace these items to be
year 2000 compliant are not likely to be incremental costs to the Company. The
Company's remediation of its mainframe hardware and operating software is 94%
complete and the remediation of its servers and client server operating software
is 30% complete. The Company estimates that all mainframe and client server
hardware and operating software will be year 2000 compliant by the first half of
1999. In addition, during 1998, the Company secured software which will assist
in the discovery of noncompliant desktop hardware and software. It is estimated
that the assessment and remediation process will be completed by the first half
of 1999.
The Company is currently unable to determine the impact that year 2000
noncompliance may have on its financial condition, cash flows and results of
operations. The Company believes that it is taking the necessary measures to
address issues that may arise relating to the year 2000 and that its production
systems will be compliant. The Company realizes, however, that noncompliance by
third parties could impact its business. The possibility exists that a portion
of the Company's distribution channel may not be compliant, that communication
with agents could be disrupted, that underwriting data, such as motor vehicle
reports, could be unobtainable, that the claim settling process could be
delayed or that frequency and severity of losses may increase due to external
factors. The Company is contacting its key independent insurance agents,
vendors and suppliers (e.g. banks, credit bureaus, motor vehicle departments,
rating agencies, etc.) to determine their status of compliance and to assess
the impact of noncompliance to the Company. The Company is working closely with
all critical business relationships to minimize its exposure to year 2000
issues, including on-site visits to identify their state of readiness.
The Company's process teams and business groups are identifying potential
year 2000 scenarios. For those scenarios deemed to be both probable and with a
potentially significant business impact, the Company is developing contingency
plans. The majority of the contingency plans are drafted and were reviewed by
the Company's chief financial and technology officers during 1998. Contingency
plans may include such items as hardening facilities with back-up generators,
prioritizing resources, securing alternative vendors, developing alternative
processes, pre-ordering policyholder information, and other measures. The
Company anticipates that contingency plans will be completed for all material
relationships during the first quarter 1999.
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. These risks and uncertainties include, without limitation,
pricing competition and other initiatives by competitors, legislative and
regulatory developments, weather conditions (including the severity and
frequency of storms, hurricanes, snowfalls, hail and winter conditions), driving
patterns, court decisions and trends in litigation, interest rate levels and
other conditions in the financial and securities markets, unforeseen
technological issues associated with the year 2000 compliance efforts and the
extent to which vendors, public utilities, governmental entities and other third
parties that interface with the Company may fail to achieve year 2000
compliance, and other risks detailed from time to time in the Company's SEC
reports. The Company assumes no obligation to update the information in this
annual report.
51
<PAGE> 84
Ten Year Summary - Financial Highlights
(not covered by report of independent accountants)
(millions-except per share amounts and number of people employed)
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
INSURANCE COMPANIES SELECTED FINANCIAL INFORMATION
AND OPERATING STATISTICS-STATUTORY BASIS
Reserves:
Loss and loss adjustment expense(1) $ 1,945.8 $ 1,867.5
Unearned premiums 2,253.3 1,901.9
Policyholders' surplus(1) 2,029.9 1,722.9
Ratios:
Net premiums written to policyholders' surplus 2.6 2.7
Loss and loss adjustment expense reserves to policyholders' surplus 1.0 1.1
Loss and loss adjustment expense 68.5 71.1
Underwriting expense 22.4 20.7
- ----------------------------------------------------------------------------------------------------------------------
Statutory combined ratio 90.9 91.8
SELECTED CONSOLIDATED FINANCIAL INFORMATION-GAAP BASIS
Total revenues $ 5,292.4 $ 4,608.2
Total assets 8,463.1 7,559.6
Total shareholders' equity(2) 2,557.1 2,135.9
Common Shares outstanding 72.5 72.3
Common Share price
High $ 172 $ 120 7/8
Low 94 61 1/2
Close(3) 169 3/8 119 7/8
Market capitalization $ 12,279.7 $ 8,667.0
Book value per Common Share(2) $ 35.27 $ 29.54
Return on average common shareholders' equity(4) 19.3% 20.9%
Debt outstanding $ 776.6 $ 775.9
Ratios:
Debt to total capital 23% 27%
Price to earnings(5) 28 27
Price to book 4.8 4.1
GAAP underwriting margin(2) 8.4 6.6
Number of people employed 15,735 14,126
</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.
