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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange
Act of 1934
For the fiscal year ended December 31, 1998
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or
[ ] Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the transition period from to
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Commission file number 1-9518
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THE PROGRESSIVE CORPORATION
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(Exact name of registrant as specified in its charter)
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<S> <C>
Ohio 34-0963169
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6300 Wilson Mills Road, Mayfield Village, Ohio 44143
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(Address of principal executive offices) (Zip Code)
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(440) 461-5000
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(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on
which registered
Common Shares, $1.00 Par Value New York Stock Exchange
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Securities registered pursuant to Section 12(g) of the Act:
None
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(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[ X ] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of
the registrant at January 31, 1999: $7,864,758,903.37
The number of the registrant's Common Shares, $1.00 par value, outstanding
as of February 26, 1999: 72,819,870
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Annual Report to Shareholders for the year
ended December 31, 1998 are incorporated by reference in Parts I, II and IV
hereof. Portions of the registrant's Proxy Statement dated March 19, 1999, for
the Annual Meeting of Shareholders to be held on April 23, 1999, are
incorporated by reference in Part III hereof.
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INTRODUCTION
The Progressive Corporation and subsidiaries' (collectively, the "Company") 1998
Annual Report to Shareholders (the "Annual Report") contains portions of the
information required to be included in this Form 10-K, which are incorporated
herein by reference. Cross references to relevant sections of the Annual Report
are included under the appropriate items of this Form 10-K.
Portions of the information included in The Progressive Corporation's Proxy
Statement dated March 19, 1999, for the Annual Meeting of Shareholders to be
held on April 23, 1999 (the "Proxy Statement") have also been incorporated by
reference herein and are identified under the appropriate items in this
Form 10-K.
PART I
ITEM 1. BUSINESS
(a) General Development of Business
The Progressive insurance organization began business in 1937. The Progressive
Corporation, an insurance holding company formed in 1965, has 82 subsidiaries
and 1 mutual insurance company affiliate. The Progressive Corporation's
insurance subsidiaries and affiliate provide personal automobile insurance and
other specialty property-casualty insurance and related services throughout the
United States and Canada. The Company's property-casualty insurance products
protect its customers against collision and physical damage to their motor
vehicles and liability to others for personal injury or property damage arising
out of the use of those vehicles.
(b) Financial Information About Industry Segments
Incorporated by reference from Note 11, Segment Information, on
page 46 of the Company's Annual Report.
(c) Narrative Description of Business
The Company offers a number of personal and commercial property-casualty
insurance products primarily related to motor vehicles. Net premiums written
were $5,299.7 million in 1998, compared to $4,665.1 million in 1997 and $3,441.7
million in 1996. The underwriting profit margin was 8.4% in 1998, compared to
6.6% in 1997 and 8.5% in 1996.
Personal Lines
Of the approximately 250 United States insurance company groups writing private
passenger auto insurance, the Company estimates that it ranks fifth in size for
1998. Except as otherwise noted, all industry data and Progressive's market
share or ranking in the industry were derived either directly from data reported
by A.M. Best Company Inc. ("A.M. Best") or were estimated using A.M. Best data
as the primary source. For 1998, the estimated industry premiums written, which
include personal auto insurance in the United States and Ontario, Canada, were
$121.7 billion, and Progressive's share of this market was approximately 4.0%,
compared to $117.5 billion and 3.7%, respectively, in 1997, and $111.6 billion
and 2.8% in 1996.
The Company's Personal Lines segment writes insurance for private passenger
automobiles and recreational vehicles. This business frequently offers more than
one program in a single state, with each targeted to a specific market segment.
Personal Lines accounted for 93% of the Company's 1998 total net premiums
written, compared to 92% in both 1997 and 1996.
A portion of the Company's Personal Lines consists of nonstandard automobile
insurance products for people who have been cancelled or rejected by other
insurers. The size of the nonstandard automobile insurance market changes with
the insurance environment and is estimated to be about 20% of the United States'
personal automobile insurance market. Volume potential is influenced by the
actions of direct competitors, writers of standard and preferred automobile
insurance and state-mandated involuntary plans. Approximately 355 nonstandard
insurance companies, many of which are part of an affiliated group, compete for
this business. In 1997, the Company ranked second in direct premiums written and
near the top in underwriting performance in the nonstandard market. During 1998,
the Company continued to maintain a major presence in this market.
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The Personal Lines segment also writes standard and preferred automobile risks.
These products accounted for between 30% and 35% of the Company's total Personal
Lines premiums in 1998. Our strategy is to build towards becoming a low-cost
provider of a full line of auto insurance products and related services,
distributed through whichever channel the customer prefers. The Company's goal
is to compete successfully in the standard and preferred market, which comprises
about 80% of the United States' personal automobile insurance market.
The Company's specialty Personal Lines products include motorcycle, recreational
vehicle, mobile home, watercraft and snowmobile insurance. The Company's
competitors are specialty companies and large multi-line insurance carriers.
Although industry figures are not available, based on the Company's analysis of
this market, the Company believes that it is a significant participant in the
specialty personal lines market. In 1998, Progressive became the market share
leader in the motorcycle product.
The Company writes through multiple distribution methods, including Independent
Agents, Direct (via 1 800 AUTO PRO(R) and progressive.com) and through Strategic
Alliances. The majority of the Company's Personal Lines premiums are written
through a network of more than 30,000 Independent Insurance Agents located
throughout the United States and Canada. Subject to compliance with certain
Company-mandated procedures, these Independent Insurance Agents have the
authority to bind the Company to specified insurance coverages within prescribed
underwriting guidelines. These guidelines prescribe the kinds and amounts of
coverage that may be written and the premium rates that may be charged for
specified categories of risk. The Agents do not have authority on behalf of the
Company to settle or adjust claims, establish underwriting guidelines, develop
rates or enter into other transactions or commitments. In 1998, the Direct
distribution channel represented between 10% and 15% of the Personal Lines
volume. The Company expanded its television advertising campaign on a national
level in 1998. The Company also introduced its local advertising campaign, which
includes direct mail, radio and television advertising, to 14 more states in
1998 , bringing the total number of states in which the Company advertises to 32
plus Washington, D.C. (83 markets). In addition, the Company is the market
leader in selling auto insurance on the Internet. Consumers can comparison shop
online for auto insurance in 47 states and can buy online in 23 states plus the
District of Columbia. In 1998, Internet sales represented approximately 2% of
the Direct business volume. 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 1998.
Auto insurance differs greatly by community because regulations vary by state
and because traffic, law enforcement, cultural attitudes, insurance agents,
medical services and auto repair facilities vary by community. The Company's
matrix organization enables it to meet varied local conditions under a cohesive
set of policies and procedures that ensure consistency and control. The
Company's 44 State and Community Managers run the business in their state(s).
They manage claims, distribution, advertising budgets, price levels, agent
development, regulation and community relations for their territory. State
Managers determine their state(s) organization, and may appoint Community
Managers with responsibilities similar to their own for a large part of the
state. Processing (customer service calls, direct sales calls and claims
processing) is done at ten regional sites in Albany, New York; Austin, Texas;
Cleveland, Ohio; Colorado Springs, Colorado; Richmond, Virginia; Sacramento,
California; Tampa, Florida; Tempe, Arizona; Tigard, Oregon and Toronto, Ontario.
State Managers report directly to members of the Company's Policy Team, which is
the Company's senior policy and decision making body. In 1999, the Policy Team
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.
Other Businesses
The Company's other lines of business include the commercial vehicle business
unit, United Financial Casualty Company (UFCC), Professional Liability Group
(PLG) and Motor Carrier business unit, which are organized by customer group and
headquartered in Cleveland, Ohio. These businesses accounted for 7% of total
volume in 1998. The choice of distribution channel is driven by each customer
group's buying preference and service needs. Distribution channels include
independent agents, financial institutions and vehicle dealers. Distribution
arrangements are individually negotiated between such intermediaries and the
Company and are tailored to the specific needs of the customer group and the
nature of the related
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financial or purchase transactions. The other lines of business also market
their products directly to their customers through company-employed sales
forces. Most of these businesses are in markets that are declining in size.
Monoline commercial vehicle insurance covers commercial vehicle risks for
primary liability, physical damage and other supplementary insurance coverages.
Based on the Company's analysis of this market, the Company competes for this
business on a nationwide basis with approximately 150 other companies. In the
target segment of monoline commercial auto writers, the Company estimates its
1998 ranking to be in the top 10.
UFCC primarily provides physical damage insurance and related tracking services
to protect the commercial or retail lender's interest in collateral which is not
otherwise insured against these risks. The principal product offered is
collateral protection for automobile lenders, which is sold to financial
institutions and/or their customers. Commercial banks are UFCC's largest
customer group for these services. This business also serves savings and loan
institutions, finance companies and credit unions. According to the Company's
analysis of this market, numerous companies offer these products and none of
them has a dominant market share.
PLG's principal customers are community banks. Its principal products are
liability insurance for directors and officers and employee dishonesty
insurance. Progressive shares the risk and premium on these coverages with a
small mutual reinsurer controlled by its bank customers and various other
reinsurance entities. The program is sponsored by the American Bankers
Association. Additionally, the Company provides similar coverages for credit
unions and savings and loan institutions. The risk and premium on these
coverages are also reinsured by various reinsurance entities. PLG represented
less than one-half percent of the Company's total 1998 net premiums written.
The service operations of the other lines of business consist primarily of
processing business for involuntary plans and providing claim services to fleet
owners and other insurance companies. Service revenues were $38.2 million in
1998, compared to $45.3 million in 1997 and $46.2 million in 1996. Pretax
operating profits were $7.4 million in 1998, compared to $1.4 million and $4.3
million in 1997 and 1996, respectively.
The Motor Carrier business unit currently processes business for the Commercial
Auto Insurance Procedures (CAIP) in 27 states. As a CAIP servicing carrier, the
business unit processes over 50% of the premiums in the CAIP market without
assuming the indemnity risk. It competes with approximately 3 other providers
nationwide.
Competitive Factors
The automobile insurance and other property-casualty markets in which the
Company operates are highly competitive. Property-casualty insurers generally
compete on the basis of price, consumer recognition, coverages offered, claim
handling, financial stability, customer service and geographic coverage.
Vigorous competition is provided by large, well-capitalized national companies,
some of which have broad distribution networks of employed or captive agents,
and by smaller regional insurers. While the Company relies heavily on technology
and extensive data gathering and analysis to segment and price markets according
to risk potential, some competitors merely price their coverage at rates set
lower than the Company's published rates. By avoiding extensive data gathering
and analysis, these competitors incur lower underwriting expenses. The Company
has remained competitive by closely managing expenses and achieving operating
efficiencies, and by refining its risk measurement and price segmentation
skills. In addition, the Company offers prices for a wide spectrum of risks and
seeks to offer a wider array of payment plans, limits of liability and
deductibles than its competitors. Superior customer service and claim adjusting
are also important factors in the Company's competitive strategy.
Licenses
The Company operates under licenses issued by various state or provincial
insurance authorities. These licenses may be of perpetual duration or renewable
periodically, provided the holder continues to meet applicable regulatory
requirements. The licenses govern the kind of insurance coverages which may be
written in the issuing state. Such licenses are normally issued only after the
filing of an appropriate application and the satisfaction of prescribed
criteria. All licenses which are material to the Company's business are in good
standing.
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Insurance Regulation
The insurance subsidiaries are generally subject to regulation and supervision
by insurance departments of the jurisdictions in which they are domiciled or
licensed to transact business. At least one of the subsidiaries is licensed and
subject to regulation in each of the 50 states and certain U.S. possessions, in
three Canadian provinces and by Canadian federal authorities. The nature and
extent of such regulation and supervision varies from jurisdiction to
jurisdiction. Generally, an insurance company is subject to a higher degree of
regulation and supervision in its state of domicile. The Company's insurance
subsidiaries and affiliate are domiciled in the states of Arizona, California,
Colorado, Hawaii, Illinois, Florida, Louisiana, Michigan, Mississippi,
Missouri, New York, Ohio, Pennsylvania, Tennessee, Texas, Washington and
Wisconsin. State insurance departments have broad administrative power relating
to licensing insurers and agents, regulating premium rates and policy forms,
establishing reserve requirements, prescribing statutory accounting methods and
the form and content of statutory financial reports, and regulating the type
and amount of investments permitted. Rate regulation varies from "file and use"
to prior approval to mandated rates. Most jurisdictions prohibit rates that are
"excessive, inadequate or unfairly discriminatory."
Insurance departments are charged with the responsibility of ensuring that
insurance companies maintain adequate capital and surplus and comply with a
variety of operational standards. Insurance companies are generally required to
file detailed annual and other reports with the insurance department of each
jurisdiction in which they conduct business. Insurance departments are
authorized to make periodic and other examinations of regulated insurers'
financial condition, to ensure adherence to statutory accounting principles and
compliance with state insurance laws and regulations.
Insurance holding company laws enacted in many jurisdictions grant to insurance
authorities the power to regulate acquisitions of insurers and certain other
transactions involving insurers and to require periodic disclosure of certain
information. These laws impose prior approval requirements for certain
transactions between regulated insurers and their affiliates and generally
regulate dividend and other distributions, including loans and cash advances,
between regulated insurers and their affiliates. See the "Dividends" discussion
in Item 5(c) for further information on these dividend limitations.
Under state insolvency and guaranty laws, regulated insurers can be assessed or
required to contribute to state guaranty funds to cover policyholder losses
resulting from insurer insolvencies. Insurers are also required by many states,
as a condition of doing business in the state, to provide coverage to certain
risks which are not insurable in the voluntary market. These so-called "assigned
risk" plans generally specify the types of insurance and the level of coverage
which must be offered to such involuntary risks, as well as the allowable
premium. Many states also have involuntary market plans which hire a limited
number of servicing carriers to provide insurance to involuntary risks. These
plans, through assessments, pass underwriting and administrative expenses on to
insurers that write voluntary coverages in those states.
Insurance companies are generally required by insurance regulators to maintain
sufficient surplus to support their writings. Although the ratio of writings to
surplus that the regulators will allow is a function of a number of factors,
including the type of business being written, the adequacy of the insurer's
reserves, the quality of the insurer's assets, and the identity of the
regulator, as a general rule, the regulators prefer that annual net written
premiums be not more than three times the insurer's total policyholders'
surplus. Thus, the amount of an insurer's surplus may, in certain cases, limit
its ability to grow its business.
Many states have laws and regulations that limit an insurer's ability to exit a
market. For example, certain states limit an automobile insurer's ability to
cancel and non-renew policies. Furthermore, certain states prohibit an insurer
from withdrawing one or more lines of business from the state, except pursuant
to a plan that is approved by the state insurance department. The state
insurance department may disapprove a plan that may lead to market disruption.
Laws and regulations that limit cancellation and non-renewal and that subject
program withdrawals to prior approval requirements may restrict an insurer's
ability to exit unprofitable markets.
Regulation of insurance constantly changes as real or perceived issues and
developments arise. Some changes may be due to technical factors, such as
changes in investment laws made to recognize new investment vehicles; other
changes result from such general pressures as consumer resistance to price
increases and concerns relating to insurer solvency. In recent years,
legislation and voter initiatives have been introduced which deal with insurance
rate development, rate determination and the
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ability of insurers to cancel or renew insurance policies, reflecting concerns
about availability, prices and alleged discriminatory pricing.
In some states, the automobile insurance industry has been under pressure in
recent years from regulators, legislators or special interest groups to reduce,
freeze or set rates to or at levels that are not necessarily related to
underlying costs, including initiatives to roll back automobile and other
personal lines rates. This kind of activity has adversely affected, and may in
the future adversely affect, the profitability and growth of the subsidiaries'
automobile insurance business in those jurisdictions, and may limit the
subsidiaries' ability to increase rates to compensate for increases in costs.
Adverse legislative and regulatory activity limiting the subsidiaries' ability
to adequately price automobile insurance may occur in the future. The impact of
these regulatory changes on the subsidiaries' businesses cannot be predicted.
The state insurance regulatory framework has come under increased federal
scrutiny, and certain state legislatures have considered or enacted laws that
alter and, in many cases, expand state authority to regulate insurance companies
and insurance holding company systems. Further, the National Association of
Insurance Commissioners (NAIC) and state insurance regulators are re-examining
existing laws and regulations, specifically focusing on insurance company
investments, issues relating to the solvency of insurance companies and further
limitations on the ability of regulated insurers to pay dividends. The NAIC also
developed a risk-based capital (RBC) program to enable regulators to take
appropriate and timely regulatory actions relating to insurers that show signs
of weak or deteriorating financial conditions. RBC is a series of dynamic
surplus-related formulas which contain a variety of factors that are applied to
financial balances based on a degree of certain risks, such as asset, credit and
underwriting risks. In addition, from time to time, the United States Congress
and certain federal agencies investigate the current condition of the insurance
industry to determine whether federal regulation is necessary.
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.
Statutory Accounting Principles
The Company's results are reported in accordance with generally accepted
accounting principles (GAAP), which differ from amounts reported under statutory
accounting principles (SAP) prescribed by insurance regulatory authorities.
Specifically, under GAAP:
1. Commissions, premium taxes and other costs incurred in connection with
writing new and renewal business are capitalized and amortized on a pro
rata basis over the period in which the related premiums are earned, rather
than expensed as incurred, as required by SAP.
2. Certain assets are included in the consolidated balance sheets, which for
SAP are charged directly against statutory surplus. These assets consist
primarily of premium receivables that are outstanding over 90 days,
furniture and equipment and prepaid expenses.
3. Amounts related to ceded reinsurance are shown gross as prepaid reinsurance
premiums and reinsurance recoverables, rather than netted against unearned
premium reserves and loss and loss adjustment expense reserves,
respectively, as required by SAP.
4. Fixed maturities securities, which are classified as available-for-sale, are
reported at market values, rather than at amortized cost, or the lower of
amortized cost or market depending on the specific type of security, as
required by SAP. Equity securities are reported at quoted market values
which may differ from the NAIC market values as required by SAP.
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5. Costs for computer software developed or obtained for internal use are
capitalized and amortized over their useful life, rather then expensed as
incurred, as required by SAP.
The differing treatment of income and expense items results in a corresponding
difference in federal income tax expense.
Investments
The Company employs a conservative approach to investment and capital management
intended to ensure that there is sufficient capital to support all the insurance
premium that can be profitably written. The Company's portfolio is invested
primarily in short-term and intermediate-term, investment-grade fixed-income
securities. The Company's investment portfolio, at market value, was $5,674.3
million at December 31, 1998, compared to $5,270.4 million at December 31, 1997.
Investment income is affected by shifts in the types of investments in the
portfolio, changes in interest rates and other factors. Investment income,
including net realized gains on security sales, before expenses and taxes, was
$306.2 million in 1998, compared to $373.4 million in 1997 and $232.9 million in
1996. See Management's Discussion and Analysis of Financial Condition and
Results of Operations, beginning on page 14 herein for additional discussion.
Employees
The number of employees, excluding temporary employees, at December 31, 1998,
was 15,735.
Liability for Property-Casualty Losses and Loss Adjustment Expenses
The consolidated financial statements include the estimated liability for unpaid
losses and loss adjustment expenses (LAE) of the Company's insurance
subsidiaries. Total loss reserves are established at a level that is intended to
represent the midpoint of the reasonable range of loss reserve estimates. The
liabilities for losses and LAE are determined using actuarial and statistical
procedures and represent undiscounted estimates of the ultimate net cost of all
unpaid losses and LAE incurred through December 31 of each year. These estimates
are subject to the effect of future trends on claim settlement. These estimates
are continually reviewed and adjusted as experience develops and new information
becomes known. Such adjustments, if any, are reflected in the current results of
operations.
The accompanying tables present an analysis of property-casualty losses and LAE.
The following table provides a reconciliation of beginning and ending estimated
liability balances for 1998, 1997 and 1996 on a GAAP basis.
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RECONCILIATION OF NET RESERVES FOR LOSSES AND LOSS ADJUSTMENT EXPENSES
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(millions) 1998 1997 1996
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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
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Net balance at January 1 1,867.5 1,532.9 1,314.4
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Net reserves of subsidiary purchased -- 82.2 --
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Incurred related to:
Current year 3,560.5 3,070.8 2,341.9
Prior years (184.2) (103.3) (105.8)
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Total incurred 3,376.3 2,967.5 2,236.1
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Paid related to:
Current year 2,376.0 1,971.5 1,424.7
Prior years 922.0 743.6 592.9
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Total paid 3,298.0 2,715.1 2,017.6
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Net balance at December 31 1,945.8 1,867.5 1,532.9
Plus reinsurance recoverable on unpaid losses 242.8 279.1 267.7
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Balance at December 31 $2,188.6 $2,146.6 $1,800.6
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The reconciliation above shows a $184.2 million redundancy, which emerged during
1998, in the 1998 liability and a $103.3 million redundancy in the 1997
liability, based on information known as of December 31, 1998 and December 31,
1997, respectively.
The anticipated effect of inflation is explicitly considered when estimating
liabilities for losses and LAE. While anticipated increases due to inflation are
considered in estimating the ultimate claim costs, the increase in average
severities of claims is caused by a number of factors that vary with the
individual type of policy written. Future average severities are projected based
on historical trends adjusted for anticipated changes in underwriting standards,
inflation, policy provisions and general economic trends. These anticipated
trends are monitored based on actual development and are modified if necessary.
The Company has not entered into any loss reserve transfers or similar
transactions having a material effect on earnings or reserves.
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ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSES DEVELOPMENT
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(millions)
YEAR ENDED 1988 1989 1990 1991 1992 1993 1994(3) 1995 1996 1997 1998
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LIABILITY FOR UNPAID
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LOSSES AND LAE(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
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PAID (CUMULATIVE) AS OF:
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One year later 283.1 293.1 322.4 353.4 366.8 417.0 525.3 593.0 743.6 922.0
Two years later 393.7 446.8 490.8 518.8 520.0 589.8 706.4 838.9 1,034.5
Three years later 465.0 539.8 570.4 583.2 598.2 664.1 810.6 960.1 --
Four years later 514.0 588.2 600.0 617.6 632.8 709.9 857.1 -- --
Five years later 540.7 603.1 613.6 635.8 658.6 729.8 -- -- --
Six years later 545.1 608.1 624.7 651.2 669.7 -- -- -- --
Seven years later 545.5 614.7 631.1 656.2 -- -- -- -- --
Eight years later 549.0 619.2 634.7 -- -- -- -- -- --
Nine years later 551.7 620.9 -- -- -- -- -- -- --
Ten years later 552.9 -- -- -- -- -- -- -- --
</TABLE>
<TABLE>
<CAPTION>
LIABILITY RE-ESTIMATED
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AS OF:
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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 -- -- -- -- -- -- -- --
</TABLE>
<TABLE>
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CUMULATIVE REDUNDANCY $ 78.6 $106.7 $130.2 $173.3 $245.3 $229.5 $158.1 $195.8 $ 168.4 $ 184.2
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PERCENTAGE(2) 12.1 14.3 16.4 20.1 25.6 22.7 14.4 14.9 11.0 9.9
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</TABLE>
1 Represents loss and LAE reserves net of reinsurance recoverables on unpaid
losses at the balance sheet date.
2 Cumulative redundancy / liability for unpaid losses and LAE.
3 In 1994, based on a review of its total loss reserves, the Company
eliminated its $71.0 million "supplemental reserve."
The above table presents the development of balance sheet liabilities for
1988 through 1997. The top line of the table shows the estimated liability for
unpaid losses and LAE recorded at the balance sheet date for each of the
indicated years for the property-casualty insurance subsidiaries only. This
liability represents the estimated amount of losses and LAE for claims arising
in all prior years that are unpaid at the balance sheet date, including losses
that had been incurred but not reported.
