The Progressive Corporation DEF 14A
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
SCHEDULE 14A
Proxy Statement Pursuant to Section 14(a) of the Securities
Exchange Act of 1934 (Amendment No. )
Filed by the Registrant þ
Filed by a Party other than the Registrant o
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Preliminary Proxy Statement |
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Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2)) |
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Definitive Proxy Statement |
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Soliciting Material Pursuant to §240.14a-12 |
The Progressive Corporation
(Name of Registrant as Specified In Its Charter)
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
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NOTICE OF ANNUAL
MEETING OF SHAREHOLDERS
The Progressive Corporation will hold its Annual Meeting of
Shareholders on Friday, April 18, 2008, at 10:00 a.m.,
local time, at 6671 Beta Drive, Mayfield Village, Ohio, for the
following purposes:
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1.
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To elect four directors, each to serve for a term of three years;
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To approve amendments to the Companys Amended Articles of
Incorporation and Code of Regulations to adopt a majority voting
standard in uncontested elections of directors;
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3.
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To approve an amendment to the Companys Code of
Regulations to modify the definition of a directors
term of office;
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4.
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To approve an amendment to the Companys Code of
Regulations to increase the maximum number of director positions
from 12 to 13 and to fix the number of directors at 13;
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5.
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To ratify the appointment of PricewaterhouseCoopers LLP as the
Companys independent registered public accounting firm for
2008; and
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6. To transact such other business as may properly
come before the meeting.
The foregoing items of business are more fully described in the
Proxy Statement accompanying this Notice. Only shareholders of
record of The Progressive Corporation (NYSE:PGR) at the close of
business on February 19, 2008, will be entitled to receive
notice of and to vote at the meeting or any adjournment thereof.
Your vote is important. Whether or not you plan to be present at
the meeting, please vote by Internet or telephone (following the
instructions on the enclosed proxy card), or by completing and
returning the proxy card in the enclosed postage-paid envelope.
If you later choose to revoke your proxy, you may do so at any
time before voting occurs at the Annual Meeting by following the
procedures described in the Questions and Answers about
the Annual Meeting and Voting section in the attached
Proxy Statement.
By Order of the Board of Directors.
Charles E. Jarrett, Secretary
March 7, 2008
The Proxy Statement and the 2007 Annual Report to
Shareholders are also available at progressiveproxy.com.
The Progressive
Corporation
Proxy Statement
Table of Contents
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A-1
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B-1
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C-1
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i
THE PROGRESSIVE
CORPORATION
PROXY STATEMENT
GENERAL
INFORMATION REGARDING PROXY MATERIALS AND THE ANNUAL MEETING OF
SHAREHOLDERS TO BE HELD ON APRIL 18, 2008
The Board of Directors of The Progressive Corporation provides
this Proxy Statement to you to solicit your proxy to act upon
the matters outlined in the accompanying Notice of Annual
Meeting of Shareholders. These include the election of four
directors, amendments to our Amended Articles of Incorporation
and Code of Regulations, and the ratification of the appointment
of Progressives independent registered public accounting
firm for 2008, each described in more detail below.
The Annual Meeting will take place on Friday, April 18,
2008 at 10:00 a.m., local time, at 6671 Beta Drive,
Mayfield Village, Ohio 44143. The proxies also may be voted at
any adjournment or postponement of the meeting.
The form of proxy (proxy card) and this Proxy Statement, which
includes Progressives 2007 Annual Report to Shareholders
as an Appendix, are being mailed to shareholders beginning on or
about March 10, 2008.
All properly executed written proxies, and all proxies that are
properly completed and submitted by Internet or telephone, will
be voted at the meeting in accordance with the directions given
by the shareholder, unless the shareholder revokes his or her
proxy before voting occurs at the meeting.
Only shareholders of record of The Progressive Corporation
(NYSE:PGR) at the close of business on February 19, 2008,
the record date, will be entitled to receive notice of and to
vote at the meeting or any adjournment thereof. Each shareholder
on the record date is entitled to one vote for each of our
Common Shares, $1.00 par value, held. On the record date,
there were 677,988,816 shares of our common stock issued
and outstanding.
QUESTIONS AND
ANSWERS ABOUT THE ANNUAL MEETING AND VOTING
Why did I receive
these materials?
You received these materials because you are a shareholder of
Progressive. We hold a meeting of our shareholders annually.
This years meeting will be held on Friday, April 18,
2008. At the meeting, shareholders will be asked to vote on
several items of business. Since it is not practical or
convenient for all shareholders to attend the meeting in person,
our Board of Directors is seeking your proxy to vote on these
matters.
What is a
proxy?
A proxy is your legal authority for another person to vote the
stock you own at our Annual Meeting. The person you designate to
vote your shares is referred to as your proxy. If you designate
someone as your proxy in a written document, that document is
also sometimes referred to as a proxy or proxy card. When you
submit a proxy card, the person(s) named as your proxy(ies) on
the card are required to vote your shares at the Annual Meeting
in the manner you have instructed. By voting via proxy, each
shareholder is able to ensure that his or her vote is counted
without having to attend the Annual Meeting in person.
Who is soliciting
my proxy?
This solicitation of proxies is made by and on behalf of our
Board of Directors. The Board has approved the matters to be
acted upon at the Annual Meeting (described in more detail
below), subject to approval by shareholders, and recommends that
you vote in favor of each director nominee named in this Proxy
Statement and for each of the other proposals. However, you
control your vote, and the voting instructions that you provide
will be followed.
What is the
purpose of the Annual Meeting?
At the Annual Meeting, shareholders will act upon the matters
outlined in the Notice of Annual Meeting of Shareholders. These
include:
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Election of four directors, each to serve for a term of 3 years;
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Approval of amendments to our Amended Articles of Incorporation
and Code of Regulations to:
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Elect directors by majority vote in uncontested elections;
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Modify the definition of a directors term of
office;
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Increase the number of director positions on our Board of
Directors from 12 to 13 and fix the size of the Board
at 13;
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Ratification of the selection of PricewaterhouseCoopers LLP as
our independent registered public accounting firm for
2008; and
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Any other business that properly comes before the meeting.
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Also, once the business of the Annual Meeting is concluded,
management will briefly comment on the companys
performance and will be available to respond to appropriate
questions from shareholders. The Annual Meeting will not be
accessible via teleconference or webcast.
What is a proxy
statement?
This document (including the exhibits, but excluding the 2007
Annual Report to Shareholders attached as an appendix) is
our Proxy Statement. The proxy statement is a document that
Securities and Exchange Commission (SEC) regulations require us
to give shareholders when we are soliciting shareholders
proxies to vote their shares. This Proxy Statement and the
Annual Report contain important information about The
Progressive Corporation and its subsidiaries, and about the
matters that will be voted on at the meeting. Please read these
materials carefully so that you have the information you need to
make informed decisions.
Who is entitled
to vote at the Annual Meeting?
Anyone who holds our common stock at the close of business on
February 19, 2008, the record date, is entitled to receive
the Notice of Annual Meeting and this Proxy Statement and to
vote his or her shares at the Annual Meeting. As of the record
date, there were 677,988,816 shares of our common stock
outstanding and entitled to vote. Each share of common stock is
entitled to one vote on each matter properly brought before the
meeting.
What is the
difference between a shareholder of record and a
shareholder who holds stock in street
name?
If you hold Progressive shares directly in your name with our
transfer agent, National City Bank, you are a shareholder
of record (also known as a registered
shareholder). The Notice of Annual Meeting, Proxy
Statement, 2007 Annual Report to Shareholders and proxy card
have been sent directly to you by Progressive or our
representative.
If you own your shares indirectly through a broker, bank or
other financial institution, your shares are said to be held in
street name. Technically, the bank or broker is the
shareholder of record with respect to those shares. In this
case, the Notice of Annual Meeting, Proxy Statement, Annual
Report to Shareholders and a voting instruction form have been
forwarded to you by your broker, bank, other financial
institution or their designated representative. Through this
process, your bank or broker collects the voting instructions
from all of their respective customers who hold Progressive
shares and then submits those votes to us.
What shares are
included on the proxy card?
If you are a shareholder of record, you will receive only one
proxy card for all the shares of common stock you hold as of
February 19, 2008:
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in certificate form (i.e., you hold paper share certificates as
evidence of your ownership); and
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in book-entry form (i.e., physical certificates are not issued;
includes shares held in a direct registration program or shares
of restricted stock held by some of our employees and former
employees).
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Employees and former employees who hold shares in our Retirement
Security Program (RSP), our 401(k) plan, will receive separate
instructions on the number of shares that are eligible to be
voted and how to cast their votes on those shares.
If you hold shares in street name, the voting instruction form
that you receive from your bank or broker should include a
statement of the number of shares that you are entitled to vote.
Any questions concerning this information should be directed to
your bank or broker.
2
What methods can
I use to vote?
By Mail. All shareholders of record can vote
by written proxy card. Please be sure to complete, sign and date
the proxy card and return it in the enclosed, prepaid envelope.
If you are a street name holder, you will receive a voting form
and instructions from your bank or broker.
By Telephone or Internet. All shareholders of
record also can vote by touch-tone telephone from the
U.S. and Canada, using the toll-free telephone number on
the proxy card, or through the Internet using the procedures and
instructions described on the proxy card.
The availability of telephone and Internet voting for street
name holders will depend on the voting processes of your broker,
bank or other financial institution. Voting instructions will be
included in the materials you receive from them.
If you vote by telephone or on the Internet, you do not have to
return your proxy card or voting instruction form.
In Person. All shareholders of record may vote
in person at the Annual Meeting. Street name holders may vote in
person at the Annual Meeting only if they bring a legal proxy
from their bank or broker. If you are a street name holder and
you plan to vote in person, you must request the legal proxy
from your bank or broker well in advance of the meeting date.
If you hold shares in our RSP, you will receive voting
instructions from our plan administrator. If voting instructions
are received by the plan administrator, they will be voted
according to the instructions received. If you do not specify
your voting instructions in the manner required by the plan
administrator, the administrator will not vote your RSP shares.