5 Represents the closing stock price / operating earnings per share.
All share and per share amounts were adjusted for the December 1992, 3 for 1
stock split.
52
<PAGE> 85
<TABLE>
<CAPTION>
1996 1995 1994 1993
<S> <C> <C> <C> <C>
INSURANCE COMPANIES SELECTED FINANCIAL INFORMATION
AND OPERATING STATISTICS-STATUTORY BASIS
Reserves:
Loss and loss adjustment expense(1) $ 1,532.9 $ 1,314.4 $ 1,100.2 $ 1,053.7
Unearned premiums 1,382.9 1,140.4 954.8 688.9
Policyholders' surplus(1) 1,292.4 1,055.1 945.1 701.9
Ratios:
Net premiums written to policyholders' surplus 2.7 2.8 2.6 2.6
Loss and loss adjustment expense reserves to policyholders' surplus 1.2 1.2 1.2 1.5
Loss and loss adjustment expense 70.2 71.6 64.2 62.6
Underwriting expense 19.8 21.4 22.4 25.4
- --------------------------------------------------------------------------------------------------------------------------------
Statutory combined ratio 90.0 93.0 86.6 88.0
SELECTED CONSOLIDATED FINANCIAL INFORMATION-GAAP BASIS
Total revenues $ 3,478.4 $ 3,011.9 $ 2,415.3 $ 1,954.8
Total assets 6,183.9 5,352.5 4,675.1 4,011.3
Total shareholders' equity(2) 1,676.9 1,475.8 1,151.9 997.9
Common Shares outstanding 71.5 72.1 71.2 72.1
Common Share price
High $ 72 1/4 $ 49 1/2 $ 40 1/2 $ 46 1/8
Low 40 3/8 34 3/4 27 3/4 26 5/8
Close(3) 67 3/8 48 7/8 35 40 1/2
Market capitalization $ 4,817.3 $ 3,523.9 $ 2,492.0 $ 2,920.1
Book value per Common Share(2) $ 23.45 $ 19.31 $ 14.97 $ 12.62
Return on average common shareholders' equity(4) 20.5% 19.6% 27.4% 36.0%
Debt outstanding $ 775.7 $ 675.9 $ 675.6 $ 477.1
Ratios:
Debt to total capital 32% 31% 37% 32%
Price to earnings(5) 16 17 13 15
Price to book 2.9 2.5 2.3 3.2
GAAP underwriting margin(2) 8.5 5.7 11.5 10.7
Number of people employed 9,557 8,025 7,544 6,101
</TABLE>
<TABLE>
<CAPTION>
1992 1991 1990 1989
<S> <C> <C> <C> <C>
INSURANCE COMPANIES SELECTED FINANCIAL INFORMATION
AND OPERATING STATISTICS-STATUTORY BASIS
Reserves:
Loss and loss adjustment expense(1) $ 994.7 $ 901.7 $ 827.4 $ 787.7
Unearned premiums 538.5 513.6 474.1 467.6
Policyholders' surplus(1) 658.3 676.7 636.7 578.1
Ratios:
Net premiums written to policyholders' surplus 2.2 2.0 1.9 2.0
Loss and loss adjustment expense reserves to policyholders' surplus 1.5 1.3 1.3 1.4
Loss and loss adjustment expense 68.3 65.7 62.1 65.9
Underwriting expense 29.8 33.5 31.1 31.4
- -----------------------------------------------------------------------------------------------------------------------------------
Statutory combined ratio 98.1 99.2 93.2 97.3
SELECTED CONSOLIDATED FINANCIAL INFORMATION-GAAP BASIS
Total revenues $ 1,738.9 $ 1,493.1 $ 1,376.2 $ 1,392.7
Total assets 3,440.9 3,317.2 2,912.4 2,643.7
Total shareholders' equity(2) 629.0 465.7 408.5 435.2
Common Shares outstanding 67.1 63.3 69.3 76.2
Common Share price
High $ 29 3/8 $ 20 5/8 $ 18 3/4 $ 14 1/2
Low 14 3/4 15 11 7 1/2
Close(3) 29 1/8 18 17 1/8 12 7/8
Market capitalization $ 1,954.3 $ 1,139.4 $ 1,186.8 $ 981.1