9
<PAGE> 10
The upper section of the table shows the cumulative amount paid with respect to
the previously recorded liability as of the end of each succeeding year. The
lower portion of the table shows the re-estimated amount of the previously
recorded liability based on experience as of the end of each succeeding year.
The estimate is increased or decreased as more information about the claims
becomes known for individual years. For example, as of December 31, 1998 the
companies had paid $620.9 million of the currently estimated $641.9 million of
losses and LAE that had been incurred through the end of 1989; thus an estimated
$21.0 million of losses incurred through 1989 remain unpaid as of the current
financial statement date.
The "Cumulative Redundancy" represents the aggregate change in the estimates
over all prior years. For example, the 1988 liability has developed redundant by
$78.6 million over ten years. That amount has been reflected in income over the
ten years and did not have a significant effect on the income of any one year.
The effects on income during the past three years due to changes in estimates of
the liabilities for losses and LAE is shown in the reconciliation table on
page 8 as the "prior years" contribution to incurred losses and LAE.
In evaluating this information, note that each cumulative redundancy amount
includes the effects of all changes in amounts during the current year for prior
periods. For example, the amount of the redundancy related to losses settled in
1991, but incurred in 1988, will be included in the cumulative deficiency or
redundancy amount for years 1988, 1989 and 1990. Conditions and trends that have
affected development of the liability in the past may not necessarily occur in
the future. Accordingly, it generally is not appropriate to extrapolate future
redundancies or deficiencies based on this table.
The Analysis of Loss and Loss Adjustment Expenses Development table on page 9 is
constructed from Schedule P, Part-1, from the 1991 through 1998 Consolidated
Annual Statements, as filed with the state insurance departments, and
Schedules O and P filed for years prior to 1991. This development table differs
from the development displayed in Schedule P, Part-2 due to the fact Schedule P,
Part-2 excludes unallocated loss adjustment expenses and reflects the change in
the method of accounting for salvage and subrogation for 1994 and prior.
(d) Financial Information about Foreign and Domestic Operations
The Company operates throughout the United States and Canada. The amount of
Canadian revenues and assets are less than 2% of the Company's consolidated
revenues and assets. The amount of operating income (loss) generated by its
Canadian operations is immaterial with respect to the Company's consolidated
operating income.
10
<PAGE> 11
ITEM 2. PROPERTIES
The Company's 517,800 square foot corporate office complex is located on a
42-acre parcel in Mayfield Village, Ohio, owned by a subsidiary. The Company's
central data processing facility occupies a building containing approximately
107,000 square feet of office space, on this same parcel.
The Company also owns six other buildings in suburbs adjoining the corporate
office complex, five buildings in Tampa, Florida, a building in Tempe, Arizona
and a building in Tigard, Oregon. In total, these buildings contained
approximately 1,088,500 square feet of office, warehouse and training facility
space and are owned by subsidiaries of the Company. These locations are occupied
by the Company's business units or other operations and are not segregated by
industry segment. In addition, the Company owns two buildings, one in Tampa,
Florida and one in Plymouth Meeting, Pennsylvania, which are partially leased to
non-affiliates.
In November 1997, the Company purchased 91 acres in Mayfield Village, Ohio to
construct an office complex near the site of its current corporate headquarters.
This office complex is part of a five-year cooperative effort with Mayfield
Village to develop over 300 acres. Progressive would serve as the anchor
corporate user with additional business users and recreational facilities on the
site. The Company 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 additional 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 Company is also constructing a 90,000 square foot
office in Albany, New York, which is expected to be completed during 1999. The
construction projects are being funded through operating cash flows.
The Company leases approximately 490,000 square feet of office and warehouse
space at various locations throughout the United States for its other business
units and staff functions. In addition, the Company leases approximately 365
claim offices, consisting of 1,540,000 square feet, at various locations
throughout the United States. Two offices are leased in Canada. These leases are
generally short-term to medium-term leases of standard commercial office space.
As the Company continues to grow, it expects that it will need additional space
and is actively engaged in seeking out additional locations to meet its current
and anticipated needs.
ITEM 3. LEGAL PROCEEDINGS
Incorporated by reference from Note 2, Litigation, on page 39 of the Company's
Annual Report.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated by reference from information with respect to executive officers of
The Progressive Corporation and its subsidiaries set forth in Item 10 in
Part III of this Annual Report on Form 10-K.
11
<PAGE> 12
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
(a) Market Information
The Company's Common Shares are traded on the New York Stock Exchange under the
symbol PGR. The high and low prices set forth below are as reported on the
consolidated transaction reporting system.
<TABLE>
<CAPTION>
Dividends
Year Quarter High Low Close Per Share
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1998 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 $.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 $.240
================================================================================================
</TABLE>
The closing price of the Company's Common Shares on February 26, 1999 was
$128 1/2.
(b) Holders
There were 3,954 shareholders of record on February 26, 1999.
(c) Dividends
Statutory policyholders' surplus was $2,029.9 million and $1,722.9 million at
December 31, 1998 and 1997, respectively. Generally, under state insurance laws,
the net admitted assets of insurance subsidiaries available for transfer to a
corporate parent are limited to those net admitted assets, as determined in
accordance with SAP, which exceed minimum statutory capital requirements. At
December 31, 1998, $245.7 million of consolidated statutory policyholders'
surplus represents net admitted assets of the insurance subsidiaries that are
required to meet minimum statutory surplus requirements in the subsidiaries'
states of domicile. Furthermore, state insurance laws limit the amount that can
be paid as a dividend or other distribution in any given year without prior
regulatory approval and adequate policyholders' surplus must be maintained to
support premiums written. Based on the dividend laws currently in effect, the
insurance subsidiaries may pay aggregate dividends to the corporate parent of
$274.2 million in 1999 out of statutory policyholders' surplus, without prior
approval by regulatory authorities.
12
<PAGE> 13
ITEM 6. SELECTED FINANCIAL DATA
(millions - except per share amounts)
<TABLE>
<CAPTION>
For the years ended December 31,
1998 1997 1996 1995 1994
-----------------------------------------------------
<S> <C> <C> <C> <C> <C>
Total revenues $5,292.4 $4,608.2 $3,478.4 $3,011.9 $2,415.3
Operating income 449.3 336.0 309.1 220.1 212.7
Net income(1) 456.7 400.0 313.7 250.5 274.3
Per share:
Operating income(2) 6.01 4.46 4.12 2.85 2.76
Net income(1),(2) 6.11 5.31 4.14 3.26 3.59
Dividends .250 .240 .230 .220 .210
Total assets 8,463.1 7,559.6 6,183.9 5,352.5 4,675.1
Debt outstanding 776.6 775.9 775.7 675.9 675.6
</TABLE>
1 During 1994, based on a review of the adequacy of its total loss reserves,
the Company eliminated its $71.0 million "supplemental reserve"
($46.2 million after tax), resulting in a one-time increase in earnings of
$.62 per share.
2 Presented on a diluted basis. In 1997, the Company adopted Statement of
Financial Accounting Standards (SFAS) 128 "Earnings Per Share," and, as a
result, restated prior periods per share amounts, if applicable.
13
<PAGE> 14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION The Progressive Corporation is a holding company and does
not have any revenue producing operations of its own. It receives cash through
borrowings, equity sales, subsidiary dividends and other transactions, and may
use the proceeds to contribute to the capital of its insurance subsidiaries in
order to support premium growth, to repurchase its Common Shares and other
outstanding securities, to 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 Item 5(C) on page 12
herein.
The Company has substantial capital resources and is unaware of any trends,
events or circumstances that are reasonably likely to affect its capital
resources in a material way. 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.
14
<PAGE> 15
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.
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.
The quality distribution of the fixed-income portfolio is as follows:
<TABLE>
<CAPTION>
Percentage at Percentage at
Rating December 31, 1998 December 31,1997
---------------- ----------------- ----------------
<S> <C> <C>
AAA 57.7% 67.5%
AA 14.3 13.0
A 20.4 12.9
BBB 4.1 3.4
Non Rated/Other 3.5 3.2
----------------- ----------------
100.0% 100.0%
================= ================
</TABLE>
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)
15
<PAGE> 16
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 of the Company's 1998 Annual Report. 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 the Company's non-investment-grade fixed-maturity securities and
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
16
<PAGE> 17
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 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
17
<PAGE> 18
$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 in-force 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 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.
18
<PAGE> 19
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
19
<PAGE> 20
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 contingency plans were substantially
completed for all material relationships during the first quarter 1999 and the
Company will continue to review them throughout 1999.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995: EXCEPT FOR HISTORICAL INFORMATION, THE MATTERS DISCUSSED IN THIS ANNUAL
REPORT ON FORM 10-K ARE FORWARD-LOOKING STATEMENTS THAT ARE SUBJECT TO CERTAIN
RISKS AND UNCERTAINTIES THAT COULD CAUSE THE ACTUAL RESULTS TO DIFFER MATERIALLY
FROM THOSE PROJECTED. 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.
20
<PAGE> 21
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The quantitative and qualitative disclosures about market risk are incorporated
by reference from the "Investments" section of Management's Discussion and
Analysis of Financial Condition and Results of Operations set forth in Item 7 of
the Company's Annual Report on Form 10-K for the year ended December 31, 1998,
and pages 56 and 57 of the Company's 1998 Annual Report to Shareholders, which
is included as Exhibit 13 to such Annual Report on Form 10-K.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements of the Company, along with the related
notes, supplementary data and report of independent accountants, are
incorporated by reference from the Company's 1998 Annual Report, pages 34
through 47 and pages 52 through 59.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
21
<PAGE> 22
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
A description of all of the directors and the individuals who have been
nominated for election as directors at the 1999 Annual Meeting of Shareholders
of the Registrant, is incorporated herein by reference from the section entitled
"Election of Directors" in the Proxy Statement, pages 2 through 6.
A description of the executive officers of the Registrant and its subsidiaries
follows. Unless otherwise indicated, the executive officer has held the
position(s) indicated for at least the last five years.
<TABLE>
<CAPTION>
Offices Held and
Name Age Last Five Years' Business Experience
---- --- ------------------------------------
<S> <C> <C>
Peter B. Lewis 65 President and Chairman of the Board; Chief Executive Officer - Insurance
Operations since January 1999; Chief Executive Officer prior to January 1999;
President, Chairman of the Board and Chief Executive Officer of Progressive
Casualty Insurance Company, the principal subsidiary of the Registrant
Alan R. Bauer 46 Internet Distribution Leader since January 1999; International/Internet Officer
from December 1996 to December 1998; Independent Agent Marketing Process Leader
from March 1996 to December 1996; West Division President prior to March 1996
Charles B. Chokel 45 Chief Executive Officer - Investments and Capital Management since January 1999;
Treasurer from December 1994 to December 1998; Chief Financial Officer
prior to January 1999
W. Thomas Forrester 50 Chief Financial Officer and Treasurer since January 1999; Ownership Process Leader
from March 1996 to December 1998; Central States Division President from January 1995
to March 1996; Diversified Division President in 1994
Moira A. Lardakis 47 Chief Communications Officer since January 1999; Community Manager Support Process Leader
from January 1998 to December 1998; General Manager of Ohio Business Unit from March 1996
to December 1997; Ohio Division President prior to March 1996
Daniel R. Lewis 52 Independent Agent Distribution Leader since January 1999; Independent Agent Marketing
Process Leader from December 1996 to December 1998; General Manager of South Florida
Community from November 1994 to December 1996; Treasurer and Central Division President
prior to December 1994
Robert J. McMillan 47 Direct Distribution Leader since January 1999; Consumer Marketing Process Leader from
January 1998 to December 1998; Product Process Leader from March 1996 to December 1997;
Florida Division President prior to March 1996
Brian J. Passell 42 Chief Claim Officer since January 1999; General Manager of Pennsylvania from March 1996 to
December 1998; Division Claim Manager prior to March 1996
Glenn M. Renwick 43 Chief Information Officer since January 1998; Consumer Marketing Process Leader from
March 1996 to December 1997; Director of Consumer Marketing prior to March 1996
David L. Roush 45 Strategic Alliance Distribution Leader
</TABLE>
22
<PAGE> 23
<TABLE>
<CAPTION>
<S> <C> <C>
David M. Schneider 61 Chief Legal Officer and Secretary
Tiona M. Thompson 48 Chief Human Resources Officer
Robert T. Williams 42 Chief Pricing/Product Officer since January 1999; Product Process Leader from January 1998 to
December 1998; General Manager of New York Business Unit from March 1996 to December 1997;
New York Division President from December 1994 to March 1996; Manager of Special Lines prior to
March 1997
</TABLE>
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.
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference from the section of the Proxy Statement entitled
"Executive Compensation," pages 10 through 21.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Incorporated by reference from the section of the Proxy Statement entitled
"Security Ownership of Certain Beneficial Owners and Management," pages 7
through 9.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Incorporated by reference from the section of the Proxy statement entitled
"Election of Directors - Certain Relationships and Related Transactions,"
pages 5 and 6.
23
<PAGE> 24
PART IV
-------
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON
FORM 8-K.
(a)(1) Listing of Financial Statements
The following consolidated financial statements of the Registrant
and its subsidiaries, included in the Registrant's Annual Report,
are incorporated by reference in Item 8:
Report of Independent Accountants
Consolidated Statements of Income - For the Years Ended
December 31, 1998, 1997 and 1996
Consolidated Balance Sheets - December 31, 1998 and 1997
Consolidated Statements of Changes in Shareholders' Equity -
For the Years Ended December 31, 1998, 1997 and 1996
Consolidated Statements of Cash Flows - For the Years Ended
December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
Supplemental Information*
*Not covered by Report of Independent Accountants.
(a)(2) Listing of Financial Statement Schedules
The following financial statement schedules of the Registrant and
its subsidiaries, Report of Independent Accountants and Consent
of Independent Accountants are included in Item 14(d):
Schedules
---------
Report of Independent Accountants
Consent of Independent Accountants
Schedule I - Summary of Investments -
Other than Investments in Related Parties
Schedule II - Condensed Financial
Information of Registrant
Schedule III - Supplementary Insurance
Information
24
<PAGE> 25
Schedule IV - Reinsurance
Schedule VI - Supplemental Information Concerning
Property-Casualty Insurance Operations
No other schedules are required to be filed
herewith pursuant to Article 7 of Regulation S-X.
(a)(3) Listing of Exhibits
See exhibit index contained herein at pages 40 through 44.
Management contracts and compensatory plans and
arrangements are identified in the Exhibit Index as Exhibit
Nos. (10)(C) through (10)(S).
(b) Reports on Form 8-K
None.
(c) Exhibits
The exhibits in response to this portion of Item 14 are
submitted concurrently with this report.
(d) Financial Statement Schedules
The response to this portion of Item 14 is located at pages
31 through 39.
25
<PAGE> 26
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
THE PROGRESSIVE CORPORATION
March 26, 1999 BY: /s/ Peter B. Lewis
-----------------------------
Peter B. Lewis
Chairman, President and Chief
Executive Officer - Insurance Operations
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed below by the following persons on behalf of the registrant in
the capacities and on the dates indicated.
/s/ Peter B. Lewis Chairman, President, Chief Executive March 26, 1999
- ------------------------ Officer - Insurance Operations and a
Peter B. Lewis Director
/s/ Charles B. Chokel Chief Executive Officer - Investments March 26, 1999
- ------------------------ and Capital Management
Charles B. Chokel
/s/ W. Thomas Forrester Treasurer and Chief Financial Officer March 26, 1999
- ------------------------
W. Thomas Forrester
/s/ Jeffrey W. Basch Chief Accounting Officer March 26, 1999
- ------------------------
Jeffrey W. Basch
* Director March 26, 1999
- ------------------------
Milton N. Allen
* Director March 26, 1999
- ------------------------
B. Charles Ames
* Director March 26, 1999
- ------------------------
James E. Bennett III
* Director March 26, 1999
- ------------------------
Charles A. Davis
26
<PAGE> 27
* Director March 26, 1999
- ------------------------
Stephen R. Hardis
* Director March 26, 1999
- ------------------------
Janet M. Hill
* Director March 26, 1999
- ------------------------
Norman S. Matthews
* Director March 26, 1999
- ------------------------
Donald B. Shackelford
* Director March 26, 1999
- ------------------------
Paul B. Sigler
* DANE A. SHRALLOW, by signing his name hereto, does sign this document on
behalf of the persons indicated above pursuant to a power of attorney duly
executed by such persons.
By /s/ Dane A. Shrallow March 26, 1999
------------------------
Dane A. Shrallow
Attorney-in-fact
27
<PAGE> 28
ANNUAL REPORT ON FORM 10-K
ITEM 14(d)
FINANCIAL STATEMENT SCHEDULES
YEAR ENDED DECEMBER 31, 1998
THE PROGRESSIVE CORPORATION
MAYFIELD VILLAGE, OHIO
28
<PAGE> 29
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders,
The Progressive Corporation:
Our report on the consolidated financial statements of The Progressive
Corporation and subsidiaries has been incorporated by reference in this Form
10-K from page 47 of the 1998 Annual Report to Shareholders of The Progressive
Corporation. In connection with our audits of such financial statements, we have
also audited the related financial statement schedules listed in the index on
pages 24 and 25 of this Form 10-K.
In our opinion, the financial statement schedules referred to above, when
considered in relation to the basic financial statements taken as a whole,
present fairly, in all material respects, the information required to be
included therein.
PRICEWATERHOUSECOOPERS LLP
Cleveland, Ohio
January 25, 1999 (March 1, 1999 as to Note 14 of the 1998 Annual Report to
Shareholders of The Progressive Corporation)
29
<PAGE> 30
CONSENT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders,
The Progressive Corporation:
We consent to the incorporation by reference in the Registration Statement of
The Progressive Corporation on Form S-8 (File No. 333-51613) filed May 1, 1998,
the Registration Statement on Form S-8 (File No. 333-25197) filed April 15,
1997, the Registration Statement on Form S-8 (File No. 33-57121) filed
December 29, 1994, the Registration Statement on Form S-8 (File No. 33-64210)
filed June 10, 1993, the Registration Statement on Form S-8 (File No. 33-51034)
filed August 20, 1992, the Registration Statement on Form S-8
(File No. 33-46944) filed April 3, 1992, the Registration Statement on Form S-8
(File No. 33-38793) filed February 4, 1991, the Registration Statement on
Form S-8 (File No. 33-38107) filed December 6, 1990, the Registration Statement
on Form S-8 (File No. 33-37707) filed November 9, 1990, the Registration
Statement on Form S-8 (File No. 33-33240) filed January 31, 1990, and the
Registration Statement on Form S-8 (File No. 33-16509) filed August 14, 1987, of
our reports dated January 25, 1999, (March 1, 1999 as to Note 14 of the 1998
Annual Report to Shareholders of The Progressive Corporation) on our audits of
the consolidated financial statements and financial statement schedules of The
Progressive Corporation and subsidiaries as of December 31, 1998 and 1997, and
for each of the three years in the period ended December 31, 1998, which reports
are included in this Annual Report on Form 10-K.
PRICEWATERHOUSECOOPERS LLP
Cleveland, Ohio
March 26, 1999
30
<PAGE> 31
SCHEDULE I -- SUMMARY OF INVESTMENTS -- OTHER
THAN INVESTMENTS IN RELATED PARTIES
THE PROGRESSIVE CORPORATION AND SUBSIDIARIES
- --------------------------------------------
(millions)
<TABLE>
<CAPTION>
December 31, 1998
-----------------------------------------------
Amount At Which
Shown In The
Type of Investment Cost Market Value Balance Sheet
-----------------------------------------------
<S> <C> <C> <C>
Fixed Maturities:
Available-for-sale:
United States Government and
government agencies and
authorities $ 665.4 $ 668.9 $ 668.9
States, municipalities and political
subdivisions 1,649.0 1,693.6 1,693.6
Asset-backed securities 1,491.4 1,486.9 1,486.9
Foreign government obligations 52.9 53.3 53.3
Corporate and other debt securities 280.1 282.7 282.7
Redeemable preferred stock 32.8 33.6 33.6
-----------------------------------------------
Total fixed maturities 4,171.6 4,219.0 4,219.0
-----------------------------------------------
Equity securities:
Common stocks 512.2 636.9 636.9
Preferred stocks 374.3 376.5 376.5
-----------------------------------------------
Total equity securities 886.5 1,013.4 1,013.4
-----------------------------------------------
Short-term investments 441.9 441.9 441.9
-----------------------------------------------
Total investments $5,500.0 $5,674.3 $5,674.3
===============================================
</TABLE>
The Company did not have any securities of one issuer with an aggregate cost or
market value exceeding 10% of total shareholders' equity at December 31, 1998.
31
<PAGE> 32
SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
CONDENSED STATEMENTS OF INCOME
THE PROGRESSIVE CORPORATION (PARENT COMPANY)
- --------------------------------------------
(millions)
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
--------------------------------------------
<S> <C> <C> <C>
Revenues
Dividends from subsidiaries* $151.0 $108.1 $125.0
Intercompany investment income* 25.9 35.3 36.5
--------------------------------------------
176.9 143.4 161.5
--------------------------------------------
Expenses
Interest expense 64.5 64.5 61.4
Other operating costs and expenses 5.2 6.2 4.1
--------------------------------------------
69.7 70.7 65.5
--------------------------------------------
Operating income and income before income
taxes and other items below 107.2 72.7 96.0
Income tax benefit (16.2) (12.7) (10.2)
--------------------------------------------
Income before equity in undistributed earnings
of subsidiaries 123.4 85.4 106.2
Equity in undistributed net income of
consolidated subsidiaries* 333.3 314.6 207.5
--------------------------------------------
Net income $456.7 $400.0 313.7
============================================
</TABLE>
*Eliminated in consolidation.
See notes to condensed financial statements.
32
<PAGE> 33
SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
CONDENSED BALANCE SHEETS
THE PROGRESSIVE CORPORATION (PARENT COMPANY)
- --------------------------------------------
(millions)
<TABLE>
<CAPTION>
December 31,
1998 1997
-------- --------
ASSETS
<S> <C> <C>
Investment in non-consolidated affiliates $ .4 $ .4
Investment in subsidiaries* 2,882.9 2,437.8
Receivable from subsidiary* 441.1 489.4
Intercompany receivable* 9.9 --
Income taxes 19.7 28.9
Other assets 12.6 6.7
-------- --------
TOTAL ASSETS $3,366.6 $2,963.2
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued expenses $ 32.9 $ 23.5
Intercompany payable* -- 27.9
Debt 776.6 775.9
-------- --------
Total liabilities 809.5 827.3
-------- --------
Shareholders' equity:
Common Shares, $1.00 par value, authorized 300.0
shares, 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 of investment
in equity securities of consolidated subsidiaries 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 $3,366.6 $2,963.2
======== ========
</TABLE>
*Eliminated in consolidation.
See notes to condensed financial statements.
33
<PAGE> 34
SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
CONDENSED STATEMENTS OF CASH FLOWS
THE PROGRESSIVE CORPORATION (PARENT COMPANY)
- --------------------------------------------
(millions)
<TABLE>
<CAPTION>
Years Ended December 31,
1998 1997 1996
------- ------- -------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net income $ 456.7 $ 400.0 $ 313.7
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Equity in income of consolidated subsidiaries (484.3) (422.7) (332.5)
Changes in:
Intercompany receivable or payable (37.8) 34.5 19.0
Accounts payable and accrued expenses 9.3 1.4 1.8
Income taxes 9.2 (15.9) 13.1
Other, net (4.7) (3.5) (.9)
------- -------- --------
Net cash provided by (used in) operating (51.6) (6.2) 14.2
activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Additional investments in equity securities of
consolidated subsidiaries (124.1) (219.3) (42.2)
Return of capital from consolidated subsidiary -- -- .5
Purchase of consolidated subsidiaries -- (100.5) (26.6)
Dividends received from consolidated subsidiaries 151.0 108.1 125.0
------- -------- --------
Net cash provided by (used in) investing 26.9 (211.7) 56.7
activities
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
Receivable from subsidiary 48.3 206.4 (35.0)
Dividends paid to shareholders (18.1) (17.3) (19.6)
Acquisition of treasury shares (42.6) (2.9) (47.9)
------- ------- -------
Net cash provided by (used in) financing
activities 24.7 217.9 (70.9)
------- ------- -------
Change in cash -- -- --
Cash, beginning of year -- -- --
------- ------- -------
Cash, end of year $ -- $ -- $ --
======= ======= =======
</TABLE>
See notes to condensed financial statements.