To allow sufficient time for voting by the RSP administrator,
your voting instructions must be received by
11:59 p.m., eastern time, on Tuesday, April 15,
2008. You can change your vote at any time prior to this
cut-off time; only your last vote will be counted.
Whether or not you plan to attend the Annual Meeting, the Board
of Directors strongly encourages you to vote your shares by
proxy prior to the meeting. Your vote is important. Please
follow the voting instructions carefully to make sure that your
shares are voted appropriately. You can save us the expense of a
second mailing if you vote your shares promptly.
If I submit a
proxy, may I later change or revoke it?
If you are a shareholder of record, you can revoke your proxy
before votes are cast at the Annual Meeting by:
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written notice to the Secretary of the company;
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timely delivery of a valid, later-dated and signed proxy card or
a later-dated vote by telephone or via the Internet; or
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voting in person at the Annual Meeting.
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If you are a street name holder of shares, you may submit new
voting instructions by contacting your bank, broker or other
financial institution. You may also vote in person at the Annual
Meeting if you obtain a legal proxy as described in the answer
to the previous question.
All shares that have been properly voted and not revoked will be
voted at the Annual Meeting as instructed.
Who counts the
votes?
Votes will be tabulated by or under the direction of the
Inspectors of Election, some of whom may be regular employees of
Progressive. The Inspectors of Election will certify the results
of the voting at the Annual Meeting.
What are my
voting choices when voting for director nominees, and what vote
is needed to elect directors?
When you vote on our nominees for the Board of Directors, you
will have the following choices:
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vote for all nominees (by marking your proxy card
WITH authority to vote for the election of the
nominees);
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withhold votes as to all nominees (by marking your proxy card
WITHOUT authority to vote for all nominees); or
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vote for certain nominees, but withhold votes as to specified
nominees (by marking your proxy card WITH authority
to vote for the nominees, in general, and identifying in the
space provided individual nominees as to whom you withhold your
authority to vote).
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The director nominees who receive the greatest number of
affirmative votes will be elected directors. Broker non-votes
(discussed below) thus will not affect the results of the
election. The Board recommends a vote for each of the nominees.
3
What are my
voting choices when voting on the proposals to amend our Amended
Articles of Incorporation or Code of Regulations (Items 2
through 4), and what vote is needed to pass the
proposals?
For each proposal, you may select from the following choices:
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vote FOR the proposal;
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vote AGAINST the proposal; or
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ABSTAIN from voting on the proposal.
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The proposal to approve majority voting for directors in
uncontested elections (Item 2 below) will be adopted if
approved by the affirmative vote of a majority of the
companys common shares outstanding as of the record date.
As such, abstentions and broker non-votes will have the same
effect as votes against the proposal.
The proposals to amend the definition of a directors
term of office in our Code of Regulations
(Item 3 below) and to increase the number of director
positions from 12 to 13 and to fix the number of directors at 13
(Item 4 below) will be adopted if approved by the
affirmative vote of seventy-five percent (75%) of the
companys common shares outstanding as of the record date.
Abstentions and broker non-votes will have the same effect as
votes against the proposal. In addition, shareholders
approval of Item 3 will be deemed effective only if
shareholders have also approved the proposal in
Item 2 described in the immediately preceding paragraph.
The Board recommends a vote FOR each of the proposals.
What are my voting choices when voting on the ratification of
the appointment of PricewaterhouseCoopers LLP as our independent
registered public accounting firm for 2008 (Item 5 below),
and what vote is needed to ratify their appointment?
In the vote on the approval of the appointment of
PricewaterhouseCoopers LLC as the companys independent
registered public accounting firm for 2008, shareholders may:
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vote FOR the ratification;
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vote AGAINST the ratification; or
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ABSTAIN from voting on the ratification.
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This proposal will be adopted if approved by the affirmative
vote of a majority of the votes cast on this proposal, provided
the total number of votes cast represents a majority of the
outstanding common shares. Broker non-votes will not be treated
as votes cast. Abstentions will be treated as votes cast and,
consequently, will have the same effect as votes against the
proposal.
The Board recommends a vote FOR the ratification.
What is a broker non-vote?
A broker non-vote occurs when a brokers or banks
customer does not provide the broker or bank with voting
instructions on non-routine matters for shares owned
by the customer (sometimes referred to as the beneficial
owner) but held in the name of the broker or bank. For
such matters, the broker or bank cannot vote on behalf of the
shareholder and reports the number of such shares as
non-votes. By contrast, if a proposal is considered
routine, the broker or bank, in its discretion, may
vote any shares as to which it has not received specific
instructions from its customer. Whether the proposal is
non-routine or routine is governed by the rules of the New York
Stock Exchange. Of the proposals included in this Proxy
Statement, Item 4 is considered non-routine by
the NYSE and, therefore, the broker or bank will not be allowed
to vote shares with respect to that proposal without specific
instructions from the beneficial owner.
What if I do not
specify a choice for a matter when returning a proxy?
Shareholders should specify their choice for each matter on the
enclosed proxy card. For shareholders of record, if no specific
instructions are given, proxies that are signed and returned
will be voted in accordance with the recommendations of the
Board of Directors, as follows:
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FOR the election of all four director nominees, each for a term
of 3 years;
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FOR the proposal to approve amendments to the companys
Amended Articles of Incorporation and Code of Regulations to
adopt a majority voting standard in uncontested elections of
directors;
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FOR the proposal to approve an amendment to the companys
Code of Regulations to modify the definition of a
directors term of office;
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FOR the proposal to approve an amendment to the companys
Code of Regulations to increase the maximum number of director
positions from 12 to 13 and to fix the number of directors at
13; and
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FOR the proposal to ratify the appointment of
PricewaterhouseCoopers LLP as the companys independent
registered public accounting firm for 2008.
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Can I access the
Notice of Annual Meeting, Proxy Statement, Annual Report on
Form 10-K
and the Annual Report to Shareholders on the Internet?
The Notice of Annual Meeting, Proxy Statement and 2007 Annual
Report to Shareholders are available on a dedicated Web site at
progressiveproxy.com. The Annual Report on
Form 10-K
is available at the Investor Relations section of our Web Site
at progressive.com/sec. We will also provide a copy of any of
these documents to any shareholder free of charge, upon request
by e-mail to
investor_relations@progressive.com, by calling toll-free
1-800-542-1061
or by writing to: The Progressive Corporation, Investor
Relations, 6300 Wilson Mills Road, Box W33, Mayfield Village,
Ohio 44143.
Street Name Holders. If you hold your shares
in a bank or brokerage account, your bank or broker may also
provide you copies of these documents electronically. Please
check the information provided in the proxy materials mailed to
you by your bank or broker regarding the availability of this
service.
5
ITEM 1:
ELECTION OF DIRECTORS
Four of our directors have been nominated for re-election this
year. Information about the structure of our Board of Directors
and about our individual directors follows.
Progressives Code of Regulations provides that the number
of directors shall be fixed at no fewer than five and no more
than 12. The number of directors has been fixed by shareholders
at 12, and there are currently 11 directors on the Board
and one vacancy. The Code of Regulations also provides that the
directors are to be divided into three classes as nearly equal
in number as possible and that the classes are to be elected for
staggered terms of three years each. Directors of one class are
elected annually, except as provided below. At the Annual
Meeting, the shares represented by the proxies obtained hereby,
unless otherwise specified, will be voted for the election as
directors of the four nominees named below, each to serve for a
three-year term, and until their respective successors are duly
elected and qualified. If, by reason of death or other
unexpected occurrence, any one or more of the nominees named
below is not available for election, the proxies will be voted
for such substitute nominee(s), if any, as the Board of
Directors may propose.
Based upon a recommendation from the Boards Nominating and
Governance Committee, the Board has nominated the four nominees
named below for re-election to the Board. No shareholder
nominations for the election of directors have been received
within the time period specified by Section 13 of
Article II of our Code of Regulations or pursuant to our
Shareholder-Proposed Candidate Procedures (discussed below).
Proxies cannot be voted at the Annual Meeting for a greater
number of persons than the four nominees named in this Proxy
Statement.
If written notice is given by any shareholder to the President,
a Vice President or the Secretary not less than 48 hours
before the time fixed for holding the Annual Meeting that he or
she desires that the voting for election of directors shall be
cumulative, and if an announcement of the giving of such notice
is made at the meeting by the Chairman or Secretary or by or on
behalf of the shareholder giving such notice, each shareholder
shall have the right to cumulate his or her voting power in the
election of directors. Under cumulative voting, each shareholder
may give one nominee a number of votes equal to the number of
directors to be elected multiplied by the number of shares he or
she holds, or distribute such number of votes among two or more
nominees, as the shareholder sees fit. If the enclosed proxy is
executed and returned and voting for the election of directors
is cumulative, the persons named in the enclosed proxy will have
the authority to cumulate votes and to vote the shares
represented by such proxy, and by other proxies held by them, so
as to elect as many of the four nominees named below as possible.
Pursuant to our Corporate Governance Guidelines, if a nominee
for director receives less than a majority of the votes cast in
an uncontested election, although the nominee is elected as a
director under Ohio law, he or she is expected to tender his or
her resignation to the Board. In such an event, the Nominating
and Governance Committee will consider the resignation offer and
recommend to the Board whether to accept or reject it. The Board
will then make the final decision whether to accept or reject
the tendered resignation based on all the facts and
circumstances then presented. (Note that if shareholders approve
the proposals presented in this Proxy Statement as Item 2
(majority voting for directors in uncontested elections) and
Item 3 (modifications to the definition of a
directors term of office), the Board expects
to modify the procedures summarized in this paragraph as
appropriate to reflect the amendments to our Amended Articles of
Incorporation and Code of Regulations that are approved under
those proposals.)
The Board currently has one vacancy. Under our Code of
Regulations, the Board has the right to elect a new director to
fill such a vacancy, but the new director so elected would serve
for a term that expires on the date of the next shareholder
meeting at which directors are to be elected. No decision has
been made to fill the vacancy at this time.