Book value per Common Share(2) $ 7.94 $ 5.83 $ 5.89 $ 5.71
Return on average common shareholders' equity(4) 34.7% 6.7% 21.5% 17.4%
Debt outstanding $ 568.5 $ 644.0 $ 644.4 $ 645.9
Ratios:
Debt to total capital 47% 58% 61% 60%
Price to earnings(5) 17 14 13 14
Price to book 3.7 3.1 2.9 2.3
GAAP underwriting margin(2) 3.5 (3.7) 1.0 (1.2)
Number of people employed 5,591 6,918 6,370 6,049
</TABLE>
53
<PAGE> 86
TEN YEAR SUMMARY - GAAP CONSOLIDATED OPERATING RESULTS
(not covered by report of independent accountants)
(millions-except per share amounts)
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
Direct premiums written:
Personal lines $ 4,987.1 $ 4,355.9
All other lines 464.2 469.3
- -----------------------------------------------------------------------------------------
Total direct premiums written 5,451.3 4,825.2
Reinsurance assumed - -
Reinsurance ceded (151.6) (160.1)
- -----------------------------------------------------------------------------------------
Net premiums written 5,299.7 4,665.1
Net change in unearned premiums reserve(1) (351.7) (475.6)
- -----------------------------------------------------------------------------------------
Premiums earned 4,948.0 4,189.5
- -----------------------------------------------------------------------------------------
Expenses:
Losses and loss adjustment expenses(2) 3,376.3 2,967.5
Policy acquisition costs 659.9 607.8
Other underwriting expenses 495.8 336.0
- -----------------------------------------------------------------------------------------
Total underwriting expenses 4,532.0 3,911.3
- -----------------------------------------------------------------------------------------
Underwriting profit (loss) before taxes 416.0 278.2
Provision (benefit) for income taxes 145.6 97.4
- -----------------------------------------------------------------------------------------
Underwriting profit (loss) after taxes 270.4 180.8
Service operations profit (loss) after taxes 4.8 .9
- -----------------------------------------------------------------------------------------
275.2 181.7
Investment income after taxes 221.3 205.3
Net realized gains (losses) on security sales after taxes 7.4 64.0
Interest expense after taxes (39.7) (42.0)
Proposition 103 reserve reduction after taxes - -
Non-recurring items after taxes - -
Other expenses after taxes(3) (7.5) (9.0)
- -----------------------------------------------------------------------------------------
Income before tax adjustments and cumulative
effect of accounting change 456.7 400.0
Tax adjustments(4) - -
Cumulative effect of accounting change5 - -
- -----------------------------------------------------------------------------------------
Net income $ 456.7 $ 400.0
=================================
Per share(6)
Net income(2) $ 6.11 $ 5.31
Dividends .250 .240
Average equivalent shares
Basic 72.5 72.0
Diluted 74.7 75.3
</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.
All share and per share amounts were adjusted for the December 1992, 3 for 1
stock split.