34
<PAGE> 35
SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
NOTES TO CONDENSED FINANCIAL STATEMENTS
- ---------------------------------------
The accompanying condensed financial statements of The Progressive Corporation
(the "Registrant") should be read in conjunction with the consolidated financial
statements and notes thereto of The Progressive Corporation and subsidiaries
included in the Registrant's 1998 Annual Report.
STATEMENTS OF CASH FLOWS -- For the purpose of the Statements of Cash Flows,
cash includes only bank demand deposits. The Registrant paid income taxes of
$235.9 million in 1998, and $166.9 million, and $120.4 million in 1997 and 1996,
respectively. Total interest paid was $63.8 million for 1998 and 1997 and $60.2
million for 1996.
DEBT -- Debt at December 31 consisted of:
<TABLE>
1998 1997
------------ --------------
(millions) Market Market
Cost Value Cost Value
-------------------------------
<S> <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, 149.7 162.4 149.6 164.6
December 1988)
-------------------------------
$776.6 $821.6 $775.9 $820.5
===============================
</TABLE>
Debt includes amounts the Registrant has borrowed and contributed to the capital
of its insurance subsidiaries or borrowed for other long-term purposes.
All debt is noncallable with interest payable semiannually.
In May 1990, the Registrant entered into a revolving credit arrangement with
National City Bank, which is reviewed by the bank annually. Under this
agreement, the Registrant has the right to borrow up to $10.0 million. By
selecting from available credit options, the Registrant may elect to pay
interest at rates related to the London interbank offered rate, the bank's base
rate or at a money market rate. A commitment fee is payable on any unused
portion of the committed amount at the rate of .125% per annum. At December 31,
1998 and 1997, the Registrant had no borrowings under this arrangement.
Aggregate principal payments on debt outstanding at December 31, 1998 are $30.0
for 1999, $300.0 million for 2000, $0 million for 2001, 2002 and 2003, and
$450.0 million thereafter.
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.
35
<PAGE> 36
SCHEDULE II -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)
NOTES TO CONDENSED FINANCIAL STATEMENTS
- ---------------------------------------
INCOME TAXES -- The Registrant files a consolidated Federal income tax return
with all eligible subsidiaries. The Federal income taxes in the accompanying
Condensed Balance Sheets represent amounts recoverable from the Internal Revenue
Service by the Registrant as agent for the consolidated tax group. The
Registrant and its subsidiaries have adopted, pursuant to a written agreement, a
method of allocating consolidated Federal income taxes. Amounts allocated to the
subsidiaries under the written agreement are included in Intercompany Receivable
from Subsidiaries in the accompanying Condensed Balance Sheets.
INVESTMENTS IN CONSOLIDATED SUBSIDIARIES -- The Registrant, through its
investment in consolidated subsidiaries, recognizes the changes in unrealized
gains (losses) on equity securities of the subsidiaries. These amounts were:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
(millions) 1998 1997 1996
----------------------------------------------------------
Unrealized gains (losses):
Available-for-sale: fixed maturities $(7.2) $ 29.5 $ (18.3)
equity securities (6.9) 44.8 53.7
Deferred income taxes 5.1 (26.0) (12.5)
----------------------------------------------------------
$(9.0) $ 48.3 $ 22.9
==========================================================
</TABLE>
OTHER MATTERS -- The information relating to incentive compensation plans is
incorporated by reference from Note 9, Employee Benefit Plans, "Incentive
Compensation Plans" on pages 44 and 45 of the Registrant's 1998 Annual Report.
36
<PAGE> 37
SCHEDULE III -- SUPPLEMENTARY INSURANCE INFORMATION
THE PROGRESSIVE CORPORATION AND SUBSIDIARIES
- --------------------------------------------
(millions)
<TABLE>
<CAPTION>
Future
policy Other
benefits, policy Benefits, Amortization
Deferred losses, claims claims, of deferred
policy claims and and losses and policy Other Net
acquisition loss Unearned benefits Premium Investment settlement acquisition operating premiums
Segment costs(1) expenses(1) premiums(1) payable(1) revenue income(1)(2) expenses costs(3) expenses written
-----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Year ended
December 31,
1998:
Personal
Lines $4,580.7 $3,164.4 $610.9 $444.1 $4,922.3
Other 367.3 211.9 49.0 51.7 377.4
-----------------------------------------------------------------------------------------------------------------------
Total $299.1 $2,188.6 $2,329.7 $ -- $4,948.0 $294.8 $3,376.3 $659.9 $495.8 $5,299.7
=======================================================================================================================
Year ended
December 31,
1997:
Personal
Lines $3,832.7 $2,743.3 $556.0 $290.4 $4,288.8
Other 356.8 224.2 51.8 45.6 376.3
-----------------------------------------------------------------------------------------------------------------------
Total $259.6 $2,146.6 $1,980.1 $ -- $4,189.5 $274.9 $2,967.5 $607.8 $336.0 $4,665.1
=======================================================================================================================
Year ended
December 31,
1996:
Personal
Lines $2,916.0 $2,069.2 $439.9 $176.1 $3,149.3
Other 283.3 166.9 42.7 32.4 292.4
-----------------------------------------------------------------------------------------------------------------------
Total $200.1 $1,800.6 $1,467.3 $ -- $3,199.3 $225.8 $2,236.1 $482.6 $208.5 $3,441.7
=======================================================================================================================
</TABLE>
(1) The Company does not allocate assets or investment income to operating
segments.
(2) Excluding investment expenses of $7.4 million in 1998, $9.9 million in 1997
and $6.1 million in 1996.
(3) Since the Company does not allocate deferred policy acquisition costs to
operating segments, amounts were allocated based on premium revenue.
37
<PAGE> 38
SCHEDULE IV -- REINSURANCE
THE PROGRESSIVE CORPORATION AND SUBSIDIARIES
- --------------------------------------------
(millions)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Year Ended Assumed Percentage
- ---------- Ceded to From of Amount
Gross Other Other Assumed
December 31, 1998 Amount Companies Companies Net Amount to Net
- ----------------- --------------------------------------------------------------------------------------------
Life Insurance in force $ -- $ -- $ -- $ -- --
============================================================================================
Premiums earned:
Property and liability $5,100.5 $152.5 $ -- $4,948.0 --
============================================================================================
December 31, 1997
- -----------------
Life Insurance in force $ -- $ -- $ -- $ -- --
============================================================================================
Premiums earned:
Property and liability $4,382.9 $193.4 $ -- $4,189.5 --
============================================================================================
December 31, 1996
- -----------------
Life Insurance in force $ .1 $ .1 $ -- $ -- --
=============================================================================================
Premiums earned:
Property and liability $3,380.7 $185.2 $3.8 $3,199.3 .1%
=============================================================================================
</TABLE>
38
<PAGE> 39
SCHEDULE VI-SUPPLEMENTAL INFORMATION CONCERNING PROPERTY - CASUALTY INSURANCE
OPERATIONS
THE PROGRESSIVE CORPORATION AND SUBSIDIARIES
- --------------------------------------------
(millions)
Paid Losses and
Losses and Loss Adjustment Expenses Loss Adjustment
Incurred Related to Expenses
----------------------------------- ---------------
<TABLE>
<S> <C> <C>
Current Prior
Year Ended Year Years
- ---------- --------------- ----------------
December 31, 1998 $3,560.5 $(184.2) $3,298.0
=============== ================ ===============
December 31, 1997 $3,070.8 $(103.3) $2,715.1
=============== ================ ===============
December 31, 1996 $2,341.9 $(105.8) $2,017.6
=============== ================ ===============
</TABLE>
Pursuant to Rule 12-18 of Regulation S-X. See Schedule III, page 35, for the
additional information required in Schedule VI.
39
<PAGE> 40
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No.
Under Reg. Form 10-K If Incorporated by Reference, Documents
S-K, Item 601 Exhibit No. Description of Exhibit with Which Exhibit was Previously Filed with SEC
<S> <C> <C> <C>
(3)(i) 3(A) Amended Articles of Incorporation, as Registration Statement No. 333-51613 (Filed with
amended, of The Progressive Corporation SEC on May 1, 1998; see Exhibit 4(C) therein)
(3)(ii) 3(B) Code of Regulations of Progressive Quarterly Report on Form 10-Q (filed with SEC
on May 15, 1997; see Exhibit 3 therein)
(4) 4(A) Indenture dated as of November 15, 1988 Annual Report on Form 10-K (Filed with SEC
between Progressive and State Street Bank on March 29, 1994; see Exhibit 4(B) therein)
and Trust Company (successor in interest to
Rhode Island Hospital Trust National Bank),
as Trustee ("Subordinated Indenture")
(including Table of Contents and
cross-reference sheet)
(4) 4(B) Form of 10 1/8% Subordinated Notes due 2000 Annual Report on Form 10-K (Filed with SEC
issued in the aggregate principal amount of on March 29, 1994; see Exhibit 4(C) therein)
$150,000,000 under the Subordinated Indenture
(4) 4(C) Indenture dated as of November 15, 1988 Annual Report on Form 10-K (Filed with SEC
between Progressive and State Street Bank on March 29, 1994; see Exhibit 4(D) therein)
and Trust Company (successor in interest to
The First National Bank of Boston), as
Trustee ("1988 Senior Indenture") (including
Table of Contents and cross-reference sheet)
(4) 4(D) Form of 10% Notes due 2000 issued in the Annual Report on Form 10-K (Filed with SEC
aggregate principal amount of $150,000,000 on March 29, 1994; see Exhibit 4(E) therein)
under the 1988 Senior Indenture
(4) 4(E) Form of 8 3/4% Notes due 1999 issued in the Annual Report on Form 10-K (Filed with SEC
aggregate principal amount of $30,000,000 on March 28, 1995; see Exhibit 4(F) therein)
under the 1988 Senior Indenture
</TABLE>
40
<PAGE> 41
EXHIBIT INDEX
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Exhibit No.
Under Reg. Form 10-K If Incorporated by Reference, Documents with
S-K, Item 601 Exhibit No. Description of Exhibit Which Exhibit was Previously Filed with SEC
(4) 4(F) $10,000,000 Unsecured Line of Credit with National Annual Report on Form 10-K (Filed with SEC
City Bank (dated May 23, 1990; renewed May 20, 1992; on March 27, 1998; see Exhibit 4(F) therein)
amended February 1, 1994 and May 1, 1997)
(4) 4(G) Indenture dated as of September 15, 1993 between Registration Statement No. 333-48935 (Filed
Progressive and State Street Bank and Trust with SEC on March 31, 1998; see Exhibit 4.1
Company (successor in interest to The First therein)
National Bank of Boston), as Trustee ("1993
Senior Indenture") (including Table of Contents
and cross-reference sheet)
(4) 4(H) Form of 7% Notes due 2013 issued in the Contained in Exhibit Binder
aggregate principal amount of $150,000,000
under the 1993 Senior Indenture
(4) 4(I) Form of 6.60% Notes due 2004 issued in the aggregate Annual Report on Form 10-K (Filed with SEC
principal amount of $200,000,000 under the 1993 on March 29, 1994; see Exhibit 4(L) therein)
Senior Indenture
(4) 4(J) First Supplemental Indenture dated March 15, 1996 Registration Statement No. 333-0175 (Filed
between Progressive and State Street Bank and Trust with SEC on March 15, 1996; see Exhibit 4.2
Company, evidencing the designation of State Street therein)
Bank and Trust Company as successor Trustee under
the 1993 Senior Indenture
(4) 4(K) Form of 7.30% Notes due 2006, issued in the Quarterly Report on Form 10-Q (Filed with
aggregate principal amount of $100,000,000 under SEC on July 31, 1996; see Exhibit 4 therein)
the 1993 Senior Indenture, as amended and
supplemented
(4) 4(L) Second Supplemental Indenture dated February 26, Current Report on Form 8-K (Filed with SEC
1999 between Progressive and State Street Bank and on February 26, 1999; see Exhibit 4.4
Trust Company, as Trustee, supplementing and therein)
amending the 1993 Senior Indenture
</TABLE>
41
<PAGE> 42
EXHIBIT INDEX
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Exhibit No.
Under Reg. Form 10-K If Incorporated by Reference, Documents with
S-K, Item 601 Exhibit No. Description of Exhibit Which Exhibit was Previously Filed with SEC
(4) 4(M) Form of 6 5/8% Senior Notes due 2029, issued in the Current Report on Form 8-K (Filed with SEC
aggregate principal amount of $300,000,000 under the on February 26, 1999; see Exhibit 4.5 therein)
1993 Senior Indenture, as amended and supplemented
(10)(i) 10(A) Construction Agreements dated November 3, 1997 Annual Report on Form 10-K (Filed with SEC on
between Progressive Casualty Insurance Company March 27, 1998; see Exhibit 10(A) therein)
and HCB Contractors
(10)(i) 10(B) Construction Agreement dated April 6, 1998 Quarterly Report on Form 10-Q (Filed with SEC
between Progressive Casualty Insurance Company on August 14, 1998; see Exhibit 10 therein)
and the Whiting-Turner Construction Company for the
Corporate Office Complex in Mayfield Village, Ohio
(10)(iii) 10(C) The Progressive Corporation 1997 Gainsharing Plan Annual Report on Form 10-K (Filed with SEC
on March 31, 1997; see Exhibit 10(B) therein)
(10)(iii) 10(D) The Progressive Corporation 1999 Gainsharing Plan Contained in Exhibit Binder
(10)(iii) 10(E) The Progressive Corporation 1997 Executive Bonus Plan Annual Report on Form 10-K (Filed with SEC
on March 31, 1997; see Exhibit 10(D) therein)
(10)(iii) 10(F) The Progressive Corporation 1999 Executive Bonus Plan Contained in Exhibit Binder
(10)(iii) 10(G) The Progressive Corporation Directors Deferral Plan Quarterly Report on Form 10-Q (Filed with SEC
(Amendment and Restatement), as further amended on November 13, 1996; see Exhibit 10 therein)
on October 25, 1996
(10)(iii) 10(H) The Progressive Corporation 1989 Incentive Plan Contained in Exhibit Binder
(amended and restated as of April 24, 1992, as
further amended on July 1, 1992 and February 5, 1993)
</TABLE>
42
<PAGE> 43
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Form 10-K
Under Reg. Exhibit If Incorporated by Reference, Documents with
S-K, Item 601 No. Description of Exhibit Which Exhibit was Previously Filed with SEC
<S> <C> <C> <C>
(10)(iii) 10(I) The Progressive Corporation 1998 Directors' Annual Report on Form 10-K/A-No. 1 (Filed with SEC
Stock Option Plan on March 30, 1998; see Exhibit 10(H) therein)
(10)(iii) 10(J) The Progressive Corporation 1990 Directors' Annual Report on Form 10-K (Filed with SEC on
Stock Option Plan (Amended and Restated March 27, 1998; see Exhibit 10(I) therein)
as of April 24, 1992 and as further amended on
July 1, 1992)
(10)(iii) 10(K) Agreement dated March 11, 1996 with Bruce W. Marlow Annual Report on Form 10-K (Filed with SEC
on March 15, 1996; see Exhibit 10(H) therein)
(10)(iii) 10(L) Amending Agreement dated April 1, 1996 between the Quarterly Report on Form 10-Q (Filed with SEC
Company and Bruce W. Marlow relating to certain on July 31, 1996; see Exhibit 10 therein)
outstanding stock options previously granted to
Mr. Marlow
(10)(iii) 10(M) The Progressive Corporation 1995 Incentive Plan Annual Report on Form 10-K (Filed with SEC on
March 28, 1995; see Exhibit 10(L) therein)
(10)(iii) 10(N) The Progressive Corporation Executive Deferred Annual Report on Form 10-K (Filed with SEC
Compensation Plan (Amended and Restated as of on March 27, 1998; see Exhibit 10(M) therein)
January 1, 1997), as further amended
December 1, 1997
(10)(iii) 10(O) Third Amendment to The Progressive Corporation Contained in Exhibit Binder
Executive Deferred Compensation Plan dated
December 1, 1998
(10)(iii) 10(P) The Progressive Corporation Executive Deferred Contained in Exhibit Binder
Compensation Trust (December 1, 1998 Amendment
and Restatement)
</TABLE>
43
<PAGE> 44
EXHIBIT INDEX
<TABLE>
<S> <C> <C> <C>
Exhibit No.
Under Reg. Form 10-K If Incorporated by Reference, Documents with
S-K, Item 601 Exhibit No. Description of Exhibit Which Exhibit was Previously Filed with SEC
(10)(iii) 10(Q) Form of Non-Qualified Stock Option Agreement Quarterly Report on Form 10-Q (Filed with SEC
under The Progressive Corporation 1989 Incentive on May 1, 1996; see Exhibit 10(B) therein)
Plan (single award)
(10)(iii) 10(R) Form of Non-Qualified Stock Option Agreement Quarterly Report on Form 10-Q (Filed with SEC on
under The Progressive Corporation 1989 Incentive May 1, 1996; see Exhibit 10(C) therein)
Plan (multiple awards)
(10)(iii) 10(S) The Progressive Corporation 1999 Information Contained in Exhibit Binder
Services Incentive Plan
(11) 11 Computation of Earnings Per Share Contained in Exhibit Binder
(12) 12 Computation of Ratio of Earnings to Contained in Exhibit Binder
Fixed Charges
(13) 13 The Progressive Corporation 1998 Annual Report Contained in Exhibit Binder
(21) 21 Subsidiaries of The Progressive Corporation Contained in Exhibit Binder
(23) 23 Consent of Independent Accountants Incorporated herein by reference to page 30 of this
Annual Report on Form 10-K
(24) 24 Powers of Attorney Contained in Exhibit Binder
(27) 27 Financial Data Schedule These exhibits are contained in the EDGAR filing
of the Annual Report on Form 10-K for the year ended
December 31, 1998 only
</TABLE>
No other exhibits are required to be filed herewith pursuant to Item 601 of
Regulation S-K.
44
<PAGE> 1
EXHIBIT NO. 4(H)
(Face of Security)
REGISTERED
REGISTERED
NO.
----------
$
-------------
CUSIP 743315 AF 0
THE PROGRESSIVE CORPORATION
7% NOTE DUE 2013
THE PROGRESSIVE CORPORATION, an Ohio corporation (the "Issuer"), for value
received, hereby promises to pay to
or registered assigns, at the office or agency of the Issuer at the office of
the Trustee in Canton, Massachusetts, the principal sum of
dollars on October 1, 2013, in such coin or currency of the United States of
America as at the time of payment shall be legal tender for the payment of
public and private debts, and to pay interest semiannually on April 1 and
October 1 of each year, commencing on April 1, 1994, on said principal sum at
said office or agency, in like coin or currency, at the rate per annum specified
in the title of this Note, from the April 1 or the October 1, as the case may
be, next preceding the date of this Note to which interest has been paid, unless
the date hereof is a date to which interest has been paid, in which case from
the date of this Note, or unless no interest has been paid on the Notes, in
which case from October 6, 1993, until payment of said principal sum has been
made or duly provided for; provided, that payment of interest may be made at the
option of the Issuer by check mailed to the address of the person entitled
thereto as such address shall appear on the Security Register. Nothwithstanding
the foregoing, if the date hereof is after the fifteenth day of March or
September, as the case may be, and before the following April 1 or October 1,
this Note shall bear interest from such April 1 or October 1; provided, that if
the Issuer default in the payment of interest due on such April 1 or October 1,
then this Note shall bear interest from the next preceding April 1 or October 1
to which interest has been paid or, if no interest has been paid on this Note,
from October 6, 1993. The interest so payable on any April 1 or October 1 will,
subject to certain exceptions provided in the Indenture referred to on the
reverse hereof, be paid to the person in whose name this Note is registered at
the close of business on the March 15 or September 15, as the case may be, next
preceding such April 1 or October 1.
<PAGE> 2
Reference is made to the further provisions of this Note set forth on the
reverse hereof. Such further provisions shall for all purposes have the same
effect as though fully set forth at this place.
This Note shall not be valid or become obligatory for any purpose until the
certificate of authentication hereon shall have been signed by the Trustee under
the Indenture referred to on the reverse hereof.
IN WITNESS WHEREOF, The Progressive Corporation has caused this instrument
to be signed by facsimile by its duly authorized officers and has caused a
facsimile of its corporate seal to be affixed hereto or imprinted hereon.
THE PROGRESSIVE CORPORATION
<TABLE>
<S> <C>
[CORPORATE SEAL] By:
-----------------------------------
President and Chief Executive
Officer
Attest:
------------------------
Secretary
</TABLE>
Date: ----------------
TRUSTEE'S CERTIFICATE OF AUTHENTICATION
This is one of the Securities, of the series designated herein, referred to
in the within-mentioned Indenture.
THE FIRST NATIONAL BANK OF BOSTON,
as TRUSTEE
By:
-----------------------------------
Authorized Signatory
<PAGE> 3
(Back of Security)
THE PROGRESSIVE CORPORATION
7% NOTE DUE 2013
This Note is one of a duly authorized issue of debenture, notes, bonds or
other evidences of indebtedness of the Issuer (hereinafter called the
"Securities") of the series hereinafter specified, all issued or to be issued
under and pursuant to an indenture dated as of September 15, 1993 (herein called
the "Indenture"), duly executed and delivered by the Issuer to The First
National Bank of Boston, as Trustee (herein called the "Trustee"), to which
Indenture and all indentures supplemental thereto reference is hereby made for a
description of the rights, limitations of rights, obligations, duties and
immunities thereunder of the Trustee, the Issuer and the holders of the
Securities. The Securities may be issued in one or more series, which different
series may be issued in various aggregate principal amounts, may mature at
different times, may bear interest (if any) at different rate, may be subject to
different redemption provisions (if any), may be subject to different sinking,
purchase or analogous funds (if any) and may otherwise vary as in the Indenture
provided. This Note is one of a series designated as the 7% Notes Due 2013 of
the Issuer, limited in aggregate principal amount to $150,000,000.
In case an Event of Default, as defined in the Indenture, with respect to
the 7% Notes Due 2013 shall have occurred and be continuing, the principal
hereof any be declared, and upon such declaration shall become, due and payable,
in the manner, with the effect and subject to the conditions provided in the
Indenture.
The Indenture contains provisions permitting the Issuer and the Trustee,
with the consent of the Holders of not less than 66-2/3% in aggregate principal
amount of the Securities at the time Outstanding (as defined in the Indenture)
of all series to be affected (voting as one class), evidenced as in the
Indenture provided, to execute supplemental indentures adding any provisions to
or changing in any manner or eliminating any of the provisions of the Indenture
or of any supplemental indenture or modifying in any manner the rights of the
Holders of the Securities of each such series: provided, however, that no such
supplemental indenture shall (i) extend the final maturity of any Security, or
reduce the principal amount thereof, or reduce the rate or extend the time of
payment of any interest thereon, or impair or affect the rights of any Holder to
institute suit for the payment thereof, without the consent of the Holder of
each Security so affected or (ii) reduce the aforesaid percentage of Securities,
the Holders of which are required to consent to any such supplemental indenture,
without the consent of the Holder of each Security so affected. It is also
provided in the Indenture
3
<PAGE> 4
that, with respect to certain defaults or Events of Default regarding the
Securities of any series, prior to any declaration accelerating the maturity of
such Securities, the Holders of a majority in aggregate principal amount
Outstanding of the Securities of such series may on behalf of the Holders of all
the Securities of such series waive any such past default or Event of Default
and its consequences. The preceding sentence shall not, however, apply to a
default in the payment of the principal of or premium, if any, or interest on
any of the Securities. Any such consent or wavier by the Holder of this Note
(unless revoked as provided in the Indenture) shall be conclusive and binding
upon such Holder and upon all future Holders and owners of this Note and any
Note which may be issued in exchange or substitution herefor, irrespective of
whether or not any notation thereof is made upon this Note or such other Note.