6
The following information is provided for each person nominated
for election as a director and for those directors whose terms
will continue after the Annual Meeting. Unless otherwise
indicated, each such nominee or director has held the principal
occupation indicated for more than the last five years. Each
nominee is currently a director of Progressive.
Nominees for
Election at the Annual Meeting
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Principal Occupation and
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Director
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Term
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Name
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Age
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Last Five Years Business Experience
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Other Directorships
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Since
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Expires
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Charles A. Davis
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59
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Chief Executive Officer, Stone Point Capital LLC, Greenwich,
Connecticut (global private equity firm) since June 2005;
Chairman and CEO, MMC Capital, Inc., Greenwich, Connecticut
(global private equity firm) prior to June 2005; Vice Chairman,
Marsh & McLennan Companies, Inc., New York, New York
(financial services) prior to December 2004
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AXIS Capital Holdings Limited, Media General, Inc., and The
Hershey Company
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1996
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2011
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Bernadine P. Healy, M.D.
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63
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Health Editor and Medical Columnist, U.S. News & World
Report, Washington, D.C. (publishing)
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Ashland Inc., Invacare Corporation and National City Corporation
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2002
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2011
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Jeffrey D. Kelly
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54
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Chief Financial Officer, National City Corporation
(NCC), Cleveland, Ohio (commercial banking); Vice
Chairman of NCC since December 2004; Executive Vice President of
NCC prior to December 2004
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National City Corporation
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2000
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2011
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Abby F. Kohnstamm
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54
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President and Chief Executive Officer, Abby F.
Kohnstamm & Associates, Inc., New York, New York
(marketing consulting firm) since January 2006; Senior Vice
President of Marketing, IBM Corporation, Armonk, New York
(information technology) prior to December 2005
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Tiffany & Co.
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2006
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2011
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7
Directors Whose
Terms will Continue after the Annual Meeting
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Principal Occupation and
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Director
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Term
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Name
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Age
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Last Five Years Business Experience
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Other Directorships
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Since
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Expires
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Stephen R. Hardis
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72
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Non-Executive Chairman of the Board, Marsh & McLennan
Companies, Inc., New York, New York (financial services)
since May 2006; Lead Director, Axcelis Technologies,
Inc., Beverly, Massachusetts (semiconductor equipment
manufacturing) since May 2005; Chairman of the Board, Axcelis
Technologies, Inc. prior to May 2005
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American Greetings Corporation, Axcelis Technologies, Inc.,
Lexmark International, Inc., Marsh & McLennan Companies,
Inc. and Nordson Corporation
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1988
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2009
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Norman S. Matthews
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75
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Consultant, New York, New York
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Finlay Enterprises, Inc. and Henry Schein, Inc.
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1981
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2009
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Bradley T. Sheares, Ph.D.
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51
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Formerly Chief Executive Officer, Reliant Pharmaceuticals, Inc.,
Liberty Corner, New Jersey (pharmaceutical products) from
January 2007 to December 2007; President, U.S. Human Health
Division of Merck & Co., Inc., Whitehouse Station, New
Jersey (pharmaceutical products and services) prior to July 2006
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Honeywell International, Inc.
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2003
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2009
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Peter B. Lewis
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74
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Non-Executive Chairman of the Board of The Progressive
Corporation since March 2003; Executive Chairman of the Board
prior to March 2003
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None
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1965
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2010
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8
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Principal Occupation and
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Director
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Term
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Name
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Age
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Last Five Years Business Experience
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Other Directorships
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Since
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Expires
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Patrick H. Nettles, Ph.D.
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64
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Executive Chairman of the Board of Directors, Ciena Corporation,
Linthicum, Maryland (telecommunications)
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Axcelis Technologies, Inc. and Ciena Corporation
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2004
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2010
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Glenn M. Renwick
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52
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President and Chief Executive Officer of The Progressive
Corporation; President, Chairman of the Board and Chief
Executive Officer of Progressive Casualty Insurance Company (a
Progressive subsidiary) prior to April 2004; officer and
director of various other subsidiaries of Progressive
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Fiserv, Inc.
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1999
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2010
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Donald B. Shackelford
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75
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Chairman of the Board, Fifth Third Bank, Central Ohio (successor
to State Savings Bank), Columbus, Ohio (commercial banking)
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Diamond Hill Investment Group, Inc.
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1976
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2010
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9
OTHER BOARD OF
DIRECTORS INFORMATION
Board of
Directors Independence Standards and
Determinations
The Board of Directors has approved categorical independence
standards which, if satisfied by a director, will permit a
determination that such director is independent for purposes of
the New York Stock Exchange (NYSE) Listing Standards. Under
Progressives standards, an individual director may be
determined to be independent only if he or she
satisfies each of the following requirements, or if he or she is
otherwise determined to be independent by a disinterested
majority of the Board as provided below:
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He or she is not currently an officer or employee of The
Progressive Corporation or any of its subsidiaries, and has not
been an officer or employee of Progressive or any of its
subsidiaries at any time during the past three years. For
purposes of this requirement, officer does not
include a non-executive Chairman of the Board who is otherwise
independent under these standards.
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No member of his or her immediate family is an executive officer
of Progressive or has been an executive officer of Progressive
at any time during the past three years.
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Neither he or she, nor any member of his or her immediate
family, receives, or has received during any twelve-month period
within the past three years, more than $100,000 in direct
compensation from Progressive or any of its subsidiaries, other
than (i) retainer and meeting fees and equity grants for
service as a director, and (ii) pension or other forms of
deferred compensation for prior service (provided such
compensation is not contingent on continued service). For
purposes of this requirement, compensation received by an
immediate family member for service as an employee of
Progressive (other than as an executive officer) will not be
considered.
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He or she (i) is not currently a partner or employee of a
firm that is Progressives internal or external auditor,
and (ii) was not at any time within the past three years a
partner or employee of such a firm who personally worked on
Progressives audit during that time.
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No member of his or her immediate family (i) is currently a
partner in a firm that is Progressives internal or
external auditor, (ii) is currently an employee of such
firm who participates in the firms audit, assurance or tax
compliance (but not tax planning) practice, or (iii) was at
any time within the past three years a partner or employee of
such firm and personally worked on Progressives audit
during that time.
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Neither he or she, nor any member of his or her immediate
family, is or has been at any time during the past three years,
employed as an executive officer of another company where any of
the present executive officers of Progressive at the same time
serves or served on the compensation committee of such other
company.
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Neither he or she, nor any member of his or her immediate
family, has a direct business or other relationship with
Progressive or any of its subsidiaries (as a lawyer, consultant
or otherwise), other than as a director of Progressive, or has
had any such business or other relationship with Progressive at
any time during the past three years. For purposes of this
requirement, service by an immediate family member as an
employee of Progressive (other than as an executive officer)
will not compromise the directors independence.
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Neither he or she, nor any member of his or her immediate
family, is a member of or counsel to any law firm that
Progressive has retained during the last fiscal year or proposes
to retain during the current fiscal year.
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Neither he or she, nor any member of his or her immediate
family, is a partner or executive officer of any investment
banking firm that has performed services for Progressive (other
than as a participating underwriter in a syndicate) during the
last fiscal year or that Progressive proposes to have perform
such services during the current fiscal year.
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He or she is not a current employee of, and no member of his or
her immediate family is a current executive officer of, and
neither he or she nor any member of his or her immediate family
holds a one percent or greater equity interest in, any other
company or organization that has, or has had at any time within
the past three years, a material business or other relationship
with Progressive or any of its subsidiaries. For purposes of
this standard, a relationship will be deemed to be material if
the total amount of the payments made or received by Progressive
or any of its subsidiaries in connection with such business or
other relationship during the relevant fiscal year was, or for
the current fiscal year is expected to be, more than the greater
of (i) $1 million or (ii) two percent of the
consolidated gross revenues of such other entity.
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Contributions by Progressive to a charitable or non-profit
organization in which a director or his or her spouse serves as
a director, trustee or executive officer or in an equivalent
position will be deemed immaterial under Progressives
standards if Progressives contributions to such
organization in any calendar year do not exceed $25,000
(excluding matching gifts made by The Progressive Insurance
Foundation in response to employee contributions to such
organization). If Progressive makes
10
annual contributions in excess of
the stated amount to any such organization, the effect, if any,
on the directors independence will be considered on a
case-by-case
basis.
If a director has one or more relationships with Progressive
that fall outside of our categorical standards, the materiality
of such other relationships will be determined by a
disinterested majority of directors on a
case-by-case
basis. Material relationships can include commercial,
industrial, banking, consulting, legal, accounting, charitable
and familial relationships, among others. The ownership of even
a significant amount of stock, by itself, however, is not a bar
to a finding of independence.
The Board of Directors has considered the independence of each
of the directors under the foregoing standards and, based on
such considerations and the recommendations of the Nominating
and Governance Committee of the Board of Directors, and after
due inquiry into the facts and circumstances of each
directors relationships with Progressive (if any), has
determined that each of our current directors, with the
exception of Glenn M. Renwick as discussed further below,
(i) satisfies Progressives independence standards as
described above, (ii) has no relationship with Progressive
or its subsidiaries or with any charitable organization that
received a contribution from Progressive that would require an
individual determination as to such directors
independence, and (iii) is independent under the applicable
NYSE Listing Standards.
Mr. Philip Laskawy, who resigned from our Board in December
2007, had been determined by the Board to be independent in
early 2007. Due to his resignation, his independence was not
reconsidered in early 2008 along with our current directors,
although management is aware of no facts or circumstances that
would have changed his status prior to his resignation.
Mr. Glenn M. Renwick is not independent by virtue of his
position as Progressives current President and Chief
Executive Officer.
Meetings of the
Board of Directors and Attendance
The Board of Directors held nine meetings during 2007, two of
which were held by conference call.
All of the current directors were on the Board throughout 2007.
All directors attended more than 75% of their scheduled Board
and Committee meetings.
Pursuant to Progressives Corporate Governance Guidelines,
directors are expected to attend Progressives Annual
Meeting of Shareholders. Normally, a meeting of the Board will
be scheduled on the date of the Annual Meeting.