54
<PAGE> 87
<TABLE>
<CAPTION>
1996 1995 1994 1993
<S> <C> <C> <C> <C>
Direct premiums written:
Personal lines $ 3,165.4 $ 2,644.6 $ 2,181.7 $ 1,548.9
All other lines 473.0 424.3 463.4 417.5
- -------------------------------------------------------------------------------------------------------------------
Total direct premiums written 3,638.4 3,068.9 2,645.1 1,966.4
Reinsurance assumed 3.8 .1 2.9 9.2
Reinsurance ceded (200.5) (156.2) (190.8) (156.4)
- -------------------------------------------------------------------------------------------------------------------
Net premiums written 3,441.7 2,912.8 2,457.2 1,819.2
Net change in unearned premiums reserve(1) (242.4) (185.6) (266.1) (150.5)
- -------------------------------------------------------------------------------------------------------------------
Premiums earned 3,199.3 2,727.2 2,191.1 1,668.7
- -------------------------------------------------------------------------------------------------------------------
Expenses:
Losses and loss adjustment expenses(2) 2,236.1 1,943.8 1,397.3 1,028.0
Policy acquisition costs 482.6 459.6 391.5 311.6
Other underwriting expenses 208.5 167.2 150.8 151.3
- -------------------------------------------------------------------------------------------------------------------
Total underwriting expenses 2,927.2 2,570.6 1,939.6 1,490.9
- -------------------------------------------------------------------------------------------------------------------
Underwriting profit (loss) before taxes 272.1 156.6 251.5 177.8
Provision (benefit) for income taxes 95.2 54.8 88.0 62.2
- -------------------------------------------------------------------------------------------------------------------
Underwriting profit (loss) after taxes 176.9 101.8 163.5 115.6
Service operations profit (loss) after taxes 2.8 5.6 6.5 4.4
- -------------------------------------------------------------------------------------------------------------------
179.7 107.4 170.0 120.0
Investment income after taxes 175.6 156.2 131.2 107.1
Net realized gains (losses) on security sales after taxes 4.6 30.4 15.5 70.1
Interest expense after taxes (40.0) (37.1) (35.9) (25.8)
Proposition 103 reserve reduction after taxes -- -- -- --
Non-recurring items after taxes -- -- -- (2.6)
Other expenses after taxes(3) (6.2) (6.4) (6.5) (1.5)
- -------------------------------------------------------------------------------------------------------------------
Income before tax adjustments and cumulative
effect of accounting change 313.7 250.5 274.3 267.3
Tax adjustments(4) -- -- -- --
Cumulative effect of accounting change(5) -- -- -- --
- -------------------------------------------------------------------------------------------------------------------
Net income $ 313.7 $ 250.5 $ 274.3 $ 267.3
=========================================================
Per share(6) $ 4.14 $ 3.26 $ 3.59 $ 3.59
Net income(2) .230 .220 .210 .200
Dividends
Average equivalent shares 71.6 71.8 71.6 69.3
Basic 74.2 74.2 74.0 71.8
Diluted
</TABLE>
<TABLE>
<CAPTION>
1992 1991 1990 1989
<S> <C> <C> <C> <C>
Direct premiums written:
Personal lines $ 1,214.6 $ 1,047.4 $ 876.0 $ 800.1
All other lines 422.2 489.4 482.8 487.0
- -------------------------------------------------------------------------------------------------------------------
Total direct premiums written 1,636.8 1,536.8 1,358.8 1,287.1
Reinsurance assumed 4.3 .1 .1 7.2
Reinsurance ceded (189.9) (212.3) (162.6) (134.0)
- -------------------------------------------------------------------------------------------------------------------
Net premiums written 1,451.2 1,324.6 1,196.3 1,160.3
Net change in unearned premiums reserve(1) (25.1) (37.7) (5.1) 36.2
- -------------------------------------------------------------------------------------------------------------------
Premiums earned 1,426.1 1,286.9 1,191.2 1,196.5
- -------------------------------------------------------------------------------------------------------------------
Expenses:
Losses and loss adjustment expenses(2) 930.9 858.0 762.9 799.3
Policy acquisition costs 304.1 313.7 292.7 296.7
Other underwriting expenses 141.5 162.1 123.7 114.9