No reference herein to the Indenture and no provision of this Note or of
the Indenture shall alter or impair the obligation of the Issuer, which is
absolute and unconditional, to pay the principal of and interest on this Note in
the manner, at the respective times, at the rate and in the coin or currency
herein prescribed.
The Notes are issuable in registered form without coupons in denominations
of $1,000 and any integral multiple of $1,000 at the office or agency of the
Issuer at the office of the Trustee in Canton, Massachusetts, and in the manner
and subject to the limitations provided in the Indenture, but without the
payment of any service charge. Notes may be exchanged for a like aggregate
principal amount of Notes of other authorized denominations.
The Notes are not subject to redemption at the option of the Issuer or
through the operation of a sinking fund.
Upon due presentment for registration of transfer of this Note at the
office or agency of the Issuer at the office of the Trustee in Canton,
Massachusetts, a new Note or Notes of authorized denominations for an equal
aggregate principal amount will be issued to the transferee in exchange
therefor, subject to the limitations provided in the Indenture, without charge
except for any tax or other governmental charge imposed in connection therewith.
The Issuer, the Trustee and any authorized agent of the Issuer or the
Trustee may deem and treat the registered Holder hereof as the absolute owner of
this Note (whether or not this Note shall be overdue and notwithstanding any
notation or ownership or other writing hereon), for the purpose of receiving
payment of, or on account of, the principal hereof and, subject to the
provisions on the face hereof, interest hereon, and for all other purposes, and
neither the Issuer nor the Trustee nor any authorized agent of the Issuer or the
Trustee shall be affected by notice to the contrary.
4
<PAGE> 5
No recourse under or upon any obligation, covenant or agreement of the
Issuer in the Indenture or any indenture supplemental thereto or in any Note, or
because of the creation of any indebtedness represented thereby, shall be had
against any incorporator, shareholder, officer or director, as such, of the
Issuer or of any successor corporation, either directly or through the Issuer or
any successor corporation, under any rule of law, statute or constitutional
provision or by the enforcement of any assessment or by any legal or equitable
proceeding or otherwise, all such liability being expressly waived and released
by the acceptance hereof and as part of the consideration for the issue hereof.
Terms used herein which are defined in the Indenture shall have the
respective meanings assigned thereto in the Indenture.
5
<PAGE> 6
------------------------
ABBREVIATIONS
The following abbreviations, when used in the inscription on the face of
this instrument, shall be construed as though they were written out in full
according to applicable laws or regulations:
<TABLE>
<S> <C> <C>
TEN COM - as tenants in common
TEN ENT - as tenants by the entireties
CUST - Custodian
JT TEN - as joint tenants with right of
survivorship and not as tenants
UNIF GIFT MIN ACT - Uniform Gifts to Minors Act
in common
-----------------------------------
(State)
</TABLE>
Additional abbreviations may also be used though not in the above list.
---------------------------------------------
FOR VALUE RECEIVED the undersigned hereby sell(s), assign(s) and transfer(s)
unto
PLEASE INSERT SOCIAL SECURITY OR OTHER
IDENTIFYING NUMBER OF ASSIGNEE
- ------------------------------------------------------------------------------
- ------------------------------------------------------------------------------
Please print or typewrite name and address including postal zip code of
assignee
- ------------------------------------------------------------------------------
the within Note and all rights
thereunder, hereby irrevocably constituting and appointing
- ------------------------------------------------------------------------------
attorney to transfer said Note on the
books of the Issuer, with full power of substitution in the premises.
<TABLE>
<S> <C>
Date:
------------------- ---------------------------------------------
NOTICE: The signature to this assignment must
correspond with the name as written upon the
face of the within instrument in every particular,
without alteration or enlargement or any change
whatever.
</TABLE>
6
<PAGE> 1
EXHIBIT NO. 10(D)
THE PROGRESSIVE CORPORATION
1999 GAINSHARING PLAN
1. The Progressive Corporation and its subsidiaries ("Progressive" or the
"Company") have adopted The Progressive Corporation 1999 Gainsharing Plan
(the "Plan") as part of their overall compensation program. The objective of
the compensation program is to pay competitive base salaries and for
gainsharing to bring total cash compensation to the top of the market when
Core Business (as defined below) and assigned Business Segment performance
meets expectations. A Business Segment may consist of a distribution
channel, business unit, product, function, process or other business
category, such as new or renewal business. Participants will have the
opportunity to earn cash compensation in excess of the top of the market
when Core Business and assigned Business Segment performance exceeds
expectations.
2. Plan participants for each Plan year shall be selected by the Executive
Compensation Committee (the "Committee") of the Board of Directors of The
Progressive Corporation from those officers and regular employees of
Progressive who are assigned primarily to the Core Business or a corporate
support function as of December 1 (or such other date as may be determined
by the Chief Human Resources Officer) of that Plan year. The gainsharing
opportunity, if any, for those executive officers who participate in The
Progressive Corporation 1999 Executive Bonus Plan will be provided by and be
a component of that plan. The Plan shall be administered by or under the
direction of the Committee.
3. Annual Gainsharing Payments under the Plan will be determined by application
of the following formula:
Annual Gainsharing Payment = Paid Earnings x Target Percentage x
Performance Factor
4. Paid Earnings for any Plan year means the following items paid to a
participant during the Plan year: (a) regular, vacation, sick, holiday,
funeral and overtime pay, (b) lump sum merit adjustments based on
performance and (c) retroactive payments of any of the foregoing items
relating to the same Plan year.
For purposes of the Plan, Paid Earnings shall not include any
short-term or long-term disability payments made to the participant, the
earnings replacement component of any worker's compensation award or any
other bonus or incentive compensation awards.
Notwithstanding the foregoing, if the sum of the regular, vacation, sick,
holiday and funeral pay received by a participant during a Plan year
exceeds his/her salary range maximum for that Plan year, then his/her Paid
Earnings for that Plan year shall equal his/her salary range maximum, plus
any of the following items received by such participant during that Plan
year: (a) overtime pay, (b) retroactive payments of regular, vacation, sick,
holiday, overtime and funeral pay and (c) lump sum merit adjustments.
<PAGE> 2
5. Target Percentages vary by position. Target Percentages for Plan
participants typically are as follows:
================================================================================
POSITION TARGET %
- --------------------------------------------------------------------------------
Policy Team Members, General Managers and Senior Process 40% - 135%
Leaders/Managers
- --------------------------------------------------------------------------------
Top Functional/Line Managers 35%
- --------------------------------------------------------------------------------
Senior Functional/Line Managers 25%
- --------------------------------------------------------------------------------
Middle Functional/Line Managers 15%
- --------------------------------------------------------------------------------
Senior Professionals and Managers 12%
- --------------------------------------------------------------------------------
Professionals and Supervisors 8%
================================================================================
Target Percentages will be established within the above ranges by, and may
be changed with the approval of (a) the CEO - Insurance Operations or
CEO-Investments and Capital Management, (b) Chief Human Resources Officer
and (c) if applicable, the appropriate process leader (collectively, the
"Designated Executives"). Target Percentages also may be changed from year
to year by the Designated Executives.
6. The Performance Factor
A. General
The Performance Factor shall consist of one or more Profitability and
Growth Components and a Cost Structure Improvement Component, as
described below (the "Performance Components"). The Performance
Components will be weighted to reflect the nature of the individual
participant's assigned responsibilities. The weighting factors may
differ among participants and will be determined, and may be changed
from year to year, by or under the direction of the Committee.
B. Profitability and Growth Components
The Profitability and Growth Components measure overall operating
performance of Progressive's Personal Lines segment (excluding Midland
Financial Group, Inc.) and the commercial vehicle insurance business
unit (collectively, the "Core Business"), as a whole, or the
participant's assigned Business Segment, for the Plan year for which an
Annual Gainsharing Payment is to be made. For purposes of computing a
Performance Score for these Components, operating performance results
are measured by a Gainsharing Matrix, as established by or under the
direction of the Committee for the Plan year, which assigns a
Profitability and Growth Performance Score to various combinations of
profitability (as measured by the Gainsharing Combined Ratio) and
growth (based on year-to-year change in Net Written Premium) outcomes.
A separate Gainsharing Matrix may be established for the Core Business
and each Business Segment, as determined by or under the direction of
the Committee.
<PAGE> 3
The Gainsharing Combined Ratio is determined for the Core Business,
and for each Business Segment (as applicable), as follows:
1. Each year, target combined ratios are established by or under the
direction of the Committee for all products within the Core
Business, as a whole, and for each Business
Segment, determined to yield an average target policy life
combined ratio of 96.
2. A weighted target combined ratio is calculated for the Core
Business or applicable Business Segment based on the various
target combined ratios for the constituent product categories,
which are weighted on the basis of the Net Earned Premium
generated by each such product category for the Plan year.
3. The actual GAAP combined ratio achieved for the Plan year is
subtracted from the weighted target combined ratio to determine
the extent to which performance is over or under target. This
result, whether positive or negative, is subtracted from the
average policy life combined ratio target of 96 to determine the
Gainsharing Combined Ratio.
The Gainsharing Combined Ratio is then matched with growth in Net
Written Premium using the Gainsharing Matrix to determine a
Profitability and Growth Performance Score.
C. Cost Structure Improvement Component
------------------------------------
The Cost Structure Improvement Component measures success in
achieving cost structure improvement for the Core Business, as a
whole, and for the 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 Cost Structure Improvement Score will be computed in
accordance with the following formula:
Cost Structure
Improvement = 1+ [Target Expense Ratio-Actual Expense Ratio]
Score -------------------------------------------
3
<PAGE> 4
D. Component Weighting
-------------------
Performance Components for the Core Business and assigned Business
Segment are weighted as provided above. For participants in the Core
Business, the typical weighting will be as follows:
Performance Component Weighting
--------------------- ---------
Core Business Profitability and Growth Results 60%
Core Business Cost Structure Improvement Results 15%
Business Segment Profitability and Growth Results 25%
Total 100%
There will typically be no Business Segment Profitability and Growth
Component for participants assigned to a corporate support function
(such as Finance, Human Resources and Law) and others who are not
assigned primarily to a Business Segment. Individualized programs may
be developed if and to the extent deemed appropriate by the Designated
Executives.
The Performance Score for each Performance Component is multiplied by
the assigned weighting factor to produce a Weighted Performance Score.
The sum of the Weighted Performance Scores equals the Performance
Factor. The final Performance Factor can vary from 0 to 2.0, based on
actual performance versus the pre-established objectives.
7. Subject to Paragraph 8 below, no later than December 31 of each Plan year,
each participant will receive an initial payment in respect of his or her
Annual Gainsharing Payment for that Plan year equal to 75% of an amount
calculated on the basis of Paid Earnings for the first 11 months of the Plan
year, one month of estimated earnings, performance data through the first 11
months of the Plan year (estimated, if necessary) and one month of
forecasted operating results. No later than February 15 of the following
year, each such participant shall receive the balance of his or her Annual
Gainsharing Payment, if any, for such Plan year, based on his or her Paid
Earnings and performance data for the entire Plan year.
Any Plan participant who is then eligible to participate in The Progressive
Corporation Executive Deferred Compensation Plan ("Deferral Plan") may elect
to defer all or a portion of the Annual Gainsharing Payment otherwise
payable under this Plan, subject to and in accordance with the terms of the
Deferral Plan.
8. Unless otherwise determined by the Committee or as provided at Paragraph 10
hereof, in order to be entitled to receive any portion of an Annual
Gainsharing Payment for any Plan year, the participant must be employed by
Progressive on the payment date for that portion of the Annual Gainsharing
Payment. Annual Gainsharing Payments will be net of any legally required
deductions for federal, state and local taxes and other items.
9. The right to any Annual Gainsharing Payment hereunder may not be
transferred, assigned or encumbered by any participant. Nothing herein shall
prevent any participant's interest hereunder from being subject to
involuntary attachment, levy or other legal process.
<PAGE> 5
10. The Plan shall be administered by or under the direction of the Committee.
The Committee shall have the authority to adopt, alter and repeal such
rules, guidelines, procedures and practices governing the Plan as it shall,
from time to time, in its sole discretion, deem advisable.
The Committee shall have full authority to determine the manner in which
the Plan will operate, to interpret the provisions of the Plan and to make
all determinations hereunder. All such interpretations and determinations
shall be final and binding on Progressive, all Plan participants and all
other parties. No such interpretation or determination shall be relied on
as a precedent for any similar action or decision.
Unless otherwise determined by the Committee, all of the authority of the
Committee hereunder (including, without limitation, the authority to
administer the Plan, select the persons entitled to participate herein,
interpret the provisions thereof, waive any of the requirements specified
herein and make determinations hereunder and to establish, change or modify
Performance Components and their respective weighting factors, performance
targets and Target Percentages) may be exercised by the Designated
Executives. In the event of a conflict, the determination of the Committee
will govern.
11. The Plan may be terminated, amended or revised, in whole or in part, at any
time and from time to time by the Committee, in its sole discretion.
12. The Plan will be unfunded and all payments due under the Plan shall be made
from Progressive's general assets.
13 Nothing in the Plan shall be construed as conferring upon any person the
right to remain a participant in the Plan or to remain employed by
Progressive, nor shall the Plan limit Progressive's right to discipline or
discharge any of its officers or employees or change any of their job
titles, duties or compensation.
14. Progressive shall have the unrestricted right to set off against or recover
out of any Annual Gainsharing Payment or other sums owed to any participant
under the Plan any amounts owed by such participant to Progressive.
15. This Plan supersedes all prior plans, agreements, understandings and
arrangements regarding bonuses or other cash incentive compensation payable
by or due from Progressive. Without limiting the generality of the
foregoing, this Plan supersedes and replaces The Progressive Corporation
1997 Gainsharing Plan, as heretofore in effect (the"Prior Plan"), which is
and shall be deemed to be terminated as of December 31, 1998 (the
"Termination Date"); provided, that any bonuses or other sums earned under
the Prior Plan with respect to any Plan year ended on or prior to the
Termination Date shall be unaffected by such termination and shall be paid
to the appropriate participants when and as provided thereunder.
16. This Plan is adopted, and is to be effective, as of January 1, 1999. This
Plan shall be effective for 1999 and for each calendar year thereafter
unless and until terminated by the Committee.
17. This Plan shall be interpreted and construed in accordance with the laws of
the State of Ohio.
<PAGE> 1
EXHIBIT NO. 10(F)
-----------------
THE PROGRESSIVE CORPORATION
1999 EXECUTIVE BONUS PLAN
1. The Progressive Corporation and its subsidiaries ("Progressive") have
designed an executive compensation program consisting of three components:
salary, annual bonus and equity-based incentives in the form of
non-qualified stock options. These components have been 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. The annual bonus component of this program is
performance-based and focuses on current results.
2. The 1999 Executive Bonus Plan (the "Plan") provides the annual bonus
component of Progressive's executive compensation program for Plan
participants. The Plan shall be administered by or under the direction of
the Executive Compensation Committee (the "Committee") of the Board of
Directors. Executive officers of Progressive may be selected by the
Committee to participate in the Plan for one or more Plan years. Plan years
shall coincide with Progressive's fiscal years.
3. Subject to the following sentence, the amount of the annual bonus
earned by any participant under the Plan for any Plan year
("Annual Bonus") will be determined by application of the following
formula:
Annual Bonus = Paid Salary x Target Percentage x Performance Factor
The Annual Bonus payable to any participant with respect to any Plan year
shall not exceed $3,000,000.
4. The salary rate of each Plan participant for any Plan year shall be
established by the Committee no later than ninety (90) days after
commencement of such Plan year. For purposes of the Plan, "salary" and "Paid
salary" shall include regular, vacation, sick, holiday and funeral pay
received by the participant during the Plan year for work or services
performed by the participant as an officer or employee of Progressive, but
shall not include any (a) short-term or long-term disability payments,
(b) lump sum merit adjustments, (c) discretionary or other bonus or
incentive payments or (d) the earnings replacement component of any worker's
compensation award.
5. The Target Percentages for the participants in the Plan shall be determined
by the Committee, but will not exceed 150% for any participant. Target
Percentages may vary among Plan participants and may be changed from year to
year by the Committee.
6. The Performance Factor
A. General
The Performance Factor shall consist of one or more of the following
components: a Core Business Profitability and Growth Component, a
Business Segment Performance Component, a Cost Structure Improvement
Component and an Investment Performance Component (the "Bonus
Components"). An appropriate combination of Bonus Components will be
designated for each participant, and the designated Bonus Components
will be weighted, based on such participant's assigned responsibilities,
as determined by the Committee.
<PAGE> 2
The relative weighting of the Bonus Components may vary among Plan
participants and may be changed from year to year by the Committee.
For purposes of computing the amount of the Annual Bonus for any Plan year,
the performance score achieved for each of the designated Bonus Components
will be multiplied by the applicable weighting factor to produce a Weighted
Performance Score. The sum of the Weighted Performance Scores will equal the
Performance Factor. 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.
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 payment of the Annual Bonus.
B. Core Business Profitability and Growth Component
------------------------------------------------
The Core Business Profitability and Growth Component measures overall
operating performance of Progressive's Personal Lines segment (excluding
Midland Financial Group, Inc.) and the commercial vehicle business unit
(collectively, the "Core Business") for the Plan year for which an Annual
Bonus payment is to be made. For purposes of computing a Performance Score
for this Component, operating performance results are measured by a
Gainsharing Matrix, as established by or under the direction of the
Committee for the Plan year, which assigns a Profitability and Growth
Performance Score to various combinations of profitability (as measured by
the Gainsharing Combined Ratio) and growth (based on year-to-year change in
Net Written Premium) outcomes.
The Gainsharing Combined Ratio is determined for the Core Business
as follows:
1. Each year, a target combined ratio is established by or under the
direction of the Committee for all products within the Core Business,
determined to yield an average policy life target combined ratio of 96.
2. A weighted target combined ratio is calculated based on the various
target combined ratios for the constituent product categories, which are
weighted on the basis of the Net Earned Premium generated by each such
product category for the Plan year.
3. The actual GAAP combined ratio achieved for the Plan year is subtracted
from the weighted target combined ratio to determine the extent to which
performance is over or under target. This result, whether positive or
negative, is subtracted from the average policy life combined ratio
target of 96 to determine the Gainsharing Combined Ratio.
<PAGE> 3
The Gainsharing Combined Ratio is then matched with growth in Net Written
Premium using the Gainsharing Matrix to determine a Core Business
Profitability and Growth Performance Score.
C. Business Segment Performance Component
--------------------------------------
The Business Segment Performance Component measures the performance of a
designated Business Segment (as defined below) 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 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 Plan
participant for any Plan year and, for each such Component, will determine
the applicable criteria upon which performance will be measured, the goals
to be achieved and the performance scores that will result from various
levels of performance. The applicable 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.
D. Cost Structure Improvement Component
------------------------------------
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 Cost Structure Improvement Score will be computed in accordance with the
following formula:
Cost Structure
Improvement = 1 + [Target Expense Ratio-Actual Expense Ratio]
-------------------------------------------
3
Score
<PAGE> 4
E. Investment Performance Component
The Investment Performance Component compares the investment
performance of the individual segments of Progressive's investment
portfolio ("Portfolio Segments") against the performance of selected
groups of comparable investment funds ("Investment Benchmarks") over
such period or periods as shall be determined by the Committee.
Investment results are marked to market in order to calculate total
return, which is then compared against the designated Investment
Benchmarks to produce a Performance Score for each Portfolio Segment.
The applicable Portfolio Segments will be identified, and the related
Investment Benchmarks and funds which comprise the Investment
Benchmarks will be determined, by the Committee and may be changed from
year to year by the Committee.
At the conclusion of a Plan year, the investment funds which comprise
an Investment Benchmark are ranked according to their respective levels
of performance for the Plan year. The investment performance achieved
by each Portfolio Segment for the Plan year is then compared against
the performance of the several investment funds which comprise the
applicable Investment Benchmark to determine the decile in which such
Portfolio Segment's performance falls ("Decile Ranking"). The
Performance Score for each Portfolio Segment is determined by its
Decile Ranking for the Plan year, as follows:
-----------------------------------------
Decile Performance
Ranking Score
-----------------------------------------
1st 2
-----------------------------------------
2nd 1.78
-----------------------------------------
3rd 1.56
-----------------------------------------
4th 1.33
-----------------------------------------
5th 1.11
-----------------------------------------
6th .89
-----------------------------------------
7th .67
-----------------------------------------
8th .44
-----------------------------------------
9th .22
-----------------------------------------
10th 0
-----------------------------------------
The Performance Scores for the several Portfolio Segments are weighted,
based on the average amounts invested in each such Segment during the
Plan year, and the weighted Performance Scores for the Portfolio
Segments are then combined to produce the Investment Performance Score.
Investment expense is not included in determining investment
performance vs. benchmark.
8. 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 March 15 of the immediately following year. The
provisions of this Paragraph shall be subject to Paragraph 9 hereof.
<PAGE> 5
Any Plan participant who is eligible to participate in The Progressive
Corporation Executive Deferred Compensation Plan ("Deferral Plan") may
elect to defer all or a portion of the Annual Bonus otherwise payable under
this Plan, subject to and in accordance with the terms of the Deferral
Plan.
9. 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 Progressive on the date designated for payment thereof. Annual Bonus
payments made to participants will be net of any legally required
deductions for federal, state and local taxes and other items.
10. The right to any of the Annual Bonuses hereunder may not be transferred,
assigned or encumbered by any participant. Nothing herein shall prevent any
participant's interest hereunder from being subject to involuntary
attachment, levy or other legal process.
11. The Plan will be administered by or under the direction of the Committee.
The Committee will have the authority to adopt, alter and repeal such
rules, guidelines, procedures and practices governing the Plan as it, from
time to time, in its sole discretion deems advisable.
The Committee will have full authority to determine the manner in which the
Plan will operate, to interpret the provisions of the Plan and to make all
determinations thereunder. All such interpretations and determinations will
be final and binding on Progressive, all Plan participants and all other
parties. No such interpretation or determination may be relied on as a
precedent for any similar action or decision.
The Plan will be administered by the Committee in accordance with the
requirements of Section 162(m) of the Internal Revenue Code, as amended,
and the rules and regulations promulgated thereunder (the "Code").
12. The Plan will be subject to approval by the holders of Progressive's Common
Shares, $1.00 par value ("shareholders") in accordance with the
requirements of Section 162(m) of the Code and no Annual Bonus will be paid
hereunder unless the Plan has been so approved.
13. The Plan may be terminated, amended or revised, in whole or in part, at any
time and from time to time by the Committee, in its sole discretion;
provided that the Committee may not increase the amount of compensation
payable hereunder to any participant above the amount that would otherwise
be payable upon attainment of the applicable performance goals, or
accelerate the payment of any portion of the Annual Bonus due to any
participant under the Plan without discounting the amount of such payment
in accordance with Section 162(m) of the Code, and further provided that
any amendment or revision of the Plan required to be approved by
shareholders pursuant to Section 162(m) of the Code will not be effective
until approved by Progressive's shareholders in accordance with the
requirements of Section 162(m).