Progressives 2007 Annual Meeting of Shareholders was
attended by 11 out of 12 of its then current directors. A full
copy of our Corporate Governance Guidelines can be found on our
Web site at progressive.com/governance, or may be requested in
print by writing to: The Progressive Corporation, Investor
Relations, 6300 Wilson Mills Road, Box W33, Mayfield Village,
Ohio 44143.
Meetings of the
Non-Management Directors
Pursuant to Progressives Corporate Governance Guidelines,
our non-management directors meet in executive session at least
quarterly. Each such meeting also constitutes a meeting of our
independent directors. The Chairman of the Board, provided that
he or she is not an executive officer of Progressive, presides
at these meetings. In the event that a non-executive Chairman is
not available to lead these meetings, the presiding director
would be chosen by the non-management directors in attendance.
In 2007, the non-management directors met in executive session
six times.
Board
Committees
The Board has named an Executive Committee, an Audit Committee,
a Compensation Committee, an Investment and Capital Committee,
and a Nominating and Governance Committee, as described below.
The complete written charters for each of the Committees (other
than the Executive Committee, which does not have a charter) can
be found on our Web site at progressive.com/governance, or may
be requested in print by writing to: The Progressive
Corporation, Investor Relations, 6300 Wilson Mills Road, Box
W33, Mayfield Village, Ohio 44143.
Executive
Committee
Messrs. Hardis, Kelly, Lewis (Chairman) and Renwick are the
current members of the Boards Executive Committee, which
exercises all powers of the Board between Board meetings, except
the power to fill vacancies on the Board or its Committees.
During 2007, the Executive Committee did not meet, but adopted
resolutions by written action pursuant to Ohio corporation law
on 13 occasions.
11
Audit
Committee
Drs. Healy and Nettles and Mr. Hardis (Chairman) are the
current members of the Boards Audit Committee, which
assures that the organizational structure, policies, controls
and systems are in place to monitor performance. The Audit
Committee monitors the integrity of Progressives financial
statements, our financial reporting processes and internal
control over financial reporting, our compliance with legal and
regulatory requirements and the public release of financial
information. The Committee also is responsible for confirming
the independence of, and the selection, appointment,
compensation, retention and oversight of the work of, our
independent registered public accounting firm. The Committee
provides an independent channel to receive appropriate
communications from employees, shareholders, auditors, legal
counsel, bankers, consultants and other interested parties. The
Board of Directors has determined that each of the members of
the Audit Committee is financially literate, has no relationship
to Progressive that may interfere with the exercise of his or
her independence from management and Progressive, and is
independent as defined in the applicable Securities and Exchange
Commission (SEC) rules and NYSE Listing Standards.
During 2007, the Audit Committee met in person seven times and
participated in five conference calls to review our financial
and operating results.
Audit Committee Financial
Expert. The Board of Directors has
determined that Mr. Stephen R. Hardis, the Chairman of the
Audit Committee, is an audit committee financial expert, as that
term is defined in the applicable SEC regulations, and that he
has accounting or related financial management expertise, as
required by the NYSE Listing Standards. Mr. Hardis is a
former Chairman and Chief Executive Officer of Eaton
Corporation, where he served as Chief Financial and
Administrative Officer before becoming CEO. He has served on the
audit committees of a number of public companies through the
years, including as a member of Progressives Audit
Committee from April 1988 through December 1999. He is currently
the chairman of the audit committee of one other public company,
where he has also been named the audit committee financial
expert. The Board has determined that through appropriate
education and experience, Mr. Hardis has demonstrated that
he possesses the following attributes:
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An understanding of accounting principles generally accepted in
the United States of America and financial statements;
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The ability to assess the general application of such principles
in connection with the accounting for estimates, accruals and
reserves;
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Experience preparing, auditing, analyzing or evaluating
financial statements that present a breadth and level of
complexity of accounting issues that are generally comparable to
the breadth and level of complexity that can reasonably be
expected to be raised by Progressives financial
statements, or experience actively supervising one or more
persons engaged in such activities;
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An understanding of internal control over financial
reporting; and
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An understanding of audit committee functions.
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Compensation
Committee
Messrs. Davis (Chairman) and Matthews and Dr. Sheares
are the current members of the Boards Compensation
Committee. During 2007, the Compensation Committee met four
times in person and three times by phone, and adopted
resolutions by written action pursuant to Ohio corporation law
on four occasions.
The Committee makes all final determinations regarding executive
compensation, including salary, equity (restricted stock awards)
and non-equity incentive compensation (cash incentive) targets,
and related performance goals, formulae and procedures. The
Committee (or in certain circumstances, the full Board of
Directors, based on the Committees recommendation) also
approves the terms of the various compensation and benefit plans
in which executive officers and other employees may participate.
Committee decisions are made after considering compensation data
from comparable companies obtained by Progressive from
independent third parties, internal analysis
and/or
recommendations presented by management. The executive
compensation decisions represent the culmination of extensive
analysis and discussion, which typically take place over the
course of multiple Committee meetings and in meetings between
the Committee and management, including our Chief Executive
Officer, our Chief Human Resource Officer, members of the Human
Resource and Law Departments, and other Progressive personnel.
In addition, the Committee frequently consults with the full
Board of Directors on executive compensation matters.
The Committees determinations regarding incentive
compensation for executive level employees (for example,
performance criteria and standards relating to annual cash bonus
determinations) also apply to incentive plans covering
non-executive employees. Under this arrangement, executives and
non-executives alike are motivated to achieve the same
12
performance objectives. The Committee has delegated to
management, however, the authority to implement such plans, and
make other compensation-related decisions (such as salary and
restricted stock awards), for non-executive level employees.
The Committee has the authority under its Charter to hire its
own compensation consultants, at Progressives expense. The
Committee regularly assesses the need for a consultant, most
recently considering the issue at its January 2008 meeting. The
Committee decided that a consultant would not be hired at that
time, in view of Progressives consistent compensation
program, the programs significant performance-based
features that have been successfully tested in both good and bad
performance years, and the availability of credible market data
from independent third parties, among other factors. The
Committee has clearly indicated that it remains open to hiring a
consultant in the future should circumstances change, and that
it will continue to monitor these and other relevant factors and
reconsider the issue from time to time. For more information on
executive compensation, see the Compensation Discussion
and Analysis section beginning on page 22.
Investment and
Capital Committee
Messrs. Kelly (Chairman), Lewis and Shackelford are the
current members of the Boards Investment and Capital
Committee, which monitors and advises Progressive on its
investment and capital management policies. During 2007, the
Investment and Capital Committee met six times.
Nominating and
Governance Committee
Messrs. Davis, Hardis and Matthews (Chairman) are the
current members of the Boards Nominating and Governance
Committee. The Committee considers the qualifications of
individuals who are proposed as possible nominees for election
to the Board and makes recommendations to the Board with respect
to such potential candidates.
The Committee also is responsible for monitoring corporate
governance matters as they affect the Board and the company. The
Committee regularly reviews Progressives Corporate
Governance Guidelines and related matters to ensure that they
continue to correspond to and support the Boards
governance philosophy. The Committee considers and, where
appropriate, recommends to the Board for approval, changes to
the Corporate Governance Guidelines based on suggestions from
Board members or management. The Committee reviewed the
Guidelines in 2007, and proposed several changes including, most
significantly, the addition of stock ownership guidelines for
the CEO and the executive officers who report directly to him.
These changes were adopted by the Board during 2007.
In addition, the Nominating and Governance Committee led the
Boards consideration of issues relating to majority voting
in uncontested director elections, due to a change in Ohio law
on the subject, and proposed amendments to the companys
Amended Articles of Incorporation and Code of Regulations to
adopt majority voting in uncontested directors elections and
related modifications. These proposals were also adopted by the
Board, subject to shareholder approval, and are included in this
Proxy Statement as the proposals set forth in Items 2 and
3. Finally, in reviewing the operation of the Board and its
flexibility to recruit and attract director candidates, the
Committee determined that an increase in the size of the Board
by one member would be desirable. The Board again agreed, and
this issue is presented for shareholder approval below in
Item 4.
Until December 2007, the Board had not had a vacancy in
approximately 18 months, so an active search for new
directors was not ongoing. In the past, a search firm had been
retained to assist in such searches, and the Committee has the
authority to retain such a firm to assist with the current
vacancy, and future vacancies, if it so chooses.
During 2007, the Nominating and Governance Committee met four
times. The Committee regularly reviews the qualifications of
potential candidates for the Board. The Committee recommended
the four nominees named above, each of whom is currently a
director, for re-election to the Board.
Shareholder-Proposed Candidate
Procedures. Pursuant to the Nominating
and Governance Committees Charter, the Board has adopted a
policy of considering director candidates who are recommended by
Progressives shareholders. In addition, the Committee has
adopted Procedures for Shareholders to Propose Candidates for
Directors (the Shareholder-Proposed Candidate
Procedures or Procedures).
Any shareholder desiring to propose a candidate for election to
the Board under these Procedures may do so by mailing to
Progressives Secretary a written notice identifying the
candidate. The written notice must also include the supporting
information required by the Shareholder-Proposed Candidate
Procedures, the complete text of which can be found on our Web
site at progressive.com/governance. The notice and supporting
information should be sent to the Secretary at the following
address: Charles E. Jarrett, Secretary, The Progressive
Corporation, 6300 Wilson Mills Road, Mayfield Village, Ohio
44143. Upon receipt, the Secretary will forward the notice, and
the other information provided, to the Committee.
13
The nominating shareholder may also include any additional
information that the shareholder believes is relevant to the
Committees consideration of the candidate. If a
shareholder proposes a candidate without submitting all of the
foregoing items, the Committee, in its discretion, may reject
the proposed candidate, request more information from the
nominating shareholder, or consider the proposed candidate while
reserving the right to request more information. In addition,
the Committee may further limit each shareholder to one proposed
candidate in any calendar year and may refuse to consider any
additional candidate(s) proposed by such shareholder or its
affiliates during the calendar year.
Shareholders may propose candidates to the Committee pursuant to
the Shareholder-Proposed Candidate Procedures at any time.