- -------------------------------------------------------------------------------------------------------------------
Total underwriting expenses 1,376.5 1,333.8 1,179.3 1,210.9
- -------------------------------------------------------------------------------------------------------------------
Underwriting profit (loss) before taxes 49.6 (46.9) 11.9 (14.4)
Provision (benefit) for income taxes 16.9 (15.9) 4.0 (2.9)
- -------------------------------------------------------------------------------------------------------------------
Underwriting profit (loss) after taxes 32.7 (31.0) 7.9 (11.5)
Service operations profit (loss) after taxes (2.8) (1.4) 2.8 2.5
- -------------------------------------------------------------------------------------------------------------------
29.9 (32.4) 10.7 (9.0)
Investment income after taxes 110.4 121.1 126.4 135.3
Net realized gains (losses) on security sales after taxes 9.6 4.9 (8.4) (.4)
Interest expense after taxes (29.4) (31.6) (32.0) (32.5)
Proposition 103 reserve reduction after taxes 70.0 -- -- --
Non-recurring items after taxes (42.6) -- -- --
Other expenses after taxes(3) (8.3) (14.9) (13.2) (15.4)
- -------------------------------------------------------------------------------------------------------------------
Income before tax adjustments and cumulative
effect of accounting change 139.6 47.1 83.5 78.0
Tax adjustments(4) -- (14.2) 9.9 --
Cumulative effect of accounting change(5) 14.2 -- -- --
- -------------------------------------------------------------------------------------------------------------------
Net income $ 153.8 $ 32.9 $ 93.4 $ 78.0
=========================================================
Per share(6) $ 2.08 $ .41 $ 1.20 $ .94
Net income(2) .191 .172 .160 .147
Dividends
Average equivalent shares 60.7 65.4 72.3 79.5
Basic 70.9 66.6 81.9 88.8
Diluted
</TABLE>
55
<PAGE> 88
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, 1998, 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, 1998
were:
(millions)
<TABLE>
<CAPTION>
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 $ 639.4 $ 627.0 $ 614.5 $ 603.2 $ 592.0
State and local government obligations 1,814.1 1,752.5 1,693.6 1,638.2 1,579.8
Asset-backed securities 1,567.5 1,527.1 1,486.9 1,443.6 1,398.3
Other debt securities 455.0 439.3 424.0 409.9 396.1
Preferred stocks 399.3 388.4 376.5 365.3 355.0
Short-term investments 444.1 443.0 441.9 440.8 439.7
- -------------------------------------------------------------------------------------------------
$ 5,319.4 $ 5,177.3 $ 5,037.4 $ 4,901.0 $ 4,760.9
========================================================
</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 72%
of the preferred stocks have mechanisms that are expected to provide an
opportunity to liquidate at par.
Derivative financial instruments held or issued for purposes of managing
interest rate exposure on the anticipated debt issuance as of
December 31, 1998 were:
(millions)
<TABLE>
<CAPTION>
MARKET VALUE
------------------------------------------------------------------
-200 BPS -100 BPS +100 BPS +200 BPS
CHANGE CHANGE ACTUAL CHANGE CHANGE
<S> <C> <C> <C> <C> <C>
Short futures position $ (32.0) $ (10.0) $ 4.4 $ 26.5 $ 42.3
Interest rate swap hedge (55.1) (33.1) (11.0) 11.0 33.1
</TABLE>
Exposure to risk is represented in terms of changes in fair value due to
selected hypothetical movements in market rates. During 1998, the Company
entered into two transactions to hedge against possible rises in interest rates
prior to the issuance of debt under the $300 million shelf registration. The
interest rate swap hedge performed as expected and is recorded as a deferred
asset under SFAS 80, "Accounting for Futures Contracts," as a qualified hedge.
The short futures position, driven by changing economic conditions, did not meet
the established criteria for hedging correlation and was discontinued as a
hedge, recognizing a net realized loss of $9.2 million in 1998. The Company
continues to hold the short futures position for risk management of the
anticipated debt offering. Changes in market rates will have a reciprocal effect
on the cost of borrowing of the debt upon issuance.