14. The Plan will be unfunded and all payments due under the Plan will
be made from Progressive's general assets.
15. Nothing in the Plan shall be construed as conferring upon any person the
right to remain a participant in the Plan or to remain employed by
Progressive, nor shall the Plan limit Progressive's right to discipline or
discharge any of its officers or employees or change any of their job
titles, duties or compensation.
<PAGE> 6
16. Progressive shall have the unrestricted right to set off against or recover
out of any bonuses or other sums owed to any participant under the Plan any
amounts owed by such participant to Progressive.
17. This Plan supersedes all prior plans, agreements, understandings and
arrangements regarding bonuses or other cash incentive compensation payable
or due to any participant from Progressive. Without limiting the generality
of the foregoing, this Plan supersedes and replaces The Progressive
Corporation 1997 Executive Bonus Plan, as heretofore in effect (the "Prior
Plan"), which is and shall be deemed to be terminated as of December 31,
1998 (the "Termination Date"); provided, that any bonuses or other sums
earned under the Prior Plan with respect to any period ended on or prior to
the Termination Date shall be unaffected by such termination and shall be
paid to the appropriate participants when and as provided the reunder.
18. This Plan is adopted and, subject to the provisions of Paragraph 12 hereof,
is to be effective, as of January 1, 1999. Subject to the provisions of
Paragraph 12, this Plan shall be effective for 1999 and for each year
thereafter unless and until terminated by the Committee.
19. This Plan shall be interpreted and construed in accordance with the laws of
the State of Ohio.
<PAGE> 1
EXHIBIT NO. 10(H)
THE PROGRESSIVE CORPORATION
1989 INCENTIVE PLAN
(amended and restated as of April 24, 1992,
as further amended on July 1, 1992 and February 5, 1993)
SECTION 1. Purpose; Definitions.
The purpose of The Progressive Corporation 1989 Incentive Plan (the "Plan")
is to enable The Progressive Corporation (the "Company") to attract, retain and
reward key employees of the Company and its Subsidiaries and Affiliates and
strengthen the mutuality of interests between such key employees and the
Company's shareholders by offering such key employees equity or equity-based
incentives.
For purposes of the Plan, the following terms shall be defined as set forth
below:
(a) "Affiliate" means Progressive Partners Limited Partnership and
any other entity (other than the Company and its Subsidiaries) that is
designated by the Board as a participating employer under the Plan.
(b) "Award" means any award of Stock Options, Stock Appreciation
Rights, Restricted Stock, Deferred Stock, Stock Purchase Rights and Other
Stock-Based Awards under the Plan.
(c) "Board" means the Board of Directors of the Company.
(d) "Book Value" means, as of any given date, on a per share basis
(1) the shareholders' equity in the Company as of the end of the
immediately preceding fiscal year as reflected in the Company's audited
consolidated balance sheet as of such year-end date, subject to such
adjustments as the Committee shall specify at or after grant, divided by
(2) the number of outstanding shares of Stock as of such year-end date,
subject to such adjustments as the Committee shall specify for events
subsequent to such year-end date.
(e) "Code" means the Internal Revenue Code of 1986, as amended from
time to time, and any successor thereto.
(f) "Committee" means the Committee referred to in Section 2 of the
Plan.
(g) "Company" means The Progressive Corporation, an Ohio corporation,
or any successor corporation.
<PAGE> 2
(h) "Deferred Stock" means an award of the right to receive Stock at the
end of a specified deferral period granted pursuant to Section 8.
(i) "Disability" means disability as determined under procedures
established by the Committee for purposes of the Plan.
(j) "Disinterested Person" shall have the meaning set forth in Rule
16b-3(c)(2)(i) as promulgated by the Securities and Exchange Commission under
the Exchange Act, or any successor definition adopted by the Commission.
(k) "Exchange Act" means the Securities Exchange Act of 1934, as amended.
(l) "Fair Market Value" means, as of any given date, the mean between the
highest and lowest quoted selling price, regular way, of the Stock on such date
on the New York Stock Exchange or, if no such sale of the Stock occurs on the
New York Stock Exchange on such date, then such mean price on the next preceding
day on which the Stock was traded. If the Stock is no longer traded on the New
York Stock Exchange, then the Fair Market Value of the Stock shall be determined
by the Committee in good faith.
(m) "Incentive Stock Option" means any Stock Option intended to be and
designated as an "Incentive Stock Option", within the meaning of Section 422 of
the Code or any successor section thereto.
(n) "Non-Qualified Stock Option" means any Stock Option that is not an
Incentive Stock Option.
(o) "Other Stock-Based Award" means an award granted pursuant to
Section 10 that is valued, in whole or in part, by reference to, or is otherwise
based on, Stock.
(p) "Plan" means The Progressive Corporation 1989 Incentive Plan, as
amended from time to time.
(q) "Restricted Stock" means an award of shares that is granted
pursuant to Section 7 and is subject to restrictions.
(r) "Section 16 participant" means a participant under the Plan who is
then subject to Section 16 of the Exchange Act.
(s) "Stock" means the Common Shares, $1.00 par value per share, of the
Company.
<PAGE> 3
(t) "Stock Appreciation Right" means an award of rights that is granted
pursuant to Section 6.
(u) "Stock Option" or "Option" means any option to purchase shares of
Stock (including Restricted Stock and Deferred Stock, if the Committee so
determines) that is granted pursuant to Section 5.
(v) "Stock Purchase Right" means an award of the right to purchase Stock
that is granted pursuant to Section 9.
(w) "Subsidiary" means any corporation (other than the Company) in an
unbroken chain of corporations beginning with the Company if each of the
corporations (other than the last corporation in the unbroken chain) owns stock
possessing 50% or more of the total combined voting power of all classes of
stock in one of the other corporations in such chain.
In addition, the terms "Change in Control," "Potential Change in Control"
and "Change in Control Price" shall have the meanings set forth, respectively,
in Sections 11(b), (c) and (d) and the term "Cause" shall have the meaning set
forth in Section 5(b)(8) below.
SECTION 2. Administration.
The Plan shall be administered by a Committee of not less than three
directors of the Company all of whom shall be directors who are Disinterested
Persons. Such directors shall be appointed by the Board and shall serve as the
Committee at the pleasure of the Board. The functions of the Committee specified
in the Plan shall be exercised by the Board if and to the extent that no
Committee exists which has the authority to so administer the Plan.
The Committee shall have full power to interpret and administer the Plan
and full authority to select the individuals to whom Awards will be granted and
to determine the type and amount of Award(s) to be granted to each participant,
the consideration, if any, to be paid for such Award(s), the timing of such
Award(s), the terms and conditions of Awards granted under the Plan and the
terms and conditions of the related agreements which will be entered into with
participants. As to the selection of and grant of Awards to participants who are
not Section 16 participants, the Committee may delegate its responsibilities to
members of the Company's management consistent with applicable law.
The Committee shall have the authority to adopt, alter and repeal such
rules, guidelines and practices governing the Plan as it shall, from time to
time, deem advisable; to interpret the terms and provisions of the Plan and any
Award issued under the Plan (and any agreements relating thereto); to direct
employees of the Company or other advisors to prepare such materials or perform
such analyses as the Committee deems necessary or appropriate; and otherwise to
supervise the administration of the Plan.
Any interpretation and administration of the Plan by the Committee, and all
actions and determinations of the Committee, shall be final, binding and
conclusive on the Company, its shareholders,
<PAGE> 4
Subsidiaries, Affiliates, all participants in the Plan, their respective legal
representatives, successors and assigns, and upon all persons claiming under or
through any of them. No member of the Board or of the Committee shall incur any
liability for any action taken or omitted, or any determination made, in good
faith in connection with the Plan.
SECTION 3. Stock Subject to the Plan.
(a) Aggregate Stock Subject to the Plan. Subject to adjustment as
provided below in Section 3(c), the total number of shares of Stock
reserved and available for Awards under the Plan is 6,500,000. Any Stock
issued hereunder may consist, in whole or in part, of authorized and
unissued shares or treasury shares.
(b) Forfeiture or Termination of Awards of Stock. If any Stock
subject to any Award granted hereunder is forfeited or an Award otherwise
terminates or expires without the issuance of Stock, the Stock subject to
such Award shall again be available for distribution in connection with
future Awards under the Plan as set forth in Section 3(a), unless the
participant who had been awarded such forfeited Stock or the expired or
terminated Award has theretofore received dividends or other benefits of
ownership with respect to such Stock. For purposes hereof, a participant
shall not be deemed to have received a benefit of ownership with respect to
such Stock by the exercise of voting rights or the accumulation of
dividends which are not realized due to the forfeiture of such Stock or the
expiration or termination of the related Award without issuance of such
Stock.
(c) Adjustment. In the event of any merger, reorganization,
consolidation, recapitalization, share dividend, share split, combination
of shares or other change in corporate structure of the Company affecting
the Stock, such substitution or adjustment shall be made in the aggregate
number of shares of Stock reserved for issuance under the Plan, in the
number and option price of shares subject to outstanding Options granted
under the Plan, in the number and purchase price of shares subject to
outstanding Stock Purchase Rights granted under the Plan, and in the number
of shares subject to Restricted Stock Awards, Deferred Stock Awards and any
other outstanding Awards granted under the Plan as may be approved by the
Committee, in its sole discretion; provided that the number of shares
subject to any Award shall always be a whole number. Any fractional shares
shall be eliminated.
SECTION 4. Eligibility.
Officers and other key employees of the Company and its Subsidiaries and
Affiliates (but excluding members of the Committee and any person who serves
only as a director) who are responsible for or contribute to the management,
growth or profitability of the business of the Company or its Subsidiaries or
Affiliates are eligible to be granted Awards under the Plan.
SECTION 5. Stock Options.
(a) Grant. Stock Options may be granted alone, in addition to or in
tandem with other Awards granted under the Plan or cash awards made outside
of the Plan. However, no Incentive Stock
<PAGE> 5
Option shall be issued in tandem with any other Award other than a Stock
Appreciation Right as provided for in Section 6. The Committee shall determine
the individuals to whom, and the time or times at which, grants of Stock Options
will be made, the number of shares purchasable under each Stock Option and the
other terms and conditions of the Stock Options in addition to those set forth
in Sections 5(b) and 5(c). Any Stock Option granted under the Plan shall be in
such form as the Committee may from time to time approve.
Stock Options granted under the Plan may be of two types which shall be
indicated on their face: (i) Incentive Stock Options and (ii) Non-Qualified
Stock Options. Subject to Section 5(c) hereof, the Committee shall have the
authority to grant to any participant Incentive Stock Options, Non-Qualified
Stock Options or both types of Stock Options.
(b) Terms and Conditions. Options granted under the Plan shall be evidenced
by Option agreements, shall be subject to the following terms and conditions and
shall contain such additional terms and conditions, not inconsistent with the
terms of the Plan, as the Committee shall deem desirable:
(1) Option Price. The option price per share of Stock purchasable
under a Non-Qualified Stock Option shall be determined by the Committee at
the time of grant and shall not be less than fifty percent of the Fair
Market Value of the Stock at the date of grant.
The option price per share of Stock purchasable under an Incentive Stock
Option shall be determined by the Committee at the time of grant and shall
be not less than 100% of the Fair Market Value of the Stock at the date of
grant (or 110% of the Fair Market Value of the Stock at the date of grant
in the case of a participant who at the date of grant owns shares
possessing more than ten percent of the total combined voting power of all
classes of stock of the Company or its parent or subsidiary corporations
(as determined under Section 425(d), (e) and (f) of the Code)).
(2) Option Term. The term of each Stock Option shall be determined
by the Committee and may not exceed ten years from the date the Option is
granted (or, with respect to Incentive Stock Options, five years in the
case of a participant who at the date of grant owns shares possessing more
than ten percent of the total combined voting power of all classes of stock
of the Company or its parent or subsidiary corporations (as determined
under Section 425(d), (e) and (f) of the Code)).
(3) Exercise. Stock Options shall be exercisable at such time or
times and subject to such terms and conditions as shall be determined by
the Committee at or after grant; provided, however, that, except as
provided in Section 5(b)(6) and Section 11, unless otherwise determined by
the Committee at or after grant, no Stock Option shall be exercisable prior
to six months and one day following the date of grant. If the Committee
provides, in its sole discretion, that any Stock Option is exercisable only
in installments, the Committee may waive, in whole or in part, such
installment exercise provisions at any time at or after grant based on such
factors as the Committee shall determine, in its sole discretion.
<PAGE> 6
(4) Method of Exercise. Subject to whatever installment
exercise provisions apply with respect to such Stock Option, and the
six month and one day holding period set forth in Section 5(b)(3),
Stock Options may be exercised in whole or in part, at any time during
the option period, by giving to the Company written notice of exercise
specifying the number of shares of Stock to be purchased.
Such notice shall be accompanied by payment in full of the option
price of the shares of Stock for which the Option is exercised, in
cash or by check or such other instrument as the Committee may accept.
Subject to the following sentence, unless otherwise determined by the
Committee, in its sole discretion, at or after grant, payment, in full
or in part, of the option price of (i) Incentive Stock Options may be
made in the form of unrestricted Stock then owned by the participant
and (ii) Non-Qualified Stock Options may be made in the form of
unrestricted Stock then owned by the participant or Stock that is part
of the Non-Qualified Stock Option being exercised. Notwithstanding the
foregoing, any election by a Section 16 participant to satisfy such
payment obligation, in whole or in part, with Stock that is part of
the Non-Qualified Stock Option being exercised shall be subject to
approval by the Committee, in its sole discretion. The value of each
such share surrendered or withheld shall be 100% of the Fair Market
Value of the Stock on the date the Option is exercised.
No Stock shall be issued pursuant to an exercise of an Option
until full payment has been made. A participant shall not have rights
to dividends or any other rights of a shareholder with respect to any
Stock subject to an Option unless and until the participant has given
written notice of exercise, has paid in full for such shares, has
given, if requested, the representation described in Section 14(a) and
such shares have been issued to him.
(5) Non-Transferability of Options. No Stock Option shall be
transferable by the participant other than by will or by the laws of
descent and distribution, and all Stock Options shall be exercisable,
during the participant's lifetime, only by the participant or, subject
to Sections 5(b)(3) and 5(c), by the participant's authorized legal
representative if the participant is unable to exercise an Option as a
result of the participant's Disability.
(6) Termination by Death. Subject to Section 5(c), if any
participant's employment by the Company or any Subsidiary or Affiliate
terminates by reason of death, any Stock Option held by such
participant may thereafter be exercised, to the extent such Option was
exercisable at the time of death or would have become exercisable
within one year from the time of death had the participant continued
to fulfill all conditions of the Option during such period (or on such
accelerated basis as the Committee may determine at or after grant),
by the estate of the participant (acting through its fiduciary), for a
period of one year (or such other period as the Committee may specify
at or after grant) from the date of such death. The balance of the
Stock Option shall be forfeited.
(7) Termination by Reason of Disability. Subject to Sections
5(b)(3) and 5(c), if a participant's employment by the Company or any
Subsidiary or Affiliate terminates by reason of Disability, any Stock
Option held by such participant may thereafter be exercised, to the
extent such Option was exercisable at the time of termination or would
have become exercisable within one year from the time of termination
had the participant continued to fulfill all conditions of the
<PAGE> 7
Option during such period (or on such accelerated basis as the
Committee may determine at or after grant), by the participant or by
the participant's duly authorized legal representative if the
participant is unable to exercise the Option as a result of the
participant's Disability, for a period of one year (or such other
period as the Committee may specify at or after grant) from the date
of such termination of employment; provided, however, that in no event
may any such Option be exercised prior to six months and one day from
the date of grant; and provided, further, that if the participant dies
within such one-year period (or such other period as the Committee
shall specify at or after grant), any unexercised Stock Option held by
such participant shall thereafter be exercisable by the estate of the
participant (acting through its fiduciary) to the same extent to which
it was exercisable at the time of death for a period of one year from
the date of such termination of employment. The balance of the Stock
Option shall be forfeited.
(8) Other Termination. Unless otherwise determined by the
Committee at or after the time of granting any Stock Option, if a
participant's employment by the Company or any Subsidiary or Affiliate
terminates for any reason other than death or Disability, all Stock
Options held by such participant shall thereupon immediately
terminate, except that if the participant is involuntarily terminated
by the Company or any Subsidiary or Affiliate without Cause, any such
Stock Option may be exercised, to the extent otherwise exercisable at
the time of such termination, at any time during the lesser of two
months from the date of such termination or the balance of such Stock
Option's term. For purposes of this Plan, "Cause" means a felony
conviction of a participant or the failure of a participant to contest
prosecution for a felony, or a participant's willful misconduct or
dishonesty, any of which, in the judgment of the Committee, is harmful
to the business or reputation of the Company or any Subsidiary or
Affiliate.
(c) Incentive Stock Options. Notwithstanding Section 4, only key
employees of the Company or any Subsidiary shall be eligible to receive
Incentive Stock Options. Notwithstanding Sections 5(b)(6) and (7), an
Incentive Stock Option shall be exercisable by (i) a participant's
authorized legal representative (if the participant is unable to exercise
the Incentive Stock Option as a result of the participant's Disability)
only if, and to the extent, permitted by Section 422 of the Code and
Section 16 of the Exchange Act and the rules and regulations promulgated
thereunder and (ii) by the participant's estate, in the case of death, or
authorized legal representative, in the case of Disability, no later than
10 years from the date the Incentive Stock Option was granted (in addition
to any other restrictions or limitations which may apply). Anything in the
Plan to the contrary notwithstanding, no term or provision of the Plan
relating to Incentive Stock Options shall be interpreted, amended or
altered, nor shall any discretion or authority granted under the Plan be
exercised, so as to disqualify the Plan under Section 422 of the Code, or,
without the consent of the participant(s) affected, to disqualify any
Incentive Stock Option under such Section 422 or any successor Section
thereto.
(d) Buyout Provisions. The Committee may at any time buy out for a
payment in cash, Stock, Deferred Stock or Restricted Stock an Option
previously granted, based on such terms and conditions as the Committee
shall establish and agree upon with the participant, provided that no such
transaction involving a Section 16 participant shall be structured or
effected in a manner that would violate, or result in any liability on the
part of the participant under, Section 16 of the Exchange Act or the rules
and regulations promulgated thereunder.
SECTION 6. Stock Appreciation Rights.
<PAGE> 8
(a) Grant. Stock Appreciation Rights may be granted alone, in
addition to or in tandem with other Awards granted under the Plan or cash
awards made outside of the Plan. The Committee shall determine the
individuals to whom, and the time or times at which, grants of Stock
Appreciation Rights will be made and the other terms and conditions of the
Stock Appreciation Rights in addition to those set forth in Section 6(b).
Any Stock Appreciation Right granted under the Plan shall be in such form
as the Committee may from time to time approve. In the case of
Non-Qualified Stock Options, such rights may be granted either at or after
the time of the grant of the related Non-Qualified Stock Options. In the
case of Incentive Stock Options, such rights may be granted in tandem with
Incentive Stock Options only at the time of the grant of such Incentive
Stock Options and exercised only when the Fair Market Value of the Stock
subject to the Option exceeds the option price of the Option.
Stock Appreciation Rights issued in tandem with Stock Options ("Tandem
SARs") shall terminate and no longer be exercisable upon the termination or
exercise of the related Stock Option, subject to such provisions as the
Committee may specify at grant if a Stock Appreciation Right is granted
with respect to less than the full number of shares of Stock subject to the
related Stock Option.
All Stock Appreciation Rights granted hereunder shall be exercised,
subject to Section 6(b), in accordance with the procedures established by
the Committee for such purpose. Upon such exercise, the participant shall
be entitled to receive an amount determined in the manner prescribed in
Section 6(b).
(b) Terms and Conditions. Stock Appreciation Rights granted under the
Plan shall be subject to the following terms and conditions and shall
contain such additional terms and conditions, not inconsistent with the
provisions of the Plan, as the Committee shall deem desirable:
(1) Tandem SARs shall be exercisable only at such time or times
and to the extent that the Stock Options to which they relate shall be
exercisable in accordance with the provisions of Section 5 and this
Section 6, and Stock Appreciation Rights granted separately
("Freestanding SARs") shall be exercisable as the Committee shall
determine; provided, however, that any Stock Appreciation Right
granted to a Section 16 participant shall not be exercisable at any
time prior to six months and one day from the date of the grant of
such Stock Appreciation Right, except that this limitation shall not
apply in the event of the death of the participant prior to the
expiration of the six-month and one-day period.
(2) Upon the exercise of a Stock Appreciation Right, a
participant shall be entitled to receive an amount in cash or shares
of Stock, as determined by the Committee, equal in value to the excess
of the Fair Market Value of one share of Stock on the date of exercise
of the Stock Appreciation Right over (i) the option price per share
specified in the related Stock Option in the case of Tandem SARs,
which price shall be fixed no later than the date of grant of the
Tandem SARs, or (ii) the price per share specified in the related
Stock Appreciation Rights Agreement in the case of Freestanding SARs,
which price shall be fixed at the date of grant and shall be not less
than fifty percent of the Fair Market Value of the Stock on the date
of grant, multiplied by the number of shares of Stock in respect of
which the Stock Appreciation Right shall have been exercised. The
Committee, in its sole discretion, shall have the right to determine
the form of payment (i.e. cash, Stock or any combination thereof) and
to approve any election by the
<PAGE> 9
participant to receive cash, in whole or in part, upon exercise of the
Stock Appreciation Right. When payment is to be made in Stock, the
number of shares of Stock to be paid shall be calculated on the basis
of the Fair Market Value of the Stock on the date of exercise.
Notwithstanding the foregoing, the Committee may unilaterally limit
the appreciation in value of any Stock Appreciation Right at any time
prior to exercise.
(3) Upon the exercise of a Tandem SAR, the Stock Option or part
thereof to which such Tandem SAR is related shall be deemed to have
been exercised.
(4) In its sole discretion, the Committee may grant "Limited"
Stock Appreciation Rights under this Section 6; that is, Freestanding
SARs that become exercisable only in the event of a Change in Control
or a Potential Change in Control, subject to such terms and conditions
as the Committee may specify at grant. Such Limited Stock Appreciation
Rights shall be settled solely in cash.
(5) Stock Appreciation Rights shall not be transferable by the
participant other than by will or by the laws of descent and
distribution, and all Stock Appreciation Rights shall be exercisable,
during the participant's lifetime, only by the participant or, subject
to Section 6(b)(6), by the participant's authorized legal
representative if the participant is unable to exercise a Stock
Appreciation Right as a result of the participant's Disability.
(6) Unless varied by the Committee, Stock Appreciation Rights
shall be subject to the terms and conditions specified for Stock
Options in Sections 5(b)(6), (7) and (8) and 5(d), except that the
terms and conditions applicable to any Stock Appreciation Right held
by a Section 16 participant shall not be varied in a manner that would
cause the exercise or cancellation of such Stock Appreciation Right to
fail to qualify for any applicable exemption from Section 16(b) of the
Exchange Act provided by Rule 16b-3 thereunder.
SECTION 7. Restricted Stock.
(a) Grant. Shares of Restricted Stock may be issued alone, in
addition to or in tandem with other Awards under the Plan or cash awards
made outside of the Plan. The Committee shall determine the individuals to
whom, and the time or times at which, grants of Restricted Stock will be
made, the number of shares of Restricted Stock to be awarded to each
participant, the price (if any) to be paid by the participant (subject to
Section 7(b)), the date or dates upon which Restricted Stock Awards will
vest and the period or periods within which such Restricted Stock Awards
may be subject to forfeiture, and the other terms and conditions of such
Awards in addition to those set forth in Section 7(b).
The Committee may condition the grant of Restricted Stock upon
the attainment of specified performance goals or such other factors as the
Committee may determine in its sole discretion.