However, to be considered by the Committee in connection with
Progressives next Annual Meeting of Shareholders (held in
April of each year), the Secretary must receive the
shareholders proposal and the information required above
on or before November 30th of the year immediately
preceding such Annual Meeting.
It is the Committees policy to review and evaluate each
candidate for nomination submitted by shareholders in accordance
with the Shareholder-Proposed Candidate Procedures on the same
basis as candidates who are suggested by our Board members,
executive officers or other sources, which may include
professional search firms retained by the Committee. The
Committee will give strong preference to candidates who are
likely to be deemed independent from Progressive under SEC and
NYSE rules. As to shareholder-proposed candidates, the Committee
may give more weight to candidates who are unaffiliated with the
shareholder proposing their nomination and to candidates who are
proposed by long-standing shareholders with significant share
ownership (i.e., greater than 1% of Progressives common
shares that have been owned for more than two years).
In considering director nominations, the Committee will
consider: the current composition of the Board and how it
functions as a group; the talents, personalities, strengths and
weaknesses of current Board members; the value of contributions
made by individual Board members; the need for a person with
specific skills, experiences or background to be added to the
Board; any available or anticipated vacancies due to retirement
or other reasons; and other factors which may enter into the
nomination decision. Upon the expiration of a directors
term on the Board, that director will be given preference for
nomination when the director indicates his or her willingness to
continue serving and, in the Committees judgment, the
director has made and is likely to continue to make a
significant contribution to the Board and Progressive.
When considering an individual candidates suitability for
the Board, the Committee will evaluate each individual on a
case-by-case
basis. The Committee does not prescribe minimum qualifications
or standards for directors, but instead looks for directors who
have demonstrated the ability to satisfy the fundamental
criteria set forth in the Committees Charter
integrity, judgment, commitment, preparation, participation and
contribution. In addition, the Committee will review the extent
of the candidates demonstrated excellence and success in
his or her chosen business, profession or other career and the
skills and talents that the candidate would be expected to add
to the Board. The Committee may choose, in individual cases, to
conduct interviews with the candidate
and/or
contact references, business associates, other members of boards
on which the candidate serves or other appropriate persons to
obtain additional information. Such background inquiries may
also be conducted, in whole or in part, on the Committees
behalf by third parties, such as professional search firms. The
Committee will make its determinations on whether to nominate an
individual candidate based on the Boards then-current
needs, the merits of that candidate and the qualifications of
other available candidates. If a candidate is not nominated, the
Committee will have the discretion to reconsider his or her
candidacy in connection with future vacancies on the Board.
The Committees decision not to nominate a particular
individual for election to the Board will not be publicized by
Progressive, unless required by applicable laws or NYSE rules.
The Committee will have no obligation to respond to shareholders
who propose candidates that the Committee has determined not to
nominate for election to the Board, but the Committee may choose
to do so in its sole discretion.
These Shareholder-Proposed Candidate Procedures are in addition
to any rights that a shareholder may have under our Code of
Regulations or under any applicable laws or regulations in
connection with the nomination of directors for our Board.
Communications
with the Board of Directors
The Board of Directors has adopted procedures for shareholders
to send written communications to the Board as a group. Such
communications must be clearly addressed to the Board of
Directors and sent to either of the following, at the election
of the shareholder:
|
|
|
|
|
Peter B. Lewis, Chairman of the Board, The Progressive
Corporation, 6300 Wilson Mills Road, Mayfield Village, Ohio
44143 or
e-mail:
peter_lewis@progressive.com.
|
|
|
|
Charles E. Jarrett, Secretary, The Progressive Corporation, 6300
Wilson Mills Road, Mayfield Village, Ohio 44143 or
e-mail:
chuck_jarrett@progressive.com.
|
14
In addition, interested parties may contact the non-management
directors as a group by sending a written communication to
either of the above-named individuals. Such communication must
be clearly addressed to the non-management directors.
The recipient will promptly forward communications so received
to the full Board of Directors or to the non-management
directors, as specified by the shareholder.
Certain
Relationships and Related Transactions
Transactions between The Progressive Corporation or its
subsidiaries and any director or executive officer, or any
entity in which one or more of our directors or executive
officers is a substantial owner, director or executive officer,
must be disclosed to and, if appropriate, approved by, our Board
of Directors. Our Code of Business Conduct and Ethics prohibits
directors and executive officers from having a direct or
indirect financial interest in any transaction involving
Progressive, unless either: (i) the transaction is
disclosed to and approved by a disinterested majority of the
Board; or (ii) with respect to a transaction with another
publicly held company, the transaction and the Progressive
persons status as a director, officer, consultant or
advisor to such other company are known to the Board, a
disinterested majority of the Board does not object to the
persons continued service to such other public company,
and the annual payments to or from Progressive under the
transaction do not exceed the lesser of 1% of Progressives
or such other companys consolidated revenues.
This policy is carried out by the Law Department as transactions
with such persons or entities, or proposals for such
transactions, are identified by management or disclosed by
members of the Board. As indicated above, the policy applies to
all transactions that occur between Progressive and the persons
or entities described above. If a transaction with any such
person or entity is proposed or entered into during the course
of the year, the transaction is presented to the Board for
consideration, typically at its next meeting. In addition, all
previously approved transactions that are expected to continue
into a new year are presented to the Board for review on an
annual basis at the Boards first meeting of the year (in
January or February). This procedure further allows the Board to
consider these relationships at the same time that it is
considering whether directors are independent under applicable
rules and regulations.
The following discussion sets forth the relationships and
transactions known by management at this time to involve
Progressive or its subsidiaries and such persons or entities. In
each case, pursuant to the policies described above, these
transactions have been disclosed to the Board of Directors and a
disinterested majority of the Board approved the transaction or,
in the case of ongoing relationships that were presented to the
Board, permitted the continuation or renewal of the relationship.
|
|
|
|
|
Mr. Jeffrey D. Kelly, a director of Progressive, is the
Vice Chairman and Chief Financial Officer of National City
Corporation, the parent company of National City Bank
(NCB). Dr. Bernadine P. Healy, a director of
Progressive, is also a director of National City Corporation.
NCB is the Transfer Agent and Registrar for our common shares
and received fees of $81,572 for such services for 2007.
Additionally, we use NCB for commercial banking services and
paid $1,303,367 to NCB in service charges during 2007. In each
case, these charges represented NCBs customary rates.
|
Progressive also has an uncommitted line of credit with NCB in
the principal amount of $125 million. We do not incur any
commitment fees for this arrangement and no borrowings were
outstanding under this line of credit at any time during 2007. A
subsidiary of Progressive has $125 million on deposit with
NCB. These funds are invested in interest-bearing securities
approved by us. This line of credit and the deposit are
components of our cash contingency arrangement to ensure the
availability of those funds in the event of certain emergencies
affecting capital markets and banking operations.
We have established a $36 million trust on behalf of the
policyholders of a nonconsolidated affiliate of Progressive,
with NCB as trustee, in order to maintain the A.M. Best
rating of the nonconsolidated affiliate. We incur an annual
trustee fee of $15,000 in connection with this trust, which
represents NCBs customary rates.
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|
|
|
|
Mr. Stephen R. Hardis, a director of Progressive, is also a
director and non-executive chairman of Marsh &
McLennan Companies, Inc. (Marsh). Progressive pays
commissions to various subsidiaries of Marsh for brokerage
services in the ordinary course of our auto and non-auto
insurance businesses, at customary rates for the services
rendered. During 2007, we paid $1,057,506 for these services.
|
During 2007, we also paid $10,796 to a division of Mercer
Management Consulting, Inc. (Mercer), a subsidiary
of Marsh, for compensation and benefits surveys. The fees paid
to Mercer were customary rates for the products purchased or
services rendered.
15
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|
|
Mr. Charles A. Davis, a director of Progressive, serves as
a director of AXIS Capital Holdings Limited (AXIS).
During 2007, AXIS reinsured part of the risk we have under the
policies we wrote for directors and officers
liability insurance, trust errors and omissions insurance and
bond products. AXIS provides reinsurance coverage of
$2.8 million on policy limits of $15 million, for
losses incurred in excess of the first $1 million. During
2007, we paid $2,839,028 in premiums to AXIS, and collected
$1,678,881 on paid losses related to, this coverage. At
December 31, 2007, we had $2,797,757 of reinsurance
recoverables on unpaid losses under this arrangement. AXIS is
one of several companies that we use to reinsure this non-auto
line of business. The terms of this reinsurance arrangement with
AXIS are consistent with those between us and the other
reinsurers.
|
|
|
|
Mr. Philip A. Laskawy, a former director of Progressive,
who left the Board in December 2007, is also a director of Cap
Gemini, S.A., a French public company. In 2007, we paid
$7,504,456 to Cap Gemini, S.A., for information technology
consulting fees. These charges represent the customary rates for
services provided.
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|
|
|
Mr. Glenn M. Renwick, President, Chief Executive Officer
and a director of Progressive, is also a director of Fiserv,
Inc. We paid $35,847 to Fiserv, Inc., or its subsidiaries, for
comparative rating software during 2007. These charges represent
the customary rates for the products purchased.
|
|
|
|
In 2006, a subsidiary of Progressive and a company owned by
Mr. Peter B. Lewis, Chairman of the Board, entered into a
sublease for space at an airplane hangar leased by the
subsidiary, to house the airplane owned by Mr. Lewiss
company and related personnel and equipment. The sublease has a
5-year term
that commenced in October 2006, and Mr. Lewiss
company has options to extend the sublease for three additional
5-year
terms. Under the sublease, Mr. Lewiss company rents
approximately two-thirds of the hangar space and one-half of the
office space at the facility, and it further reimburses one-half
of other occupancy costs (such as common area maintenance,
insurance, taxes, etc.) and one-half of certain construction and
capital expenses. In addition, Mr. Lewiss company
reimburses Progressive for fuel for its aircraft, based on
actual fuel used, plus one-half of the fuel flow fee incurred by
us under our lease for the hangar. During 2007,
Mr. Lewiss company paid Progressives subsidiary
a total of $468,146 for rent and other occupancy expenses in
accordance with the terms of the sublease, including its
one-half share of the construction costs associated with tenant
improvements.