56
<PAGE> 89
Financial instruments subject to equity market risk as of December 31, 1998
were:
(millions)
<TABLE>
<CAPTION>
HYPOTHETICAL
MARKET CHANGES
--------------------------------
MARKET
VALUE +10% -10%
<S> <C> <C> <C>
Common stocks $ 636.9 $ 697.4 $ 576.4
</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 .94. 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 $1.9 million.
Financial instruments subject to foreign currency risk as of December 31, 1998
were:
(millions)
<TABLE>
<CAPTION>
MARKET NOTIONAL HYPOTHETICAL
VALUE VALUE GAIN (LOSS)
<S> <C> <C>
Canadian fixed income investments $ 73.0 N/A $ 7.3
Other foreign fixed income investments 11.1 N/A 1.1
Foreign equity investments 111.4 N/A 11.1
Foreign currency forwards-assets .5 25.8 3.9
Foreign currency forwards-liabilities (.5) 31.8 (1.8)
- --------------------------------------------------------------------------------
$ 195.5 N/A $ 21.6
=======================================
</TABLE>
N/A = not applicable; notional value pertains only to derivative instruments
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, 1998, the
Company did not have any cross currency exposures.
TRADING FINANCIAL INSTRUMENTS
At December 31, 1998, the Company had short trading positions with a market
value of $(.4) 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, 1998.
57
<PAGE> 90
ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSES (LAE) DEVELOPMENT
(not covered by report of independent accountants)
(millions)
<TABLE>
<CAPTION>
For the years ended
December 31, 1988 1989 1990 1991 1992 1993 1994(3) 1995 1996 1997 1998
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Loss and LAE
reserves(1) $ 651.0 $ 748.6 $ 791.6 $ 861.5 $ 956.4 $1,012.4 $1,098.7 $1,314.4 $1,532.9 $1,867.5 $1,945.8
Re-estimated
reserves as of:
One year later 610.3 685.4 748.8 810.0 857.9 869.9 1,042.1 1,208.6 1,429.6 1,683.3
Two years later 573.4 677.9 726.5 771.9 765.5 837.8 991.7 1,149.5 1,364.5
Three years later 581.3 668.6 712.7 718.7 737.4 811.3 961.2 1,118.6
Four years later 575.1 667.1 683.7 700.1 725.2 794.6 940.6
Five years later 578.4 654.7 666.3 695.1 717.3 782.9
Six years later 582.2 647.1 664.8 692.6 711.1
Seven years later 574.3 645.7 664.5 688.2
Eight years later 574.4 645.4 661.4
Nine years later 575.0 641.9
Ten years later 572.4
Cumulative redundancy $ 78.6 $ 106.7 $ 130.2 $ 173.3 $ 245.3 $ 229.5 $ 158.1 $ 195.8 $ 168.4 $ 184.2
Percentage(2) 12.1 14.3 16.4 20.1 25.6 22.7 14.4 14.9 11.0 9.9
</TABLE>
The chart represents the development of the property-casualty loss and LAE
reserves for 1988 through 1997. 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) 1998 1997 1996 1995 1994
------------------ ------------------ ------------------ ------------------ ------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Florida $ 784.4 14.4% $ 663.0 13.7% $ 467.4 12.9% $ 421.9 13.7% $ 369.9 14.0%
New York 522.2 9.6 446.3 9.2 358.0 9.8 225.6 7.4 195.2 7.4
Texas 518.6 9.5 509.4 10.6 349.9 9.6 313.2 10.2 246.4 9.3
Ohio 447.7 8.2 404.3 8.4 340.8 9.4 284.1 9.3 232.0 8.8
California 343.2 6.3 291.7 6.0 171.6 4.7 126.6 4.1 126.8 4.8