(b) Terms and Conditions. Restricted Stock awarded under the Plan
shall be subject to the following terms and conditions and shall contain
such additional terms and conditions, not inconsistent
<PAGE> 10
with the provisions of the Plan, as the Committee shall deem desirable. A
participant who receives a Restricted Stock Award shall not have any rights with
respect to such Award, unless and until such participant has executed an
agreement evidencing the Award in the form approved from time to time by the
Committee and has delivered a fully executed copy thereof to the Company, and
has otherwise complied with the applicable terms and conditions of such Award.
(1) The purchase price for shares of Restricted Stock shall be
determined by the Committee at the time of grant and may be equal to their
par value or zero.
(2) Awards of Restricted Stock must be accepted by executing a
Restricted Stock Award agreement and paying whatever price (if any) is
required under Section 7(b)(1).
(3) Each participant receiving a Restricted Stock Award shall be
issued a stock certificate in respect of such shares of Restricted Stock.
Such certificate shall be registered in the name of such participant, and
shall bear an appropriate legend referring to the terms, conditions and
restrictions applicable to such Award.
(4) The Committee shall require that the stock certificates
evidencing such shares be held in custody by the Company until the
restrictions thereon shall have lapsed, and that, as a condition of any
Restricted Stock Award, the participant shall have delivered to the Company
a stock power, endorsed in blank, relating to the Stock covered by such
Award.
(5) Subject to the provisions of this Plan and the Restricted Stock
Award agreement, during a period set by the Committee commencing with the
date of such Award (the "Restriction Period"), the participant shall not be
permitted to sell, transfer, pledge, assign or otherwise encumber the
shares of Restricted Stock awarded under the Plan. The Restriction Period
shall not be less than six months and one day in duration ("Minimum
Restriction Period"). Subject to these limitations and the Minimum
Restriction Period requirement, the Committee, in its sole discretion, may
provide for the lapse of such restrictions in installments and may
accelerate or waive such restrictions, in whole or in part, based on
service, performance or such other factors and criteria as the Committee
may determine, in its sole discretion.
(6) Except as provided in this Section 7(b)(6), Section 7(b)(5) and
Section 7(b)(7), the participant shall have, with respect to the shares of
Restricted Stock awarded, all of the rights of a shareholder of the
Company, including the right to vote the Stock, and the right to receive
any dividends. The Committee, in its sole discretion, as determined at the
time of award, may permit or require the payment of cash dividends to be
deferred and, if the Committee so determines, reinvested, subject to
Section l4(f), in additional Restricted Stock to the extent shares are
available under Section 3, or otherwise reinvested. Stock dividends issued
with respect to Restricted Stock shall be treated as additional shares of
Restricted Stock that are subject to the same restrictions and other terms
and conditions that apply to the shares with respect to which such
dividends are issued.
(7) No Restricted Stock shall be transferable by a participant
otherwise than by will or by the laws of descent and distribution.
<PAGE> 11
(8) If a participant's employment by the Company or any
Subsidiary or Affiliate terminates by reason of death, any Restricted
Stock held by such participant shall thereafter vest or any
restriction lapse, to the extent such Restricted Stock would have
become vested or no longer subject to restriction within one year from
the time of death had the participant continued to fulfill all of the
conditions of the Restricted Stock Award during such period (or on
such accelerated basis as the Committee may determine at or after
grant). The balance of the Restricted Stock shall be forfeited.
(9) If a participant's employment by the Company or any
Subsidiary or Affiliate terminates by reason of Disability, any
Restricted Stock held by such participant shall thereafter vest or any
restriction lapse, to the extent such Restricted Stock would have
become vested or no longer subject to restriction within one year from
the time of termination had the participant continued to fulfill all
of the conditions of the Restricted Stock Award during such period (or
on such accelerated basis as the Committee may determine at or after
grant), subject in all cases to the Minimum Restriction Period
requirement. The balance of the Restricted Stock shall be forfeited.
(10) Unless otherwise determined by the Committee at or after
the time of granting any Restricted Stock, if a participant's
employment by the Company or any Subsidiary or Affiliate terminates
for any reason other than death or Disability, the Restricted Stock
held by such participant which is unvested or subject to restriction
at the time of termination shall thereupon be forfeited.
(c) Minimum Value Provisions. In order to better ensure that award
payments actually reflect the performance of the Company and service of the
participant, the Committee may provide, in its sole discretion, for a
tandem performance-based or other award designed to guarantee a minimum
value, payable in cash or Stock to the recipient of a Restricted Stock
Award, subject to such performance, future service, deferral and other
terms and conditions as may be specified by the Committee.
SECTION 8. Deferred Stock.
(a) Grant. Deferred Stock may be awarded alone, in addition to or in
tandem with other Awards granted under the Plan or cash awards made outside
of the Plan. The Committee shall determine the individuals to whom, and the
time or times at which, Deferred Stock shall be awarded, the number of
shares of Deferred Stock to be awarded to any participant, the duration of
the period (the "Deferral Period") during which, and the conditions under
which, receipt of the Stock will be deferred, and the other terms and
conditions of the Award in addition to those set forth in Section 8(b).
The Committee may condition the grant of Deferred Stock upon the
attainment of specified performance goals or such other factors as the
Committee shall determine, in its sole discretion.
<PAGE> 12
(b) Terms and Conditions. Deferred Stock Awards shall be subject to the
following terms and conditions and shall contain such additional terms and
conditions, not inconsistent with the terms of the Plan, as the Committee shall
deem desirable:
(1) The purchase price for shares of Deferred Stock shall be
determined at the time of grant and may be equal to their par value or
zero, as determined by the Committee. Subject to the provisions of the Plan
and the Award agreement referred to in Section 8(b)(9), Deferred Stock
Awards may not be sold, assigned, transferred, pledged or otherwise
encumbered during the Deferral Period. At the expiration of the Deferral
Period (or the Elective Deferral Period referred to in Section 8(b)(8),
where applicable), share certificates shall be delivered to the
participant, or his legal representative, for the shares covered by the
Deferred Stock Award. The Deferral Period applicable to any Deferred Stock
Award shall not be less than six months and one day ("Minimum Deferral
Period").
(2) Unless otherwise determined by the Committee at grant, amounts
equal to any dividends declared during the Deferral Period with respect to
the number of shares covered by a Deferred Stock Award will be paid to the
participant currently, or deferred and deemed to be reinvested in
additional Deferred Stock, or otherwise reinvested, all as determined at or
after the time of the Award by the Committee, in its sole discretion.
(3) No Deferred Stock shall be transferable by a participant
otherwise than by will or by the laws of descent and distribution.
(4) If a participant's employment by the Company or any Subsidiary or
Affiliate terminates by reason of death, any Deferred Stock held by such
participant shall thereafter vest or any restriction lapse, to the extent
such Deferred Stock would have become vested or no longer subject to
restriction within one year from the time of death had the participant
continued to fulfill all of the conditions of the Deferred Stock Award
during such period (or on such accelerated basis as the Committee may
determine at or after grant). The balance of the Deferred Stock shall be
forfeited.
(5) If a participant's employment by the Company or any Subsidiary or
Affiliate terminates by reason of Disability, any Deferred Stock held by
such participant shall thereafter vest or any restriction lapse, to the
extent such Deferred Stock would have become vested or no longer subject to
restriction within one year from the time of termination had the
participant continued to fulfill all of the conditions of the Deferred
Stock Award during such period (or on such accelerated basis as the
Committee may determine at or after grant), subject in all cases to the
Minimum Deferral Period requirement. The balance of the Deferred Stock
shall be forfeited.
(6) Unless otherwise determined by the Committee at or after the time
of granting any Deferred Stock Award, if a participant's employment by the
Company or any Subsidiary or Affiliate terminates for any reason other than
death or Disability, all Deferred Stock held by such participant which is
unvested or subject to restriction shall thereupon be forfeited.
<PAGE> 13
(7) Based on service, performance or such other factors or criteria as
the Committee may determine, the Committee may, at or after grant,
accelerate the vesting of all or any part of any Deferred Stock Award or
waive a portion of the Deferral Period for all or any part of such Award,
subject in all cases to the Minimum Deferral Period requirement.
(8) A participant may elect to further defer receipt of a Deferred
Stock Award (or an installment of an Award) for a specified period or until
a specified event (the "Elective Deferral Period"), subject in each case to
the Committee's approval and the terms of this Section 8 and such other
terms as are determined by the Committee, all in its sole discretion.
Subject to any exceptions approved by the Committee, such election must be
made at least 12 months prior to completion of the Deferral Period for such
Deferred Stock Award (or such installment).
(9) Each such Award shall be confirmed by, and subject to the terms
of, a Deferred Stock Award agreement evidencing the Award in the form
approved from time to time by the Committee.
(c) Minimum Value Provisions. In order to better ensure that award payments
actually reflect the performance of the Company and service of the participant,
the Committee may provide, in its sole discretion, for a tandem
performance-based or other Award designed to guarantee a minimum value, payable
in cash or Stock to the recipient of a Deferred Stock Award, subject to such
performance, future service, deferral and other terms and conditions as may be
specified by the Committee.
SECTION 9. Stock Purchase Rights.
(a) Grant. Stock Purchase Rights may be granted alone, in addition to or in
tandem with other Awards granted under the Plan or cash awards made outside the
Plan. The Committee shall determine the individuals to whom, and the time or
times at which, grants of Stock Purchase Rights will be made, the number of
shares of Stock which may be purchased pursuant to the Stock Purchase Rights,
and the other terms and conditions of the Stock Purchase Rights in addition to
those set forth in Section 9(b). The Stock subject to the Stock Purchase Rights
may be purchased, as determined by the Committee at the time of grant:
(1) at the Fair Market Value of such Stock on the date of grant;
(2) at 50% of the Fair Market Value of such Stock on the date of
grant;
(3) at an amount equal to the Book Value of such Stock on the
date of grant; or
(4) at an amount equal to the par value of such Stock on the date
of grant.
<PAGE> 14
Subject to Section 9(b) hereof, the Committee may also impose such
deferral, forfeiture or other terms and conditions as it shall determine,
in its sole discretion, on such Stock Purchase Rights or the exercise
thereof.
Each Stock Purchase Right Award shall be confirmed by, and be
subject to the terms of, a Stock Purchase Rights Agreement which shall be
in form approved by the Committee.
(b) Terms and Conditions. Stock Purchase Rights may contain such
additional terms and conditions not inconsistent with the terms of the Plan
as the Committee shall deem desirable, and shall generally be exercisable
for such period as shall be determined by the Committee. However, Stock
Purchase Rights granted to Section 16 participants shall not become
exercisable earlier than six months and one day after the grant date. Stock
Purchase Rights shall not be transferable by a participant other than by
will or by the laws of descent and distribution.
SECTION 10. Other Stock-Based Awards.
(a) Grant. Other Awards of Stock and other Awards that are valued, in
whole or in part, by reference to, or are otherwise based on, Stock,
including, without limitation, performance shares, convertible preferred
stock, convertible debentures, exchangeable securities and Stock Awards or
options valued by reference to Book Value or subsidiary performance, may be
granted alone, in addition to or in tandem with other Awards granted under
the Plan or cash awards made outside of the Plan.
At the time the Stock or Other Stock-Based Award is granted, the
Committee shall determine the individuals to whom and the time or times at
which such Stock or Other Stock-Based Awards shall be awarded, the number
of shares of Stock to be used in computing an Award or which are to be
awarded pursuant to such Awards, the consideration, if any, to be paid for
such Stock or Other Stock-Based Awards, and all other terms and conditions
of the Awards in addition to those set forth in Section 10(b).
The provisions of Other Stock-Based Awards need not be the same
with respect to each participant.
(b) Terms and Conditions. Other Stock-Based Awards shall be subject
to the following terms and conditions and shall contain such additional
terms and conditions, not inconsistent with the terms of the Plan, as the
Committee shall deem desirable:
(1) Subject to the provisions of this Plan and the Award
agreement referred to in Section 10(b)(5) below, Stock awarded or
subject to Awards made under this Section 10 may not be sold,
assigned, transferred, pledged or otherwise encumbered prior to the
date on which the Stock is issued, or, if later, the date on which any
applicable restriction, performance, holding or deferral period or
requirement is satisfied or lapses. All Stock or Other Stock Based
Awards granted under this Section 10 shall be subject to a minimum
holding period (including any applicable restriction, performance
and/or deferral periods) of six months and one day ("Minimum Holding
Period").
<PAGE> 15
(2) Subject to the provisions of this Plan and the Award
agreement and unless otherwise determined by the Committee at the time of
grant, the recipient of an Other Stock-Based Award shall be entitled to
receive, currently or on a deferred basis, interest or dividends or
interest or dividend equivalents with respect to the number of shares of
Stock covered by the Award, as determined at the time of the Award by the
Committee, in its sole discretion, and the Committee may provide that such
amounts (if any) shall be deemed to have been reinvested in additional
Stock or otherwise reinvested.
(3) Subject to the Minimum Holding Period, any Other Stock-Based
Award and any Stock covered by any such Award shall vest or be forfeited to
the extent, at the times and subject to the conditions, if any, provided in
the Award agreement, as determined by the Committee, in its sole
discretion.
(4) In the event of the participant's Disability or death, or in
cases of special circumstances, the Committee may, in its sole discretion,
waive, in whole or in part, any or all of the remaining limitations imposed
hereunder or under any related Award agreement (if any) with respect to any
part or all of any Award under this Section 10, provided that the Minimum
Holding Period requirement may not be waived, except in case of a
participant's death.
(5) Each Award shall be confirmed by, and subject to the terms
of, an agreement or other instrument evidencing the Award in the form
approved from time to time by the Committee, the Company and the
participant.
(6) Stock (including securities convertible into Stock) issued on a
bonus basis under this Section 10 shall be issued for no cash
consideration. Stock (including securities convertible into Stock)
purchased pursuant to a purchase right awarded under this Section 10 shall
bear a price of at least 50% of the Fair Market Value of the Stock on the
date of grant. The purchase price of such Stock, and of any Other Stock
Based Award granted hereunder, or the formula by which such price is to be
determined, shall be fixed by the Committee at the time of grant.
(7) In the event that any "derivative security", as defined in
Rule 16a-1(c) (or any successor thereto) promulgated by the Securities and
Exchange Commission under Section 16 of the Exchange Act, is awarded
pursuant to this Section 10 to any Section 16 participant, such derivative
security shall not be transferable other than by will or by the laws of
descent and distribution.
SECTION 11. Change In Control Provision.
(a) Impact of Event. In the event of: (1) a "Change in Control" as defined
in Section 11(b) or (2) a "Potential Change in Control" as defined in
Section 11(c), the following acceleration and valuation provisions shall apply:
<PAGE> 16
(1) Any Stock Appreciation Rights and any Stock Options awarded under
the Plan not previously exercisable and vested shall become fully
exercisable and vested;
(2) The restrictions and deferral limitations applicable to any
Restricted Stock, Deferred Stock, Stock Purchase Rights and Other
Stock-Based Awards shall lapse and such shares and awards shall be deemed
fully vested; and
(3) The value of all outstanding Awards, in each case to the extent
vested, shall, unless otherwise determined by the Committee in its sole
discretion at or after grant but prior to any Change in Control or
Potential Change in Control, be cashed out on the basis of the "Change in
Control Price" as defined in Section 11(d) as of the date such Change in
Control or such Potential Change in Control is determined to have occurred;
provided, however, that the provisions of Sections 11(a)(1)-(3) shall not
apply with respect to Awards granted to any Section 16 participant which have
been held by such participant for less than six months and one day as of the
date that such Change in Control or Potential Change in Control is determined to
have occurred.
(b) Definition of Change in Control. For purposes of Section 11(a), a
"Change in Control" means the happening of any of the following:
(1) When any "person" as defined in Section 3(a)(9) of the Exchange
Act and as used in Sections 13(d) and 14(d) thereof, including a "group" as
defined in Section 13(d) of the Exchange Act, but excluding the Company and
any Subsidiary and any employee benefit plan sponsored or maintained by the
Company or any Subsidiary (including any trustee of such plan acting as
trustee), directly or indirectly, becomes the "beneficial owner" (as
defined in Rule l3d-3 under the Exchange Act, as amended from time to
time), of securities of the Company representing 20 percent or more of the
combined voting power of the Company's then outstanding securities;
provided, however, that the terms "person" and "group" shall not include
any "Excluded Director", and the term "Excluded Director" means any
director who, on the effective date of the Plan, is the beneficial owner of
or has the right to acquire an amount of Stock equal to or greater than
five percent of the number of shares of Stock outstanding on such effective
date; and further provided that, unless otherwise determined by the Board
or any committee thereof, the terms "person" and "group" shall not include
any entity or group of entities which has acquired Stock of the Company in
the ordinary course of business for investment purposes only and not with
the purpose or effect of changing or influencing the control of the
Company, or in connection with or as a participant in any transaction
having such purpose or effect, ("Investment Intent"), as demonstrated by
the filing by such entity or group of a statement on Schedule 13G
(including amendments thereto) pursuant to Regulation 13D under the
Exchange Act, as long as such entity or group continues to hold such Stock
with an Investment Intent;
(2) When, during any period of 24 consecutive months during the
existence of the Plan, the individuals who, at the beginning of such
period, constitute the Board (the "Incumbent Directors") cease for any
reason other than death to constitute at least a majority thereof;
<PAGE> 17
provided, however, that a director who was not a director at the beginning
of such 24-month period shall be deemed to have satisfied such 24-month
requirement (and be an Incumbent Director) if such director was elected by,
or on the recommendation of or with the approval of, at least two-thirds of
the directors who then qualified as Incumbent Directors either actually
(because they were directors at the beginning of such 24-month period) or
by prior operation of this Section 11(b)(2); or
(3) The occurrence of a transaction requiring shareholder approval
for the acquisition of the Company by an entity other than the Company or a
Subsidiary through purchase of assets, by merger or otherwise;
provided, however, a change in control shall not be deemed to be a Change in
Control for purposes of the Plan if the Board approves such change prior to
either (i) the commencement of any of the events described in Section (b)(l),
(2), or (3) or (c)(l) or (ii) the commencement by any person other than the
Company of a tender offer for Stock.
(c) Definition of Potential Change in Control. For purposes of Section
11(a), a "Potential Change in Control" means the happening of any one of the
following:
(1) The approval by shareholders of an agreement by the Company, the
consummation of which would result in a Change in Control of the Company as
defined in Section 11(b); or
(2) The acquisition of beneficial ownership, directly or indirectly,
by any entity, person or group (other than the Company or a Subsidiary or
any Company employee benefit plan (including any trustee of such plan
acting as such trustee)) of securities of the Company representing 5% or
more of the combined voting power of the Company's outstanding securities
and the adoption by the Board of a resolution to the effect that a
Potential Change in Control of the Company has occurred for purposes of
this Plan.
(d) Change in Control Price. For purposes of this Section 11, "Change in
Control Price" means the highest price per share paid in any transaction
reported on the New York Stock Exchange Composite Index, or paid or offered in
any bona fide transaction related to a Change in Control or Potential Change in
Control of the Company, at any time during the 60-day period immediately
preceding the occurrence of the Change in Control (or, where applicable, the
occurrence of the Potential Change in Control event), in each case as determined
by the Committee, except that, in the case of Incentive Stock Options and Stock
Appreciation Rights relating to Incentive Stock Options, such price shall be
based only on transactions reported for the date on which the participant
exercises such Stock Appreciation Rights or, where applicable, the date on which
a cash out occurs under Section 11(a)(3).
SECTION 12. Amendments and Termination.
<PAGE> 18
The Board may at any time, in its sole discretion, amend, alter or
discontinue the Plan, but no such amendment, alteration or discontinuation shall
be made which would impair the rights of a participant under an Award
theretofore granted, without the participant's consent. The Company shall submit
to the shareholders of the Company for their approval any amendments to the Plan
which are required by Section 16 of the Exchange Act, or the rules and
regulations thereunder, to be approved by the shareholders.
The Committee may at any time, in its sole discretion, amend the terms of
any Award, but no such amendment shall be made which would impair the rights of
a participant under an Award theretofore granted, without the participant's
consent; nor shall any such amendment be made which would make the applicable
exemptions provided by Rule 16b-3 under the Exchange Act unavailable to any
Section 16 participant holding the Award without the participant's consent. The
Committee may also substitute new Stock Options for previously granted Stock
Options (on a one-for-one or other basis), including previously granted Stock
Options having a higher option price.
Subject to the above provisions, the Board shall have all necessary
authority to amend the Plan to take into account changes in applicable
securities and tax laws and accounting rules, as well as other developments.
SECTION 13. Unfunded Status of Plan.
The Plan is intended to constitute an "unfunded" plan for incentive and
deferred compensation. With respect to any payments not yet made to a
participant by the Company, nothing contained herein shall give any such
participant any rights that are greater than those of a general creditor of the
Company.
SECTION 14. General Provisions.
(a) The Committee may require each participant acquiring Stock
pursuant to an Award under the Plan to represent to and agree with the
Company in writing that the participant is acquiring the Stock without a
view to distribution thereof. The certificates for such shares may include
any legend which the Committee deems appropriate to reflect any
restrictions on transfer.
All shares of Stock or other securities delivered under the Plan shall
be subject to such stop-transfer orders and other restrictions as the
Committee may deem advisable under the rules, regulations and other
requirements of the Securities and Exchange Commission, any stock exchange
upon which the Stock is then listed, and any applicable federal or state
securities laws, and the Committee may cause a legend or legends to be put
on any certificates for such shares to make appropriate reference to such
restrictions.
<PAGE> 19
(b) Nothing contained in this Plan shall prevent the Board from
adopting other or additional compensation arrangements, subject to
shareholder approval if such approval is required; and such arrangements
may be either generally applicable or applicable only in specific cases.
(c) Neither the adoption of the Plan, nor its operation, nor any
document describing, implementing or referring to the Plan, or any part
thereof, shall confer upon any participant under the Plan any right to
continue in the employ, or as a director, of the Company or any Subsidiary
or Affiliate, or shall in any way affect the right and power of the Company
or any Subsidiary or Affiliate to terminate the employment, or service as a
director, of any participant under the Plan at any time with or without
assigning a reason therefor, to the same extent as the Company or any
Subsidiary or Affiliate might have done if the Plan had not been adopted.
(d) For purposes of this Plan, a transfer of a participant between
the Company and its Subsidiaries and Affiliates shall not be deemed a
termination of employment.
(e) No later than the date as of which an amount first becomes
includable in the gross income of the participant for federal income tax
purposes with respect to any Award under the Plan, the participant shall
pay to the Company, or make arrangements satisfactory to the Committee
regarding the payment of, any federal, state or local taxes of any kind
required by law to be withheld with respect to such amount. Subject to the
following sentence, unless otherwise determined by the Committee,
withholding obligations may be settled with Stock, including unrestricted
Stock previously owned by the participant or Stock that is part of the
Award that gives rise to the withholding requirement. Notwithstanding the
foregoing, any election by a Section 16 participant to settle such tax
withholding obligation with Stock that is part of such Award shall be
subject to approval by the Committee, in its sole discretion. The
obligations of the Company under the Plan shall be conditional on such
payment or arrangements and the Company and its Subsidiaries and Affiliates
shall, to the extent permitted by law, have the right to deduct any such
taxes from any payment of any kind otherwise due to the participant.
(f) The actual or deemed reinvestment of dividends or dividend
equivalents in additional Restricted Stock (or in Deferred Stock or other
types of Awards) at the time of any dividend payment shall only be
permissible if sufficient shares of Stock are available under Section 3 for
such reinvestment (taking into account then outstanding Stock Options,
Stock Purchase Rights and other Plan Awards).