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|
|
|
The following relatives of executive officers and directors
worked for Progressive in 2007: the son of Mr. Forrester
(retired CFO), Ian Forrester, as a product manager; the brother
of Brian Domeck (CFO), John Domeck, as an attorney; and the
son-in-law
of Mr. Hardis (director), Stephen Ware, who works in our
information technology area. The dollar value of each of these
employment relationships for 2007 was less than $175,000. In
determining the dollar value of these relationships, we used the
same methodology that is used to determine compensation for
named executive officers in the Summary Compensation Table
below, under which total compensation includes, to the extent
applicable to each individual, salary paid in 2007, Gainsharing
and other bonuses earned in 2007, restricted stock expense
recognized by Progressive during the year, company-matching
contributions to retirement security (401k) accounts and other
compensation, but excludes health and welfare benefits that are
available generally to all salaried employees, as contemplated
by the applicable regulations. In each case, we believe that the
level of compensation is appropriate in view of the
individuals position, responsibilities and experience and
is consistent with our companywide compensation structure.
|
Compensation
Committee Interlocks and Insider Participation
Messrs. Davis and Matthews and Dr. Sheares served as
members of Progressives Compensation Committee during
2007. There are no Compensation Committee interlocks.
16
REPORT OF THE
AUDIT COMMITTEE
The following Report of the Audit Committee does not
constitute soliciting material and should not be deemed filed or
incorporated by reference into any other Progressive filing
under the Securities Act of 1933 or the Securities Exchange Act
of 1934, except to the extent Progressive specifically
incorporates this Report by reference therein.
The Audit Committee of the Board of Directors (the
Committee) oversees Progressives financial
reporting process on behalf of the Board. Progressives
management has the primary responsibility for the financial
statements and the reporting process, including the systems of
internal control. In fulfilling its oversight responsibilities,
the Committee reviewed and discussed with management
Progressives audited financial statements for the year
ended December 31, 2007, including a discussion of the
quality, not just the acceptability, of the accounting
principles, reasonableness of significant judgments and clarity
of disclosures in the financial statements.
The Committee has discussed with PricewaterhouseCoopers LLC
(PWC), Progressives independent registered
public accounting firm, which is responsible for expressing an
opinion on the conformity of the financial statements with
accounting principles generally accepted in the United States of
America, PWCs judgment as to the quality, not just the
acceptability, of Progressives accounting principles and
such other matters as are required to be discussed with the
Committee under Statement on Auditing Standards No. 61, as
amended, Communication with Audit Committees. In
addition, the Committee has received the written disclosures and
letter from PWC required by Independence Standards Board
Standard No. 1 and has discussed with PWC their
independence from management and Progressive.
The Committee discussed with Progressives internal
auditors and PWC the overall scope and plans for their
respective audits. The Committee meets with the internal
auditors and PWC, with and without management present, to
discuss the results of their examinations, evaluations of
Progressives internal controls and the overall quality of
Progressives financial reporting. During 2007, the
Committee held seven meetings and participated in five
conference calls to review Progressives financial and
operating results. Also, during 2007, the Committee reassessed
the adequacy of the Audit Committees Charter, recommended
certain minor modifications to the Charter and approved the
Charter, as so modified, and recommended that the Charter be
submitted for approval to the full Board of Directors. The Board
approved the Charter, as so modified, on December 14, 2007,
and it became effective as of January 1, 2008. A copy of
the Charter, as so approved, is available on our Web site at
progressive.com/governance.
Based on the reviews and discussions referred to above, the
Committee recommended to the Board that the audited financial
statements be included in The Progressive Corporations
Annual Report on
Form 10-K
for the year ended December 31, 2007, for filing with the
Securities and Exchange Commission.
The Committee has selected and retained PWC to serve as the
independent registered public accounting firm for Progressive
and its subsidiaries for 2008. Shareholders will be given the
opportunity to express their opinion on ratification of this
selection at the 2008 Annual Meeting of Shareholders.
On December 21, 2007, Philip A. Laskawy, then Chairman of
the Audit Committee, resigned from Progressives Board of
Directors and his position on the Audit Committee. He cited the
reason for his resignation as his ongoing involvement as the
Chairman of the International Accounting Standards Committee
Foundation, whose meetings regularly conflict with scheduled
meetings of the Progressive Board. On that same date, the Board
of Directors appointed Stephen R. Hardis to replace
Mr. Laskawy as Audit Committee Chairman.
AUDIT COMMITTEE
Stephen R. Hardis, Chairman
Bernadine P. Healy, M.D.
Patrick H. Nettles, Ph.D.
17
This Page Intentionally Left Blank
18
SECURITY
OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
Security
Ownership of Certain Beneficial Owners
The following information is set forth with respect to persons
known to management to be the beneficial owners, as of
December 31, 2007, of more than 5% of Progressives
Common Shares, $1.00 par value:
|
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|
|
|
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|
Name and Address
|
|
Amount and Nature of
|
|
|
Percent
|
|
of Beneficial Owner
|
|
Beneficial
Ownership1
|
|
|
of Class
|
|
|
|
|
Davis Selected Advisers, L.P.
|
|
|
78,680,531
|
2
|
|
|
11.6
|
%
|
2949 East Elvira Road, Suite 101
|
|
|
|
|
|
|
|
|
Tucson, Arizona 85706
|
|
|
|
|
|
|
|
|
|
Peter B. Lewis
|
|
|
49,033,333
|
3
|
|
|
7.2
|
%
|
6300 Wilson Mills Road
|
|
|
|
|
|
|
|
|
Mayfield Village, Ohio 44143
|
|
|
|
|
|
|
|
|
|
Ruane, Cunniff & Goldfarb Inc.
|
|
|
34,452,567
|
4
|
|
|
5.1
|
%
|
767 Fifth Avenue, Suite 4701
|
|
|
|
|
|
|
|
|
New York, New York
10153-4798
|
|
|
|
|
|
|
|
|
|
|
|
1
|
Except as otherwise indicated, the persons listed as beneficial
owners of the common shares have sole voting and investment
power with respect to those shares. Certain of the information
contained in this table, including related footnotes, is based
on the Schedule 13G filings made by the beneficial owners
identified herein.
|
|
2
|
The common shares are held in investment accounts maintained
with Davis Selected Advisers, L.P., as of December 31,
2007, and it disclaims any beneficial interest in such shares.
Davis Selected Advisers, L.P. has advised that it has sole
voting power as to 73,675,577 of these shares, no voting power
as to the balance of these shares, and sole investment power as
to all of these shares. Mr. Charles A. Davis, a director of
Progressive, has no affiliation with Davis Selected Advisers,
L.P.
|
|
3
|
Includes 220,019 common shares held for Mr. Lewis by a
trustee under Progressives Retirement Security Program,
888,338 common shares subject to currently exercisable stock
options and 8,548 restricted common shares granted to
Mr. Lewis in his capacity as Chairman of the Board. Also
includes 1,048,705 shares held by two charitable
corporations which Mr. Lewis controls, but as to which he
has no pecuniary interest.
|
|
4
|
The common shares are held in investment accounts maintained
with Ruane, Cunniff & Goldfarb Inc., as of
December 31, 2007, and it disclaims any beneficial interest
in such shares. Ruane, Cunniff & Goldfarb Inc. has
advised that it has sole voting power as to 21,807,850 of these
shares, no voting power as to the balance of these shares, and
sole investment power as to all of these shares.
|
19
Security
Ownership of Management
The following information summarizes the beneficial ownership of
Progressives common shares as of December 31, 2007,
by each director and nominee for election as a director of
Progressive, each of the named executive officers (as identified
on page 37) and by all directors and all other individuals
who were our executive officers on December 31, 2007, as a
group. In addition, to provide a more complete picture of
certain individuals financial interest in Progressive
shares, the final two columns include share equivalent units
held in our benefit plans that do not technically qualify as
beneficially owned under the applicable regulations,
also as of December 31, 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
Common
|
|
|
Beneficially
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
Shares
|
|
|
Shares
|
|
|
Owned
|
|
|
Other
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
Interest
|
|
|
|
Subject to
|
|
|
Subject to
|
|
|
Common
|
|
|
Common
|
|
|
Common
|
|
|
|
|
|
|
Units
|
|
|
in Common
|
|
|
|
Restricted
|
|
|
Currently
|
|
|
Share
|
|
|
Shares
|
|
|
Shares
|
|
|
|
|
|
|
Equivalent
|
|
|
Shares
|
|
|
|
Stock
|
|
|
Exercisable
|
|
|
Equivalent
|
|
|
Beneficially
|
|
|
Beneficially
|
|
|
Percent
|
|
|
|
to Common
|
|
|
and Unit
|
|
Name
|
|
Awards1
|
|
|
Options2
|
|
|
Units3
|
|
|
Owned4
|
|
|
Owned
|
|
|
of
Class5
|
|
|
|
Shares6
|
|
|
Equivalents
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Charles A. Davis
|
|
|
7,052
|
|
|
|
99,945
|
|
|
|
11,877
|
|
|
|
147,837
|
|
|
|
266,711
|
|
|
|
|
*
|
|
|
|
13,429
|
|
|
|
280,140
|
|
Brian C. Domeck
|
|
|
57,495
|
|
|
|
96,992
|
|
|
|
0
|
|
|
|
4,282
|
|
|
|
158,769
|
|
|
|
|
*
|
|
|
|
0
|
|
|
|
158,769
|
|
W. Thomas
Forrester7
|
|
|
74,740
|
|
|
|
864,790
|
|
|
|
71,644
|
|
|
|
228,687
|
|
|
|
1,239,861
|
|
|
|
|
*
|
|
|
|
20,580
|
|
|
|
1,260,441
|
|
Stephen R. Hardis
|
|
|
6,838
|
|
|
|
82,337
|
|
|
|
6,086
|
|
|
|
179,163
|
|
|
|
274,424
|
|
|
|
|
*
|
|
|
|
151,021
|
|
|
|
425,445
|
|
Bernadine P. Healy, M.D.