Pennsylvania 292.3 5.4 248.3 5.1 201.3 5.5 184.9 6.0 161.2 6.1
Georgia 277.8 5.1 261.9 5.4 212.1 5.8 155.1 5.1 129.7 4.9
All other 2,265.1 41.5 2,000.3 41.6 1,537.3 42.3 1,357.5 44.2 1,183.9 44.7
- -----------------------------------------------------------------------------------------------------------------
Total $ 5,451.3 100.0% $ 4,825.2 100.0% $ 3,638.4 100.0% $ 3,068.9 100.0% $ 2,645.1 100.0%
========== ======== ======= ====== ========== ====== ========== ====== ========== ======
</TABLE>
58
<PAGE> 91
QUARTERLY FINANCIAL AND COMMON SHARE DATA
(not covered by report of independent accountants)
(millions-except per share amounts)
<TABLE>
<CAPTION>
Net Income Operating Income(1)
----------------------------- ----------------------------
Operating Per Per
Quarter Revenues(7) Total(2) Share(3) Total(2) Share(3)
1998
<S> <C> <C> <C> <C>
1 $ 1,156.2 $ 120.1 $ 1.58 $ 102.8 $ 1.35
2 1,237.2 123.0 1.61 109.1 1.43
3 1,290.9 135.1 1.81 134.4 1.80
4 1,301.9 78.5(6) 1.05(6) 103.1 1.38
- --------------------- --------------------------------- --------------------------------
$ 4,986.2 $ 456.7 $ 6.11 $ 449.3 $ 6.01
======== ===== ==== ===== ====
1997
1 $ 905.7 $ 76.5 $ 1.02 $ 78.6 $ 1.05
2 1,020.9 102.1 1.36 82.8 1.10
3 1,090.1 116.2 1.54 89.3 1.18
4 1,218.1 105.3 1.39 85.3 1.13
- --------------------- --------------------------------- --------------------------------
$ 4,234.8 $ 400.0 $ 5.31 $ 336.0 $ 4.46
======= ===== ==== ===== ====
1996
1 $ 741.4 $ 63.3 $ .82 $ 60.2 $ .78
2 794.9 78.4 1.01 78.5 1.05
3 840.3 80.3 1.08 82.5 1.11
4 868.9 91.7 1.23 87.9 1.18
- --------------------- --------------------------------- --------------------------------
$ 3,245.5 $ 313.7 $ 4.14 $ 309.1 $ 4.12
======= ===== ==== ===== ====
</TABLE>
<TABLE>
<CAPTION>
Stock Price(4)
-------------------------------------------
Rate of Dividends
Quarter High-Low Close Return(5) Per Share
1998
<S> <C> <C> <C> <C>
1 $ 135 1/2 - 106 11/16 $ 134 11/16 $ .060
2 150 - 126 1/2 141 .060
3 156 3/4 - 95 112 3/4 .065
4 172 - 94 169 3/8 .065
- ------------------------------- ------------------ ------------
$ 172 - 94 $ 169 3/8 41.6% $ .250
======================= ================== ============
1997
1 $ 73 5/8 - 63 7/8 $ 63 7/8 $ .060
2 87 3/8 - 61 1/2 87 .060
3 111 7/8 - 86 1/2 107 1/8 .060
4 120 7/8 - 99 119 7/8 .060
- ------------------------------- ------------------ ------------
$ 120 7/8 - 61 1/2 $ 119 7/8 78.4% $ .240
======================= ================== ============
1996
1 $ 51 1/4 - 43 1/2 $ 44 5/8 $ .055
2 48 7/8 - 40 3/8 46 1/4 .055
3 58 1/2 - 43 1/8 57 1/4 .060
4 72 1/4 - 55 3/8 67 3/8 .060
- ------------------------------- ------------------ ------------
$ 72 1/4 - 40 3/8 $ 67 3/8 38.5% $ .230
======================= ================== ============
</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.
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.
6 During the fourth quarter 1998, the Company wrote down $24.5 million, $.21 per
share, on investment securities considered to have other than temporary
declines in market value and realized a $9.2 million, $.08 per share, net loss
on an anticipatory hedge.