(g) The Plan, all Awards made and actions taken thereunder and any
agreements relating thereto shall be governed by and construed in
accordance with the laws of the State of Ohio.
(h) All agreements entered into with participants pursuant to the
Plan shall be subject to the Plan.
(i) The provisions of Awards need not be the same with respect to
each participant.
<PAGE> 20
SECTION 15. Effective Date of Plan.
The Plan was adopted by the Board on September 27, 1989 and approved by
shareholders on April 27, 1990. This amendment and restatement of the Plan
shall be effective as of April 24, 1992. Amendments made subsequent to
April 24, 1992 shall be effective upon the date of their adoption by the Board.
SECTION 16. Term of Plan.
No Award shall be granted pursuant to the Plan on or after April 27, 2000,
but Awards granted prior to such date may extend beyond that date.
<PAGE> 1
EXHIBIT NO. 10(O)
-----------------
THIRD AMENDMENT TO THE PROGRESSIVE CORPORATION
EXECUTIVE DEFERRED COMPENSATION PLAN
(January 1, 1997 Amendment and Restatement)
WHEREAS, The Progressive Corporation Executive Deferred Compensation Plan
is currently maintained pursuant to a January 1, 1997 Amendment and Restatement
and the First and Second Amendments thereto ("Plan"); and
WHEREAS, it is deemed desirable to amend the Plan further;
NOW, THEREFORE, the Plan is hereby amended in the respects hereinafter set
forth, effective December 1, 1998.
1. Section 1.17 of the Plan is hereby amended and restated in its entirety
to provide as follows:
"`Fixed Income Fund' means the IDS Cash Management Fund or such
-----------------
other Investment Fund as may be designated by the Committee as
the Fixed Income Fund within the meaning of the Plan."
2. Except as expressly provided in this Amendment, the terms and
provisions of the Plan shall remain entirely unchanged and continue in full
force and effect.
IN WITNESS WHEREOF, the undersigned has hereunto caused this Amendment
to be executed by its duly authorized representative effective as of the date
set forth above.
THE PROGRESSIVE CORPORATION
By: /s/ David M. Schneider
-----------------------
Title: Secretary
---------------------
<PAGE> 1
EXHIBIT NO. 10(P)
-----------------
THE PROGRESSIVE CORPORATION
EXECUTIVE DEFERRED COMPENSATION TRUST
(December 1, 1998 Amendment and Restatement)
WHEREAS, The Progressive Corporation Executive Deferred Compensation Trust
is currently maintained pursuant to a January 1, 1997 Amendment and Restatement
between The Progressive Corporation ("Company") and The Northern Trust Company
("Northern Trust") as trustee; and
WHEREAS, Northern Trust has been removed as trustee effective upon the
close of business on December 1, 1998; and
WHEREAS, Company has designated American Express Trust Company ("Trustee")
as the new trustee of the Plan effective December 1, 1998; and
WHEREAS, Company and Trustee desire to amend and restate the Trust
Agreement to reflect the designation of American Express Trust Company as
Trustee and to make certain other changes in the Trust;
NOW, therefore, effective December 1, 1998, Company and Trustee hereby
amend and restate the Trust Agreement in its entirety to provide as follows:
SECTION 1. Establishment of Trust
(a) Company hereby deposits with Trustee in trust Ten Dollars ($10.00),
which shall become the principal of the Trust to be held, administered
and disposed of by Trustee as provided in this Trust Agreement.
(b) The Trust hereby established shall be irrevocable.
(c) The Trust is intended to be a grantor trust, of which Company is the
grantor, within the meaning of subpart E, part I, subchapter J, chapter 1,
subtitle A of the Internal Revenue Code of 1986, as amended, and shall be
construed accordingly.
(d) The principal of the Trust, and any earnings thereon shall be held
separate and apart from other funds of Company and shall be used
exclusively for the uses and purposes of Plan participants and general
creditors as herein set forth. Plan participants and their beneficiaries
shall have no preferred claim on, or any beneficial ownership interest in,
any assets of the Trust. Any rights created under the Plan and this Trust
Agreement shall be mere unsecured contractual rights of Plan participants
and their beneficiaries against Company. Any assets held by the Trust will
be subject to the claims of Company's general creditors under federal and
state law in the event of Insolvency, as defined in Section 3(a) herein.
Any assets held by the Trust will also be subject to the federal and state
law claims of general creditors of each subsidiary of Company that employs
Plan participants ("Subsidiary") in the event of Insolvency, as defined in
Section 3(a) herein, but only to the extent of the amounts due under the
Plan to participants attributable to the period that such participants were
employed by such Subsidiary.
(e) Within 30 days following the end of the Plan year(s), ending after the
Trust has become irrevocable pursuant to Section 1(b) hereof, Company shall
be required to irrevocably deposit additional cash or other
<PAGE> 2
property to the Trust in an amount sufficient to pay each Plan participant
or beneficiary the benefits payable pursuant to the terms of the Plan as of
the close of the Plan year(s). Trustee shall have no duty to enforce any
funding obligations of Company and the duties of Trustee shall be governed
solely by the terms of the Trust without reference to the Plan.
SECTION 2. Payments to Plan Participants and Their Beneficiaries
-----------------------------------------------------
(a) Company shall deliver to Trustee a schedule (the "Payment Schedule")
that indicates the amounts payable in respect of each Plan participant (and
his or her beneficiaries), that provides a formula or other instructions
acceptable to Trustee for determining the amounts so payable, the form in
which such amount is to be paid (as provided for or available under the
Plan, and the time of commencement for payment of such amounts. Except as
otherwise provided herein, Trustee shall make payments to the Plan
participants and their beneficiaries in accordance with such Payment
Schedule. Company shall have the sole responsibility for all tax
withholding, filings and reports. Trustee shall withhold such amounts from
distributions as Company may direct and shall follow the instructions of
Company with respect to remission of such withheld amounts to appropriate
governmental authorities.
(b) The entitlement of a Plan participant or his or her beneficiaries to
benefits under the Plan shall be determined by Company or such party as it
shall designate under the Plan, and any claim for such benefits shall be
considered and reviewed under the procedures set out in the Plan.
(c) Company may make payment of benefits directly to Plan participants or
their beneficiaries as they become due under the terms of the Plan. Company
shall notify Trustee of its decision to make payment of benefits directly
prior to the time amounts are payable to participants or their
beneficiaries. In addition, if the principal of the Trust, and any earnings
thereon, are not sufficient to make payments of benefits in accordance with
the terms of the Plan, Company shall make the balance of each such payment
as it falls due. Trustee shall notify Company where principal and earnings
are not sufficient to make a payment then due under the Payment Schedule.
<PAGE> 3
SECTION 3. Trustee Responsibility Regarding Payments to Trust Beneficiary
--------------------------------------------------------------
When Company is Insolvent.
--------------------------
(a) Trustee shall cease payment of benefits to Plan participants and their
beneficiaries if the Company, or any subsidiary that ever employed such
participants, is Insolvent, subject to the provisions of Section 3(b)
below. Company or a Subsidiary shall be considered "Insolvent" for purposes
of this Trust Agreement if (i) Company or such Subsidiary is unable to pay
its debts as they become due, or (ii) Company or such Subsidiary is subject
to a pending proceeding as a debtor under the United States Bankruptcy
Code.
(b) At all times during the continuance of this Trust, as provided in
Section 1(d) hereof, the principal and income of the Trust shall be subject
to claims of general creditors of Company and, to the extent provided in
Section 1(d), each Subsidiary, under federal and state law as set forth
below.
(1) The Board of Directors and the Chief Executive Officer of Company
shall have the duty to inform Trustee in writing of Company's or any
Subsidiary's Insolvency. If a person claiming to be a creditor of Company
or a Subsidiary alleges in writing to Trustee that Company or such
Subsidiary has become Insolvent, Trustee shall determine whether Company or
such Subsidiary is Insolvent and, pending such determination, Trustee shall
discontinue payment of benefits to Plan participants or their
beneficiaries.
(2) Unless Trustee has actual knowledge of Company's or any Subsidiary's
Insolvency, or has received notice from Company or a Subsidiary or a person
claiming to be a creditor alleging that Company or a Subsidiary is
Insolvent, Trustee shall have no duty to inquire whether Company or a
Subsidiary is Insolvent. Trustee may in all events rely on such evidence
concerning Company's or any Subsidiary's solvency as may be furnished to
Trustee and that provides Trustee with a reasonable basis for making a
determination concerning Company's or any Subsidiary's solvency. Trustee
may appoint an independent accounting or consulting firm to make any
determination required by Trustee under this Section 3, in which event
Trustee may conclusively rely upon the determination by such firm and shall
be responsible only for the prudent selection of the firm.
(3) If at any time Trustee has determined that Company or a Subsidiary is
Insolvent, Trustee shall discontinue payments to all Plan participants and
their beneficiaries (if Company is Insolvent) or Plan participants who were
ever employed by such Subsidiary (if such Subsidiary is Insolvent), and
shall hold the assets of the Trust for the benefit of Company's or such
Subsidiary's general creditors. Nothing in this Trust Agreement shall in
any way diminish any rights of Plan participants or their beneficiaries to
pursue their rights as general creditors of Company with respect to
benefits due under the Plan or otherwise. Company shall be responsible for
furnishing Trustee with current information regarding identities of
Subsidiaries and participants who were ever employed by each such
Subsidiary.
(4) Trustee shall resume the payment of benefits to Plan participants or
their beneficiaries in accordance with Section 2 of this Trust Agreement
only after Trustee has determined that Company, or a Subsidiary as the case
may be, is not Insolvent (or is no longer Insolvent).
(c) Provided that there are sufficient assets, if Trustee discontinues the
payment of benefits from the Trust pursuant to Section 3(b) hereof and
subsequently resumes such payments, the first payment following such
discontinuance shall include the aggregate amount of all payments due to
Plan participants or their beneficiaries under the terms of the Plan for
the period of such discontinuance, less the aggregate amount of any
payments made to Plan participants or their beneficiaries by Company in
lieu of the payments provided for hereunder during any such period of
discontinuance, all in accordance with the Payment
<PAGE> 4
Schedule, which shall be modified by Company as necessary to comply with
the provisions of this paragraph (c).
SECTION 4. Payments to Company.
--------------------
Except as provided in Section 3 hereof, after the Trust has become irrevocable,
Company shall have no right or power to direct Trustee to return to Company or
to divert to others any of the Trust assets before all payment of benefits have
been made to Plan participants and their beneficiaries pursuant to the terms of
the Plan.
SECTION 5. Investment Authority.
---------------------
(a) Trustee may invest in securities (including stock or rights to
acquire stock) or obligations issued by Company. Except as provided below
and in Section 5(b), all rights associated with assets of the Trust shall
be exercised by Trustee or the person designated by Trustee, and shall in
no event be exercisable by or rest with Plan participants, except that
voting rights with respect to Trust assets will be exercised by Company.
Company shall have the right at anytime, and from time to time in its sole
discretion, to substitute assets of equal fair market value for any asset
held by the Trust. This right is exercisable by Company in a nonfiduciary
capacity without the approval or consent of any person in a fiduciary
capacity. Trustee shall have no responsibility for determining whether such
right has been properly exercised or for any investment losses that may
result from its exercise.
(b) Company may by notice to Trustee create one or more investment funds
in which Trust assets are to be invested and shall in such event direct
Trustee with respect to allocation of assets to such funds and transfers
among such funds. Company shall be responsible for the initial selection of
mutual funds or other investment vehicles which are to comprise the
investment funds and for retaining the availability of or terminating the
use of any such investment vehicles.
SECTION 6. Disposition of Income.
----------------------
(a) During the term of this Trust, all income received by the Trust, net of
expenses and taxes, shall be accumulated and reinvested.
SECTION 7. Accounting by Trustee.
----------------------
(a) Trustee shall keep accurate and detailed records of all investments,
receipts, disbursements, and all other transactions required to be made,
including such specific records as shall be agreed upon in writing between
Company and Trustee. Within 60 days following the close of each calendar
year and within 60 days after the removal or resignation of Trustee,
Trustee shall deliver to Company a written account of its administration of
the Trust during such year or during the period from the close of the last
preceding year to the date of such removal or resignation, setting forth
all investments, receipts, disbursements and other transactions effected by
it, including a description of all securities and investments purchased and
sold with the cost or net proceeds of such purchases or sales (accrued
interest paid or receivable being shown separately), and showing all cash,
securities and other property held in the Trust at the end of such year or
as of the date of such removal or resignation, as the case may be.
<PAGE> 5
SECTION 8. Responsibility of Trustee.
--------------------------
(a) Trustee shall act with the care, skill, prudence and diligence under
the circumstances then prevailing that a prudent person acting in like
capacity and familiar with such matters would use in the conduct of an
enterprise of a like character and with like aims, provided, however, that
Trustee shall incur no liability to any person for any action taken
pursuant to a direction, request, or approval given by Company which is
contemplated by, and in conformity with, the terms of this Trust and is
given in writing by Company. In the event of a dispute between Company and
a party, Trustee may apply to a court of competent jurisdiction to resolve
the dispute.
(b) Trustee may consult with legal counsel (who may also be counsel for
Company generally) with respect to any of its duties or obligations
hereunder.
(c) Trustee may hire agents, accountants, actuaries, investment advisors,
financial consultants or other professionals to assist it in performing any
of its duties or obligations hereunder.
(d) Trustee shall have, without exclusion, all powers conferred on
trustees by applicable law, unless expressly provided otherwise herein,
provided, however, that if an insurance policy is held as an asset of the
Trust, Trustee shall have no power to name a beneficiary of the policy
other than the Trust, to assign the policy (as distinct from conversion of
the policy to a different form) other than to a successor Trustee, or to
loan to any person the proceeds of any borrowing against such policy and
shall act with respect to any such policy only as directed by Company.
(e) However, notwithstanding the provisions of Section 8(d) above,
Trustee may loan to Company the proceeds of any borrowing against an
insurance policy held as an asset of the Trust.
(f) Notwithstanding any powers granted to Trustee pursuant to this Trust
Agreement or to applicable law, Trustee shall not have any power that could
give this Trust the objective of carrying on a business and dividing the
gains therefrom, within the meaning of section 301.7701-2 of the Procedure
and Administrative Regulations promulgated pursuant to the Internal Revenue
Code.
SECTION 9. Compensation and Expenses of Trustee.
-------------------------------------
Company shall pay all administrative and Trustee's fees and expenses. If not so
paid, the fees and expenses shall be paid from the Trust. The Trustee will, as
part of its compensation for services, receive interest earned on any uninvested
cash awaiting investment into or distribution from the Trust.
SECTION 10. Resignation and Removal of Trustee.
-----------------------------------
(a) Trustee may resign at any time by written notice to Company, which shall
be effective not less than 365 days after receipt of such notice unless
Company and Trustee agree otherwise.
(b) Trustee may be removed by Company on not less than 180 days notice or
upon shorter notice accepted by Trustee.
<PAGE> 6
(c) If Trustee resigns or is removed within two years after a Change of
Control, as defined herein, Company shall apply to a court of competent
jurisdiction for the appointment of a successor trustee or for
instructions.
(d) Upon resignation or removal of Trustee and appointment of a successor
Trustee, all assets shall subsequently be transferred to the successor
Trustee. The transfer shall be completed within 60 days after receipt of
notice of resignation, removal or transfer, unless Company extends the
time limit.
(e) If Trustee resigns or is removed, a successor shall be appointed, in
accordance with Section 11 hereof, by the effective date of resignation
or removal under paragraphs (a) or (b) of this section. If no such
appointment has been made, Trustee may apply to a court of competent
jurisdiction for appointment of a successor or for instructions. All
expenses of Trustee in connection with the proceeding shall be allowed
as administrative expenses of the Trust.
<PAGE> 7
Section 11. Appointment of Successor.
-------------------------
(a) If Trustee resigns or is removed in accordance with Section 10(a) or (b)
hereof, Company may appoint any third party, such as a bank trust
department or other party that may be granted corporate trustee powers
under state law, as a successor to replace Trustee upon resignation or
removal. The appointment shall be effective when accepted in writing by the
new Trustee, who shall have all of the rights and powers of the former
Trustee, including ownership rights in the Trust assets. The former Trustee
shall execute any instrument necessary or reasonably requested by Company
or the successor Trustee to evidence the transfer.
(b) If Trustee resigns or is removed pursuant to the provisions of Section
10(c) hereof and a court of competent jurisdiction appoints a successor
Trustee, the appointment shall be effective when accepted in writing by the
new Trustee. The new Trustee shall have all the rights and powers of the
former Trustee, including ownership rights in Trust assets. The former
Trustee shall execute any instrument necessary or reasonably requested by
the successor Trustee to evidence the transfer.
(c) The successor Trustee need not examine the records and acts of any prior
Trustee and may retain or dispose of existing Trust assets, subject to
Sections 7 and 8 hereof. The successor Trustee shall not be responsible for
and Company shall indemnify and defend the successor Trustee from any
claims or liability resulting from any action or inaction of any prior
Trustee or from any other past event, or any condition existing at the time
it becomes successor Trustee.
SECTION 12. Amendment or Termination.
-------------------------
(a) This Trust Agreement may be amended by a written instrument executed by
Trustee and Company. Notwithstanding the foregoing, no such amendment shall
conflict with the terms of the Plan or shall make the Trust revocable after
it has become irrevocable in accordance with Section 1(b) hereof. Company
shall be solely responsible for determining whether an amendment conflicts
with the terms of the Plan.
(b) The Trust shall not terminate until the date on which Plan participants and
their beneficiaries are no longer entitled to benefits pursuant to the
terms of the Plan. Upon termination of the Trust any assets remaining in
the Trust shall be returned to Company pursuant to certification of Company
to Trustee that the conditions for termination of the Trust have been met.
(c) Upon written approval of participants or beneficiaries entitled to payment
of benefits pursuant to the terms of the Plan, Company may terminate this
Trust prior to the time all benefit payments under the Plan have been made.
All assets in the Trust at termination shall be returned to Company.
SECTION 13. Miscellaneous
-------------
(a) Any provision of this Trust Agreement prohibited by law shall be
ineffective to the extent of any such prohibition, without invalidating the
remaining provisions hereof.
(b) Benefits payable to Plan participants and their beneficiaries under this
Trust Agreement may not be anticipated, assigned (either at law or in
equity), alienated, pledged, encumbered or subjected to attachment,
garnishment, levy, execution or other legal or equitable process.
<PAGE> 8
(c) This Trust Agreement shall be governed by and construed in accordance with
the laws of the State of Minnesota.
(d) For purposes of this Trust, Change of Control shall mean a "Change in
Control" or "Potential Change in Control" within the meaning of The
Progressive Corporation 1989 Incentive Plan (amended and restated as of
April 24, 1992 and as further amended as of July 1, 1992 and February 5,
1993). Company shall notify Trustee promptly of any Change of Control and
Trustee shall have no responsibility to independently determine whether a
Change of Control has occurred.
(e) Company shall indemnify Trustee against, and hold Trustee harmless from,
any and all loss, damage, penalty, liability, cost, expense and reasonable
attorney's fees and disbursements, that may be incurred by, imposed upon or
asserted against Trustee by reason of any claim, regulatory proceeding or
litigation arising from any act done or omitted to be done by any
individual or person with respect to the Plan or Trust, excepting only any
and all loss, damage, penalty, liability, cost, expense and reasonable
attorney's fees and disbursements, to the extent arising from Trustee's
negligence in performing or failing to perform any of the duties
specifically allocated to the Trustee under the terms of this Agreement or
from the Trustee's willful misconduct or bad faith. Trustee agrees to
indemnify and hold Company harmless from and against any and all loss,
damage, penalty, liability, cost, expense and reasonable attorney's fees
and disbursements incurred by, imposed upon or asserted against Company by
reason of any claim, regulatory proceeding or litigation to the extent
arising from the Trustee's negligence in performing or failing to perform
any of the duties specifically allocated to the Trustee under the terms of
this Agreement or from the Trustee's willful misconduct or bad faith.
(f) Trustee shall not undertake or defend any litigation arising in connection
with the Trust without the express written consent of Company. If, with
Company's consent, Trustee undertakes or defends any litigation arising in
connection with this Trust, Company agrees, subject to Section 13(e), to
indemnify Trustee against Trustee's costs, expenses and liabilities
(including, without limitation, attorneys' fees and expenses) relating
thereto and to be primarily liable for such payments. If Company does not
pay such costs, expenses and liabilities in a reasonably timely manner,
Trustee may obtain payment from the Trust.
(g) The Trustee shall deliver or cause to be executed and delivered, to the
Company, all notices, prospectuses, finance statements, proxies and proxy
soliciting materials relating to investments held hereunder. The Trustee
shall not vote any proxy or tender offer election, participate in any
voting trust, exercise any options or subscription right or join in,
dissent from or oppose any merger, reorganization, consolidation,
liquidation or sale with respect to any asset held hereunder, except in
accordance with the timely written instructions of the Company. If no such
written instructions are timely received, such proxies, elections and
voting trust shall not be voted; such options or subscription rights shall
not be exercised; and such mergers, reorganizations, consolidations,
liquidations or sales shall not be joined, dissented from or opposed.
(h) The Trustee may, in the exercise of its discretion, invest and reinvest the
assets of any trust created under this Agreement in assets issued or
distributed by American Express Financial Corporation or any of its
successors, subsidiaries or affiliates, even though American Express
Financial Corporation and its successors, subsidiaries or affiliates are
affiliated with the Trustee. Assets that the Trustee may acquire pursuant
to the authority granted by this paragraph include, but are not limited to
load and no-load mutual funds and stock of the Company. The Trustee shall
have full discretionary authority to make sales, purchases and exchanges of
assets of any trust created under this Agreement to, from, through any
securities broker/dealer owned by or affiliated with American Express
Financial Corporation, including
<PAGE> 9
but not limited to American Express Securities Services, or any of its
successors, subsidiaries or affiliates, or any unaffiliated persons,
partnerships or corporations it may select, and settle transactions in the
usual course of business.
IN WITNESS WHEREOF, Company and Trustee have hereunto caused this Trust
Agreement to be executed by their duly authorized representatives as of the date
set forth above.
THE PROGRESSIVE CORPORATION AMERICAN EXPRESS TRUST
COMPANY
By: /s/ David M. Schneider By: /s/ Tara L. Stonehouse
------------------------ -------------------------
Title: Secretary Title: Vice President
--------------------- ----------------------
<PAGE> 1
EXHIBIT NO. 10(S)
-----------------
THE PROGRESSIVE CORPORATION 1999
INFORMATION SERVICES INCENTIVE PLAN
1. The Progressive Corporation and its subsidiaries ("Progressive" or the
"Company") have adopted the Progressive Corporation 1999 Information Services
Incentive Plan (the Plan) as part of their overall compensation program.
2. All officers and regular employees of Progressive who are assigned primarily
to Information Services as of December 1 (or such other date as may be
determined by the Chief Human Resource Officer) of a given Plan year are
eligible to be selected for participation in the Plan. The Chief Information
Officer will be a participant in the Plan. The Chief Human Resource Officer and
either the CEO - Insurance Operations or the CFO ("Designated Officers") shall
have the authority to select other Plan participants for any given plan year.
3. Annual payments under the Information Services (I/S) Incentive Plan will be
determined by application of the following formula:
Annual I/S Incentive Payment = Paid Earnings x Target Percentage x I/S
Performance Factor
The Annual I/S Incentive Payment to any participant with respect to any given
plan year will not exceed $250,000.00.
4. Paid Earnings for any Plan year means the following items paid to a
participant during the Plan year: (a) regular, vacation, sick, holiday, funeral
and overtime pay, (b) lump sum merit adjustments based on performance and (c)
retroactive payments of any of the foregoing items relating to the same Plan
year.