|
|
|
6,624
|
|
|
|
0
|
|
|
|
0
|
|
|
|
44,611
|
|
|
|
51,235
|
|
|
|
|
*
|
|
|
|
4,011
|
|
|
|
55,246
|
|
Charles E. Jarrett
|
|
|
132,527
|
|
|
|
289,938
|
|
|
|
43,324
|
|
|
|
4,068
|
|
|
|
469,857
|
|
|
|
|
*
|
|
|
|
0
|
|
|
|
469,857
|
|
Jeffrey D. Kelly
|
|
|
6,624
|
|
|
|
65,493
|
|
|
|
6,421
|
|
|
|
50,820
|
|
|
|
129,358
|
|
|
|
|
*
|
|
|
|
15,227
|
|
|
|
144,585
|
|
Abby F. Kohnstamm
|
|
|
6,411
|
|
|
|
0
|
|
|
|
5,102
|
|
|
|
0
|
|
|
|
11,513
|
|
|
|
|
*
|
|
|
|
0
|
|
|
|
11,513
|
|
Peter B. Lewis
|
|
|
8,548
|
|
|
|
888,338
|
|
|
|
0
|
|
|
|
48,136,447
|
8
|
|
|
49,033,333
|
|
|
|
7.2
|
%
|
|
|
|
0
|
|
|
|
49,033,333
|
|
Norman S. Matthews
|
|
|
7,052
|
|
|
|
99,945
|
|
|
|
16,795
|
|
|
|
188,212
|
|
|
|
312,004
|
|
|
|
|
*
|
|
|
|
22,882
|
|
|
|
334,886
|
|
Patrick H. Nettles, Ph.D.
|
|
|
6,624
|
|
|
|
0
|
|
|
|
11,462
|
|
|
|
0
|
|
|
|
18,086
|
|
|
|
|
*
|
|
|
|
0
|
|
|
|
18,086
|
|
Brian J. Passell
|
|
|
152,101
|
|
|
|
494,401
|
|
|
|
0
|
|
|
|
33,543
|
9
|
|
|
680,045
|
|
|
|
|
*
|
|
|
|
0
|
|
|
|
680,045
|
|
Glenn M. Renwick
|
|
|
1,316,034
|
|
|
|
2,110,042
|
|
|
|
443,880
|
|
|
|
896,971
|
|
|
|
4,766,927
|
|
|
|
|
*
|
|
|
|
0
|
|
|
|
4,766,927
|
|
Donald B. Shackelford
|
|
|
6,411
|
|
|
|
99,945
|
|
|
|
7,853
|
|
|
|
748,108
|
|
|
|
862,317
|
|
|
|
|
*
|
|
|
|
24,181
|
|
|
|
886,498
|
|
Bradley T. Sheares, Ph.D.
|
|
|
6,411
|
|
|
|
0
|
|
|
|
3,276
|
|
|
|
0
|
|
|
|
9,687
|
|
|
|
|
*
|
|
|
|
13,105
|
|
|
|
22,792
|
|
Raymond M. Voelker
|
|
|
114,120
|
|
|
|
43,817
|
|
|
|
0
|
|
|
|
26,513
|
|
|
|
184,450
|
|
|
|
|
*
|
|
|
|
0
|
|
|
|
184,450
|
|
|
|
|
|
|
|
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
All 22 Executive Officers and Directors as a Group
|
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|
2,310,089
|
|
|
|
5,630,534
|
|
|
|
675,313
|
|
|
|
50,939,938
|
|
|
|
59,555,874
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|
|
|
8.7
|
%
|
|
|
|
264,436
|
|
|
|
59,820,310
|
|
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|
|
|
|
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*Less than 1% of Progressives outstanding common shares.
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1
|
Includes common shares held for executive officers and directors
pursuant to unvested restricted stock awards issued under
various incentive plans we maintain. The beneficial owner has
sole voting power and no investment power with respect to these
shares during the restriction period.
|
|
2
|
The beneficial owner has no voting power or investment power
with respect to these shares prior to exercising the options.
|
|
3
|
These units have been credited to the individuals account
under certain of our deferred compensation plans and are
included in shares beneficially owned due to the plan features
described below. Each unit is equal in value to one Progressive
common share.
|
|
|
|
|
|
For non-employee directors, the number represents units that
have been credited to his or her account under The Progressive
Corporation Directors Restricted Stock Deferral Plan, as amended
and restated (the Directors Equity Deferral Plan),
under which each director has the right to defer restricted
stock awards. Distributions from the Directors Equity Deferral
Plan will be made in Progressive common shares at the expiration
of the deferral period under the plan. Upon the termination of a
directors service as a director, the plan provides that
certain shares would be distributed to the director promptly
thereafter. As to the number of shares that would be distributed
promptly upon a directors termination of service, the
director is considered to have investment power over those
shares (although not voting power), and those shares are deemed
beneficially owned. See page 50 for a description of the
Directors Equity Deferral Plan.
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|
|
|
For executive officers, the number represents units that have
been credited to the participants account under The
Progressive Corporation Executive Deferred Compensation Plan
(the EDCP), upon the deferral of cash bonus awards
and restricted stock awards. As to these units, the participant
has sole investment power but no voting power. In this case, the
participant has investment power due to his or her ability to
instruct the plan trustee to liquidate his or her deemed
investment in Progressive stock and re-allocate those amounts
into one of the other deemed investments that are available
under the plan. See a description of the EDCP beginning on
page 44.
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|
|
4
|
Includes, among other shares, common shares held for executive
officers (or, in certain cases, their spouses who are former
employees) under The Progressive Retirement Security Program.
Unless otherwise indicated below, beneficial ownership of the
common shares reported in the table includes both sole voting
power and sole investment power, or voting power and investment
power that is shared with the spouse and/or minor children of
the director or executive officer.
|
|
5
|
Percentage based solely on Total Common
Shares Beneficially Owned.
|
20
|
|
6 |
The units disclosed are in addition to common shares
beneficially owned and have been credited to the
individuals account under one or more of our deferred
compensation plans, as discussed below. Each unit is equal in
value to one Progressive common share.
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|
|
|
|
For non-employee directors, the number represents units that
have been credited under The Progressive Corporation Directors
Deferral Plan, as amended and restated (Directors Deferral
Plan) and certain amounts credited under the Directors
Equity Deferral Plan. Each of our directors who is not an
employee of Progressive (other than Mr. Peter B. Lewis) and
was a director prior to April 2006 participates in Directors
Deferral Plan, under which cash retainer and meeting fees were
deferred. The amounts deferred under the Directors Deferral Plan
are deemed invested in Progressive shares for the entire
deferral period, and distributions from the plan will be made
only in cash at the time selected by the participant or as
otherwise required by the plan. As such, the investor has
neither investment power or voting power over those units. See
page 50 for a description of the Directors Deferral Plan.
Deferrals of restricted stock under the Directors Restricted
Stock Deferral Plan are included in this column to the extent
that Progressive common shares would not be distributed promptly
after the termination of the directors service, in which
case the director is not considered to have investment power or
voting power over those shares (for example, distributions that
would be made in future years under an installment distribution
plan selected by the director in accordance with the
plan); and
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|
For executive officers, the number represents units that have
been credited to the executive officer under the EDCP upon the
deferral of restricted shares that were awarded in or after
March 2005. These deferral amounts are deemed to be invested in
Progressive shares during the entire deferral, and no other
deemed investments are available to the participant. In
addition, the distribution of Progressive common shares to the
executive under the EDCP would not be made until six months
after the termination of his or her employment. As a result, the
executive has neither investment power or voting power during
the deferral period.
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|
7 |
Mr. Forrester, our former CFO, retired in March 2007.
Included in Other Common Shares Beneficially Owned
are 72,000 common shares held by Mr. Forrester as trustee
for two trusts established for the benefit of his children.
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8 |
See Footnote 3 on page 19.
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9 |
Includes 3,660 common shares held by Mr. Passell as trustee
for a trust established for the benefit of his daughter.
Mr. Passells employment with the Company terminated
in February 2008.
|
Section 16(a)
Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934, as
amended, requires our officers and directors, and persons who
beneficially own more than 10% of our common shares, if any, to
file reports of ownership and changes in ownership of
Progressive stock with the Securities and Exchange Commission.
Based on our review of Section 16 reports prepared by or
furnished to Progressive and representations made by our
officers and directors, we believe that all filing requirements
were met on a timely basis during 2007.
21
COMPENSATION
DISCUSSION AND ANALYSIS
I. GOALS
OF EXECUTIVE COMPENSATION PROGRAM
Our compensation program for executives, including the
named executive officers identified in the Summary
Compensation Table on page 37, is designed and implemented
under the direction and guidance of the Compensation Committee
of the Board of Directors. Broadly stated, we seek to maintain a
consistent compensation program with the following objectives:
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Attract and retain outstanding executives with the leadership
skills and expertise necessary to drive results and build
long-term shareholder value;
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Motivate executives to achieve the strategic goals of
Progressive and their assigned business units;
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Reward and differentiate executive performance based on the
achievement of challenging performance goals; and
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Align the interests of our executives with those of shareholders.
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II.
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OUR EXECUTIVE
COMPENSATION PROGRAM
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1. The Compensation Committee
The Compensation Committee is comprised of three Directors who
are independent from management. The Committee makes final
executive compensation decisions regarding salary, cash bonus
targets, equity awards and related performance goals, as they
apply to executive officers. For additional information on
Compensation Committee procedures, see the Compensation
Committee discussion on page 12.