7 Represents premiums earned plus service revenues.
59
<PAGE> 92
DIRECTORS
Milton N. Allen(1,2)
Director,
various companies
B. Charles Ames(1)
Partner,
Clayton, Dubilier & Rice, Inc.
(investment banking)
James E. Bennett III(1)
Senior Executive Vice President
KeyCorp
(banking)
Charles A. Davis(1)
President and
Chief Executive Officer
Marsh & McLennan
Capital, Inc.
(investment banking)
Stephen R. Hardis(1,2)
Chairman of the Board
and Chief Executive Officer
Eaton Corporation
(manufacturing)
Janet Hill(3)
Vice President
Alexander & Associates, Inc.
(management consulting)
and President,
Staubach Alexander Hill, LLC
(commercial real estate
consulting)
Peter B. Lewis(2)
Chairman of the Board,
President and
Chief Executive Officer-
Insurance Operations
Norman S. Matthews(3)
Consultant,
formerly President,
Federated Department Stores, Inc.
(retailing)
Donald B. Shackelford(3)
Chairman,
Fifth Third Bank of
Central Ohio
(commercial bank)
Dr. Paul B. Sigler(3)
Henry Ford II Professor,
Yale University
and Investigator,
Howard Hughes Medical
Institute
(education and medical
research)
(1) Audit Committee member
(2) Executive Committee member
(3) Executive Compensation Committee member
CORPORATE OFFICERS
Peter B. Lewis
Chairman, President and
Chief Executive Officer -
Insurance Operations
Charles B. Chokel
Chief Executive Officer -
Investments and
Capital Management
David M. Schneider
Secretary
W. Thomas Forrester
Treasurer
POLICY TEAM
Alan R. Bauer
Charles B. Chokel
W. Thomas Forrester
Moira G. Lardakis
Daniel R. Lewis
Peter B. Lewis
Robert J. McMillan
Brian J. Passell
Glenn M. Renwick
David L. Roush
Tiona M. Thompson
Robert T. Williams
ANNUAL MEETING
The Annual Meeting of Shareholders will be held at the offices of The
Progressive Corporation, 6671 Beta Drive, Mayfield Village, Ohio 44143 on April
23, 1999, at 10:00 a.m. There were 3,974 shareholders of record on December 31,
1998.
PRINCIPAL OFFICE
The principal office of The Progressive Corporation is at 6300 Wilson Mills
Road, Mayfield Village, Ohio 44143
Web site: progressive.com
TOLL-FREE TELEPHONE NUMBERS
For assistance after an accident or to report a loss, 24 hours a day, 7 days a
week, call: 1-800-274-4499.
For Progressive's smart new way to shop for auto insurance, available 24 hours a
day, 7 days a week, call: 1 800 AUTO PRO(R) (1-800-288-6776)
For 24 Hour Policy Service, call: 1-800-888-7764
COUNSEL
Baker & Hostetler, Cleveland, Ohio
TRANSFER AGENT AND REGISTRAR
If you have questions about a specific stock ownership account, write or call:
Corporate Trust Customer Service, National City Bank, 1900 East Ninth Street,
Cleveland, Ohio 44114. Phone: 1-800-622-6757
COMMON SHARES
The Progressive Corporation's Common Shares (symbol PGR) are traded on the New
York Stock Exchange. Dividends are customarily paid on the last day of each
quarter.
SHAREHOLDER/INVESTOR RELATIONS
The Progressive Corporation does not maintain a mailing list for distribution of
shareholders' reports. To hear the text of the latest earnings release, receive
key financial information for the past several quarters, receive dividend and
other information, shareholders can call 1-800-879-PROG. This toll-free
shareholder services line is available 24 hours a day, 7 days a week. Such
information is also available from the Company's web site: progressive.com.
To request copies of public financial information on the Company, shareholders
and potential investors may call the Company's shareholders services line at
1-800-879-PROG or write to: The Progressive Corporation, Investor Relations,
6300 Wilson Mills Road, Box W33, Mayfield Village, Ohio 44143.
For specific questions on financial or other Company information call:
440-446-2851.