For purposes of the Plan, Paid Earnings shall not include any short-term or
long-term disability payments made to the participant, the earnings
replacement component of any worker's compensation award or any other bonus
or incentive compensation awards.
Notwithstanding the foregoing, if the sum of the regular, vacation, sick,
holiday and funeral pay received by a participant during a Plan year
exceeds his/her salary range maximum for that Plan year, then his/her Paid
Earnings for that Plan year shall equal his/her salary range maximum, plus
any of the following items received by such participant during that Plan
year: (a) overtime pay, (b) retroactive payments of regular, vacation,
sick, holiday, overtime and funeral pay and (c) lump sum merit adjustments.
5. Target Percentages vary by position and shall be determined on an annual
basis by the Designated Officers. The Chief Information Officer's target
percentage will be 10%, until otherwise determined by the Executive Compensation
Committee (the "Committee") of the Board of Directors of The Progressive
Corporation.
6. The I/S Performance Factor
The I/S Performance Factor is based on application availability measured on a
point system and may vary from 0 to 2.0. Points are awarded for every day that
production systems, both mainframe and client/server, are outage free. If there
is an outage in any production system, all of the points are lost for that day.
Measured applications, hours, outage definitions and point values will be
defined on an annual basis, by or under the direction of the Designated
Officers.
<PAGE> 2
7. Subject to Paragraph 8 below, no later than December 31 of each Plan year,
each participant will receive an initial payment in respect of his or her Annual
I/S Incentive Payment for that Plan year equal to 75% of an amount calculated on
the basis of Paid Earnings for the first 11 months of the Plan year, one month
of estimated earnings, performance data through the first 11 months of the Plan
year (estimated, if necessary) and one month of forecasted operating results. No
later than February 15 of the following year, each such participant shall
receive the balance of his or her Annual I/S Incentive Payment, if any, for such
Plan year, based on his or her Paid Earnings and performance data for the entire
Plan year.
Any Plan participant who is then eligible to participate in The Progressive
Corporation Executive Deferred Compensation Plan ("Deferral Plan") may
elect to defer all or a portion of the Annual I/S Incentive Payment
otherwise payable under this Plan, subject to and in accordance with the
terms of the Deferral Plan.
8. Unless otherwise determined by the Committee or as provided at Paragraph 10
hereof, in order to be entitled to receive any portion of an Annual I/S
Incentive Payment for any Plan year, the participant must be employed by
Progressive on the payment date for that portion of the Annual I/S Incentive
Payment. Annual I/S Incentive Payments will be net of any legally required
deductions for federal, state and local taxes and other items.
9. The right to any I/S Incentive Payment hereunder may not be transferred,
assigned or encumbered by any participant. Nothing herein shall prevent any
participant's interest hereunder from being subject to involuntary attachment,
levy or other legal process.
10. The Plan shall be administered by or under the direction of the Committee.
The Committee shall have the authority to adopt, alter and repeal such rules,
guidelines, procedures and practices governing the Plan as it shall, from time
to time, in its sole discretion, deem advisable.
The Committee shall have full authority to determine the manner in which
the Plan will operate, to interpret the provisions of the Plan and to make
all determinations hereunder. All such interpretations and determinations
shall be final and binding on Progressive, all Plan participants and all
other parties. No such interpretation or determination shall be relied on
as a precedent for any similar action or decision.
Unless otherwise determined by the Committee, all of the authority of the
Committee hereunder (including, without limitation, the authority to
administer the Plan, interpret the provisions thereof, waive any of the
requirements specified herein and make determinations hereunder and to
establish, change or modify performance measures) may be exercised by the
Designated Officers. In the event of a conflict, the determination of the
Committee will govern.
11. The Plan may be terminated, amended or revised, in whole or in part, at any
time and from time to time by the Committee, in its sole discretion.
12. The Plan will be unfunded and all payments due under the Plan shall be made
from Progressive's general assets.
13. Nothing in the Plan shall be construed as conferring upon any person the
right to remain a participant in the Plan or to remain employed by Progressive,
nor shall the Plan limit Progressive's right to discipline or discharge any of
its officers or employees or change any of their job titles, duties or
compensation.
<PAGE> 3
14. Progressive shall have the unrestricted right to set off against or recover
out of any Annual I/S Incentive Payment or other sums owed to any participant
under the Plan any amounts owed by such participant to Progressive.
15. This Plan is adopted, and is to be effective, as of January 1, 1999.
This Plan shall be effective for 1999 and for each calendar year thereafter
unless and until terminated by the Committee.
16. This Plan shall be interpreted and construed in accordance with the laws of
the State of Ohio.
<PAGE> 1
EXHIBIT NO. 11
--------------
THE PROGRESSIVE CORPORATION
COMPUTATION OF EARNINGS PER SHARE
(millions - except per share amounts)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Years Ended December 31, 1998 1997 1996
---------------------------------------------------------------------------------------
Per Per Per
Amount Share Amount Share Amount Share
---------------------------------------------------------------------------------------
Basic:
Net income $456.7 $400.0 $313.7
Less: Preferred stock dividends -- -- (3.5)
Excess Preferred Stock liquidation
price over carrying value -- -- (2.9)
---------------------------------------------------------------------------------------
$456.7 $6.30 $400.0 $5.56 $307.3 $4.29
=======================================================================================
Average shares outstanding 72.5 72.0 71.6
================ ================ =================
Diluted:
Net income $456.7 $400.0 $313.7
Less: Preferred stock dividends -- -- (3.5)
Excess Preferred Stock liquidation
price over carrying value -- -- (2.9)
---------------------------------------------------------------------------------------
$456.7 $6.11 $400.0 $5.31 $307.3 $4.14
=======================================================================================
Average shares outstanding 72.5 72.0 71.6
Net effect of dilutive stock options 2.2 3.3 2.6
---------------------------------------------------------------------------------------
Total 74.7 75.3 74.2
=======================================================================================
</TABLE>
<PAGE> 1
EXHIBIT NO. 12
--------------
THE PROGRESSIVE CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(millions)
(unaudited)
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------
1998 1997
------ ------
<S> <C> <C>
Income before income taxes $661.1 $578.5
------ ------
Fixed Charges:
Interest and amortization on indebtedness 64.6 64.6
Portion of rents representative of the
interest factor 6.7 5.6
------ ------
Total fixed charges 71.3 70.2
------ ------
Total income available for fixed charges(1) $728.9 $648.7
====== ======
Ratio of earnings to fixed charges 10.2 9.2
====== ======
</TABLE>
1 Excludes interest capitalized of $3.5 million for the year ended December 31,
1998; no interest was capitalized in 1997.
<PAGE> 1
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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<PAGE> 6
--------------------------------------
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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<PAGE> 10
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.
ART HERE
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<PAGE> 15
-----------------------------------
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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<PAGE> 16
ART HERE
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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<PAGE> 17
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.
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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> 40
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> 41
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> 42
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> 43
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> 44
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> 45
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> 46
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> 47
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
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<PAGE> 48
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.
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<PAGE> 49
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> 50
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
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<PAGE> 51
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> 52
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> 53
<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> 54
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> 55
<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> 56
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> 57
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> 58
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> 59
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> 60
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.
<PAGE> 1
EXHIBIT NO. 21
--------------
SUBSIDIARIES OF THE PROGRESSIVE CORPORATION
<TABLE>
<S> <C>
Jurisdiction
Name of Subsidiary of Incorporation
- ------------------ ----------------
1890 Insurance Agency, Inc. Wyoming
Airy Insurance Center, Inc. Pennsylvania
Allied Insurance Agency, Inc. Ohio
Express Quote Services, Inc. Florida
Garden Sun Insurance Services, Inc. Hawaii
Gold Key Insurance Agency California
Greenberg Financial Insurance Services, Inc. California
Halcyon Insurance Company Ohio
Husky Sun Insurance Services, Inc. Washington
Insurance Confirmation Services, Inc. Delaware
Lakeside Insurance Agency, Inc. Ohio
Maryland Auto Insurance Solutions, Inc. Maryland
Midland Financial Group, Inc. Tennessee
Agents Financial Services - Tennessee, Inc. Tennessee
Agents Financial Services - Illinois, Inc. (90% owned) Illinois
Agents Financial Services, Inc. (40% owned) Florida
AutoSurance of America, Inc. Arizona
Midland Risk Insurance Company Tennessee
Specialty Risk Insurance Company Tennessee
Midland Risk Services, Inc. Tennessee
Midland Risk Services - Arizona, Inc. Arizona
Midland Risk Services - Nevada, Inc. Nevada
Midland Risk Insurance Services - California, Inc. California
Midland Risk Services - Illinois, Inc. (85% owned) Illinois
Midland Risk Services - Tennessee, Inc. Tennessee
Mountain Laurel Assurance Company Pennsylvania
Mountainside Insurance Agency, Inc. Colorado
National Continental Insurance Company New York
Pacific Motor Club California
PCIC Canada Holdings, Ltd. Canada
Progressive Casualty Insurance Company of Canada Canada
Progny Agency, Inc. New York
Progressive Adjusting Company, Inc. Ohio
Progressive American Insurance Company Florida
Bayside Underwriters Insurance Agency, Inc. Florida
Progressive Classic Insurance Company Wisconsin
Progressive American Life Insurance Company Ohio
Progressive Life Insurance, Ltd. Turks & Caicos Islands
Progressive Auto Pro Insurance Agency, Inc. Florida
Progressive Auto Pro Insurance Company Florida
Progressive Bayside Insurance Company Florida
Progressive Casualty Insurance Company Ohio
PC Investment Company Delaware
Progressive Gulf Insurance Agency Mississippi
Progressive Specialty Insurance Company Ohio
</TABLE>
<PAGE> 2
Progressive Consumers Insurance Company Florida
Progressive DirecTrac Service Corp. Texas
Progressive Express Insurance Company Florida
Progressive Hawaii Insurance Corp. Hawaii
Progressive Insurance Agency, Inc. Ohio
Progressive International Holdings Corp. Delaware
Progressive Investment Company, Inc. Delaware
RRM Holdings, Inc. Ohio
Progressive Marathon Insurance Company California
Progressive Max Insurance Company Ohio
Progressive Michigan Insurance Company Michigan
Progressive Mountain Insurance Company Colorado
Progressive Northeastern Insurance Company New York
Progressive Northern Insurance Company Wisconsin
Progressive Premier Insurance Company of Illinois Illinois
Progressive Universal Insurance Company of Illinois Illinois
Progressive Northwestern Insurance Company Washington
Progressive Paloverde Insurance Company Arizona
Progressive Capital Management Corp. New York
Progressive Preferred Insurance Company Ohio
Progressive Premium Budget, Inc. Ohio
Progressive Resources Services Company Ohio
Progressive Security Insurance Company Louisiana
Progressive Southeastern Insurance Company Florida
Progressive West Insurance Company California
Silver Key Insurance Agency, Inc. Nevada
The Paradyme Corporation Ohio
United Financial Insurance Agency, Inc. Ohio
United Financial Insurance Agency, Inc. Washington
The Progressive Agency, Inc. Virginia
United Financial Adjusting Company Ohio
Dealer Direct Financial Services, Inc. (25% owned) Texas
JW Software, Inc. (51% owned) Missouri
Progressive Vehicle Inspection Services, Inc. (50.1% owned) California
United Financial Casualty Company Missouri
Village Transport Corp. Delaware
Wilson Mills Land Co. Ohio
Except as indicated, each subsidiary is wholly owned by its parent.
<PAGE> 1
EXHIBIT NO. 24
--------------
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS, that I hereby constitute and appoint David
M. Schneider, Dane A. Shrallow and Michael R. Uth, and each of them, my true and
lawful attorneys-in-fact and agents, with full power of substitution and
resubstitution, for me and in my name, place and stead, in any and all
capacities, to sign and file with the Securities and Exchange Commission the
Annual Report on Form 10-K of The Progressive Corporation for the year 1998, and
any and all amendments relating thereto and other documents in connection
therewith, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
necessary and requisite to be done in connection with the foregoing, as fully to
all intents and purposes as I might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them, or their
respective substitutes, may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, I have hereunto subscribed my name in the capacity(ies)
set forth below this 22nd day of March, 1999.
Position(s) with
Signature The Progressive Corporation
- --------- ---------------------------
Chairman, President,
/s/ Peter B. Lewis Chief Executive Officer-Insurance Operations
- ----------------------- and Director
Peter B. Lewis
<PAGE> 2
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS, that I hereby constitute and appoint
David M. Schneider, Dane A. Shrallow and Michael R. Uth, and each of them, my
true and lawful attorneys-in-fact and agents, with full power of substitution
and resubstitution, for me and in my name, place and stead, in any and all
capacities, to sign and file with the Securities and Exchange Commission the
Annual Report on Form 10-K of The Progressive Corporation for the year 1998, and
any and all amendments relating thereto and other documents in connection
therewith, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
necessary and requisite to be done in connection with the foregoing, as fully to
all intents and purposes as I might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them, or their
respective substitutes, may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, I have hereunto subscribed my name in the capacity(ies)
set forth below this 22nd day of February, 1999.
Position(s) with
Signature The Progressive Corporation
- --------- ---------------------------
/s/ Jeffrey W. Basch
- ------------------------------
Jeffrey W. Basch Chief Accounting Officer
<PAGE> 3
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS, that I hereby constitute and appoint David
M. Schneider, Dane A. Shrallow and Michael R. Uth, and each of them, my true and
lawful attorneys-in-fact and agents, with full power of substitution and
resubstitution, for me and in my name, place and stead, in any and all
capacities, to sign and file with the Securities and Exchange Commission the
Annual Report on Form 10-K of The Progressive Corporation for the year 1998, and
any and all amendments relating thereto and other documents in connection
therewith, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
necessary and requisite to be done in connection with the foregoing, as fully to
all intents and purposes as I might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them, or their
respective substitutes, may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, I have hereunto subscribed my name in the capacity(ies)
set forth below this 22nd day of February, 1999.
Position(s) with
Signature The Progressive Corporation
- --------- ---------------------------
/s/ Charles B. Chokel
- ---------------------
Charles B. Chokel Chief Executive Officer-
Investments and Capital Management
<PAGE> 4
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS, that I hereby constitute and appoint David
M. Schneider, Dane A. Shrallow and Michael R. Uth, and each of them, my true and
lawful attorneys-in-fact and agents, with full power of substitution and
resubstitution, for me and in my name, place and stead, in any and all
capacities, to sign and file with the Securities and Exchange Commission the
Annual Report on Form 10-K of The Progressive Corporation for the year 1998, and
any and all amendments relating thereto and other documents in connection
therewith, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
necessary and requisite to be done in connection with the foregoing, as fully to
all intents and purposes as I might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them, or their
respective substitutes, may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, I have hereunto subscribed my name in the capacity(ies)
set forth below this 23rd day of February, 1999.
Position(s) with
Signature The Progressive Corporation
- --------- ---------------------------
/s/ W. Thomas Forresster
- ------------------------
W. Thomas Forresster Treasurer and Chief Financial Officer
<PAGE> 5
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS, that I hereby constitute and appoint David
M. Schneider, Dane A. Shrallow and Michael R. Uth, and each of them, my true and
lawful attorneys-in-fact and agents, with full power of substitution and
resubstitution, for me and in my name, place and stead, in any and all
capacities, to sign and file with the Securities and Exchange Commission the
Annual Report on Form 10-K of The Progressive Corporation for the year 1998, and
any and all amendments relating thereto and other documents in connection
therewith, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
necessary and requisite to be done in connection with the foregoing, as fully to
all intents and purposes as I might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them, or their
respective substitutes, may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, I have hereunto subscribed my name in the capacity(ies)
set forth below this 1st day of March, 1999.
Position(s) with
Signature The Progressive Corporation
- --------- ---------------------------
/s/ Milton N. Allen
- -------------------
Milton N. Allen Director
<PAGE> 6
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS, that I hereby constitute and appoint Peter
B. Lewis, David M. Schneider, Dane A. Shrallow and Michael R. Uth, and each of
them, my true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for me and in my name, place and stead, in any
and all capacities, to sign and file with the Securities and Exchange Commission
the Annual Report on Form 10-K of The Progressive Corporation for the year 1998,
and any and all amendments relating thereto and other documents in connection
therewith, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
necessary and requisite to be done in connection with the foregoing, as fully to
all intents and purposes as I might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them, or their
respective substitutes, may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, I have hereunto subscribed my name in the capacity(ies)
set forth below this 22nd day of March, 1999.
Position(s) with
Signature The Progressive Corporation
- --------- ---------------------------
/s/ B. Charles Ames
- -------------------------
B. Charles Ames Director
<PAGE> 7
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS, that I hereby constitute and appoint Peter
B. Lewis, David M. Schneider, Dane A. Shrallow and Michael R. Uth, and each of
them, my true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for me and in my name, place and stead, in any
and all capacities, to sign and file with the Securities and Exchange Commission
the Annual Report on Form 10-K of The Progressive Corporation for the year 1998,
and any and all amendments relating thereto and other documents in connection
therewith, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
necessary and requisite to be done in connection with the foregoing, as fully to
all intents and purposes as I might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them, or their
respective substitutes, may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, I have hereunto subscribed my name in the capacity(ies)
set forth below this 1st day of March, 1999.
Position(s) with
Signature The Progressive Corporation
- --------- ---------------------------
/s/ Stephen R. Hardis
- -----------------------------
Stephen R. Hardis Director
<PAGE> 8
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS, that I hereby constitute and appoint Peter
B. Lewis, David M. Schneider, Dane A. Shrallow and Michael R. Uth, and each of
them, my true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for me and in my name, place and stead, in any
and all capacities, to sign and file with the Securities and Exchange Commission
the Annual Report on Form 10-K of The Progressive Corporation for the year 1998,
and any and all amendments relating thereto and other documents in connection
therewith, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
necessary and requisite to be done in connection with the foregoing, as fully to
all intents and purposes as I might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them, or their
respective substitutes, may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, I have hereunto subscribed my name in the capacity(ies)
set forth below this 4th day of March, 1999.
Position(s) with
Signature The Progressive Corporation
- --------- ---------------------------
/s/ Norman S. Matthews
- -----------------------------
Norman S. Matthews Director
<PAGE> 9
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS, that I hereby constitute and appoint Peter
B. Lewis, David M. Schneider, Dane A. Shrallow and Michael R. Uth, and each of
them, my true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for me and in my name, place and stead, in any
and all capacities, to sign and file with the Securities and Exchange Commission
the Annual Report on Form 10-K of The Progressive Corporation for the year 1998,
and any and all amendments relating thereto and other documents in connection
therewith, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
necessary and requisite to be done in connection with the foregoing, as fully to
all intents and purposes as I might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them, or their
respective substitutes, may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, I have hereunto subscribed my name in the capacity(ies)
set forth below this 4th day of March, 1999.
Position(s) with
Signature The Progressive Corporation
- --------- ---------------------------
/s/ Donald B. Shackelford
- -------------------------------
Donald B. Shackelford Director
<PAGE> 10
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS, that I hereby constitute and appoint Peter
B. Lewis, David M. Schneider, Dane A. Shrallow and Michael R. Uth, and each of
them, my true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for me and in my name, place and stead, in any
and all capacities, to sign and file with the Securities and Exchange Commission
the Annual Report on Form 10-K of The Progressive Corporation for the year 1998,
and any and all amendments relating thereto and other documents in connection
therewith, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
necessary and requisite to be done in connection with the foregoing, as fully to
all intents and purposes as I might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them, or their
respective substitutes, may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, I have hereunto subscribed my name in the capacity(ies)
set forth below this 4th day of March, 1999.
Position(s) with
Signature The Progressive Corporation
- --------- ---------------------------
/s/ Paul B. Sigler
- -----------------------
Paul B. Sigler Director
<PAGE> 11
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS, that I hereby constitute and appoint Peter
B. Lewis, David M. Schneider, Dane A. Shrallow and Michael R. Uth, and each of
them, my true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for me and in my name, place and stead, in any
and all capacities, to sign and file with the Securities and Exchange Commission
the Annual Report on Form 10-K of The Progressive Corporation for the year 1998,
and any and all amendments relating thereto and other documents in connection
therewith, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
necessary and requisite to be done in connection with the foregoing, as fully to
all intents and purposes as I might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them, or their
respective substitutes, may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, I have hereunto subscribed my name in the capacity(ies)
set forth below this 3rd day of March, 1999.
Position(s) with
Signature The Progressive Corporation
- --------- ---------------------------
/s/ Janet M. Hill
- -----------------------------
Janet M. Hill Director
<PAGE> 12
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS, that I hereby constitute and appoint Peter
B. Lewis, David M. Schneider, Dane A. Shrallow and Michael R. Uth, and each of
them, my true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for me and in my name, place and stead, in any
and all capacities, to sign and file with the Securities and Exchange Commission
the Annual Report on Form 10-K of The Progressive Corporation for the year 1998,
and any and all amendments relating thereto and other documents in connection
therewith, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
necessary and requisite to be done in connection with the foregoing, as fully to
all intents and purposes as I might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them, or their
respective substitutes, may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, I have hereunto subscribed my name in the capacity(ies)
set forth below this 10th day of March, 1999.
Position(s) with
Signature The Progressive Corporation
- --------- ---------------------------
/s/ Charles A. Davis
- ------------------------
Charles A. Davis Director
<PAGE> 13
POWER OF ATTORNEY
-----------------
KNOW ALL MEN BY THESE PRESENTS, that I hereby constitute and appoint Peter
B. Lewis, David M. Schneider, Dane A. Shrallow and Michael R. Uth, and each of
them, my true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for me and in my name, place and stead, in any
and all capacities, to sign and file with the Securities and Exchange Commission
the Annual Report on Form 10-K of The Progressive Corporation for the year 1998,
and any and all amendments relating thereto and other documents in connection
therewith, granting unto said attorneys-in-fact and agents, and each of them,
full power and authority to do and perform each and every act and thing
necessary and requisite to be done in connection with the foregoing, as fully to
all intents and purposes as I might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or any of them, or their
respective substitutes, may lawfully do or cause to be done by virtue hereof.
IN WITNESS WHEREOF, I have hereunto subscribed my name in the capacity(ies)
set forth below this 1st day of March, 1999.
Position(s) with
Signature The Progressive Corporation
- --------- ---------------------------
/s/ James E. Bennett III
- ----------------------------
James E. Bennett III Director
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE
CONSOLIDATED BALANCE SHEETS AND STATEMENTS OF INCOME AND IS QUALIFIED IN ITS
ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 4,219,000
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 1,013,400
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 5,674,300
<CASH> 18,600
<RECOVER-REINSURE> 281,000
<DEFERRED-ACQUISITION> 299,100
<TOTAL-ASSETS> 8,463,100
<POLICY-LOSSES> 2,188,600
<UNEARNED-PREMIUMS> 2,329,700
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 776,600
0
0
<COMMON> 72,500
<OTHER-SE> 2,484,600
<TOTAL-LIABILITY-AND-EQUITY> 8,463,100
4,948,000
<INVESTMENT-INCOME> 287,400
<INVESTMENT-GAINS> 11,400
<OTHER-INCOME> 38,200
<BENEFITS> 3,376,300
<UNDERWRITING-AMORTIZATION> 659,900
<UNDERWRITING-OTHER> 495,800
<INCOME-PRETAX> 661,100
<INCOME-TAX> 204,400
<INCOME-CONTINUING> 456,700
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 456,700
<EPS-PRIMARY> 6.30
<EPS-DILUTED> 6.11
<RESERVE-OPEN> 1,867,500
<PROVISION-CURRENT> 3,560,500
<PROVISION-PRIOR> (184,200)
<PAYMENTS-CURRENT> 2,376,000
<PAYMENTS-PRIOR> 922,000
<RESERVE-CLOSE> 1,945,800
<CUMULATIVE-DEFICIENCY> (184,200)
</TABLE>