2. Primary Elements of Compensation
Our executive compensation program has retained the same basic
format for more than a decade. We have three primary
compensation elements, each of which involves annual decisions
made by the Compensation Committee to ensure reasonable,
competitive pay for our executives, with a balance of fixed and
variable compensation. These elements are:
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Base salaries;
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Annual cash bonus potential, the amount of which is determined
under our Gainsharing programs for our executives
and employees, based on the performance of Progressive or a
specific
business-unit; and
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Equity-based compensation, which is currently awarded to
executives in the form of both time-based and performance-based
restricted stock.
|
Our compensation decisions (for executives and our other
employees) are guided by the policies that individual base
salaries should generally be within a range that is tied to the
50th percentile
for similar jobs at comparable companies (with variations
determined by individual factors, as described in more detail
below), and that employees should also have the ability to earn
above-average compensation when justified by the
individuals and Progressives performance. At
executive levels, variable compensation (including annual cash
bonus and restricted stock awards) accounts for a much greater
portion of total potential compensation, providing tangible
incentives to executives to drive business unit and company
results and aligning executives interests with those of
shareholders. As a result, total pay for our executives is
heavily weighted in favor of performance-based compensation that
is tied directly to the Companys strategic goals, as well
as to the performance of our common shares. These basic elements
of our executive compensation program are discussed in greater
detail below in Part B, Elements of
Compensation Annual Decisions or Awards.
Other types of compensation available to executives are
comprised of health and welfare benefits, deferred compensation
arrangements, severance payments and very limited perquisites.
We do not provide a separate pension program, supplemental
executive retirement plan or other post-retirement payments to
executives, nor do we make tax
gross-up
payments to executives in connection with compensation received.
These additional types of compensation are discussed in more
detail below in Part C, Elements of
Compensation Other.
22
As a result, the compensation that an executive can expect to
earn at Progressive over his or her career will derive
predominantly from our three annual compensation components,
i.e., salary, cash bonus opportunity and equity awards, and the
amount ultimately earned by executives will depend greatly on
our operating performance, as well as the performance of our
common shares.
3. Compensation Comparisons
The executive compensation program is market-based and is
designed to be competitive with compensation opportunities
available to executives in similar positions at comparable
companies. If direct job comparisons are not available for an
executive, we seek to match the executive with job
classifications from comparable companies that most closely
resemble the executives position and responsibilities.
Comparable companies include those from many industries in a
revenue range that is comparable to our revenue, as indicated on
compensation surveys that we obtain from independent third party
vendors. Comparable companies are intentionally not limited to
those in the insurance industry. This choice reflects: that
there are a limited number of publicly held insurers that focus
exclusively, or even primarily, on automobile insurance (and
none with comparable revenue or market value characteristics);
that we do not generally recruit senior management level talent
from other insurance companies; and that our executives have
employment opportunities with companies doing business in a
variety of industries. As a result, we view the broader range of
companies to be a better reflection of the marketplace for the
services of our executives. We do not focus on the identity of
any individual company, but are interested in the aggregate data
and the percentile breakdowns, which are used as a guide (among
other factors) in our executive compensation decisions, as
discussed further below.
4. Internal Pay Equity
We do not use internal pay equity as a constraint on
compensation paid to the Chief Executive Officer or other
executives. Such systems typically put a ceiling on part or all
of an executives compensation based on a specified
multiple of compensation awarded to another executive or a class
of employees of the company. Management and the Committee do not
believe that such arbitrary limitations are an appropriate way
to make compensation decisions for our executives. Instead, we
rely on the judgment of the Committee, after considering
recommendations from management (including the CEO), available
market data and evaluations of executive performance.
5. No Tax
Gross-Up
Payments
We do not provide, and no executive officer is entitled to
receive, any tax
gross-up
payments in connection with compensation, severance, perquisites
or other benefits provided by Progressive, except that we pay
all regular employees, including the named executive officers,
5-year
anniversary awards (i.e., at their
5th,
10th,
15th,
etc., anniversaries) in amounts not to exceed $300 on a net
(after tax) basis. When such amounts are paid to named executive
officers, the gross (pre-tax) amount is included in our Summary
Compensation Table.
B. Elements
of Compensation Annual Decisions or Awards
This section summarizes our policies and plans relating to the
basic elements of compensation, each of which is determined on
an annual basis salary, annual cash bonus
opportunity and restricted stock awards (subsections 1-3 below).
In subsection 4 below, we discuss details of the 2007
compensation decisions for the named executive
officers1
and performance results. A number of changes that are being
implemented for 2008 are also addressed in more detail at the
end of this section (subsection 5 below).
1. Salary
Executive salaries are designed to attract and retain executive
talent and to reward individual performance. As a general
matter, executive salaries are set in a range around the
50th percentile
for executives with similar responsibilities at comparable
companies. Variations from this general rule can occur on a
case-by-case
basis for any number of reasons, including the nature of a
specific executives position and responsibilities, our
business needs, the tenure of an executive in his or her current
position, individual performance and the executives future
potential. The salary level for our CEO, Glenn Renwick, which
has been maintained well below market at $750,000 per year since
February 2002, is an exception to this general approach and is
discussed separately below.
1 The
discussion below excludes Mr. Forrester, other than matters
related to his retirement in March 2007. Due to his impending
retirement, Mr. Forresters salary rate did not change
for 2007, and he did not participate in our Gainsharing or
restricted stock programs for the year.
23
Salary amounts then serve as the basis for determining annual
cash bonus potential and the value of annual equity awards, as
described in more detail in the following sections.
2. Cash
Bonuses
Gainsharing Program. Each executive has the
opportunity to earn an annual, performance-based cash bonus
under our 2007 Executive Bonus Plan or other bonus plans. The
Executive Bonus Plan operates under the same performance
criteria used in our 2007 Gainsharing Plan, which covers all of
our non-executive employees (those plans are sometimes referred
to together as Gainsharing, the Gainsharing
program or the Gainsharing plans). Gainsharing
bonuses are determined using the following formula:
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|
|
|
|
Paid
Salary
|
|
X
|
|
Target Percentage
|
|
X
|
|
Performance Factor
|
|
=
|
|
Annual
Bonus
|
For each executive, his or her salary and target percentage are
established by the Committee each year during the first calendar
quarter. When the participants annual salary is multiplied
by his or her assigned target percentage, the product is
referred to as the participants target bonus
or target bonus amount for the year. The performance
factor can range from 0.0 to 2.0 each year, depending on
the extent to which Progressives results,
and/or the
results of the executives assigned business unit, fall
short of, meet or exceed the objective performance goals
established in advance by the Committee. As a result, each
participant can earn an annual cash bonus of between 0.0 and 2.0
times his or her target bonus amount (with an amount equal to
2.0 times an executives target bonus thus being the
executives maximum potential bonus). The payment of the
target bonus amount, which would result from a 1.0 performance
factor under the plans, is typically expected to put an
employees annual cash compensation (salary plus bonus) at
approximately the
50th percentile
of total cash compensation for similar jobs at comparable
companies, although there is more variability at executive
levels due to a number of factors, including lack of comparable
data and individual factors such as tenure, responsibilities and
our business needs. Note that all Gainsharing and other
performance-based cash bonus awards for the named executive
officers are reported on the Summary Compensation Table below as
Non-Equity Incentive Plan Compensation.
Under the Gainsharing plans, the performance factor is
determined after the end of each year based on actual operating
performance for that year by our principal business units, when
compared with growth and profitability criteria that were
established by the Compensation Committee during the first
quarter of the plan year. Generally, the performance factors
under our Gainsharing plans are determined by reference to
either (i) the overall operating performance of our core
insurance businesses, excluding investment results (the
Core Business), or (ii) a combination of the
performance of the Core Business and the performance of the
respective executives assigned business unit. For 2007,
the Core Business was defined to include the Agency Auto, Direct
Auto, Special Lines and Commercial Auto businesses.
The Gainsharing cash bonus is designed to reward executives
based on the operating performance of Progressives
insurance business as a whole
and/or an
executives assigned business unit, as compared with
objective performance criteria that are established by the
Committee during the first quarter of each year and are not
thereafter modified. The purpose of the cash bonus program is to
motivate executives to achieve and surpass current performance
goals, which over time, should positively impact the returns of
long-term shareholders. Additional discussion of the 2007
Gainsharing program, the operating results for the business
units comprising the Core Business and the calculation of the
Performance Factor for 2007 can be found below under 2007
Compensation Decisions and Results and under
Narrative Disclosure to Summary Compensation Table and
Grants of Plan-Based Awards Table on page 39.
The Gainsharing performance factor for our Core Business is
calculated on a monthly basis, using year-to-date results, and
published in our regular, monthly earnings release. In addition,
the final performance factor was used by the Company to
calculate our annual dividend payment to shareholders for the
first time in 2007. The annual dividend of $.1450 per share was
paid on January 31, 2008 to shareholders of record on
December 31, 2007. The Gainsharing factor and, as a result,
the Companys ongoing operating performance, are therefore
monitored and disclosed to the public throughout the course of
the year, and are ultimately used to reward both employees and
shareholders.
Other Bonus Plans. In 2007, our Chief
Information Officer, Mr. Raymond Voelker, participated in
The Progressive Corporation 2007 Information Technology
Incentive Plan (the IT Bonus Plan) for 10% of his
potential bonus, along with other employees who worked in this
business area. This plan provides cash bonus opportunities to
participants for satisfaction of pre-established performance
criteria relating to the outage-free availability of certain
information technology systems. For more information on
Mr. Voelkers bonus under the IT Bonus Plan, see the
discussion below under 2007 Compensation Decision and
Results; Cash Bonus IT Plan. In addition, the
entire 2007 cash bonus for our Chief Investment Officer was
determined under our Executive Bonus Plan based on the
performance of our fixed-income investment portfolio when
compared, on a
24
risk-adjusted basis, with the performance achieved by a group of
comparable money management firms, as determined by a third
party vendor. Our equity portfolio is not included in this
analysis because this portfolio tracks the Russell 1000 Index
and is not actively managed by our investment group.
Recent Gainsharing Results. Outstanding growth
and profitability results in each of 2003 and 2004 were rewarded
by a Core Business performance factor of 2.0, and the highest
possible bonus under our Gainsharing plans, for most executive
officers and other employees of Progressive. By contrast, a
significant down year in our insurance operations in 2000
resulted in a performance factor of 0.0 for our Core Business,
and no annual cash bonus, for most executive officers and
employees. Performance factors for 2005, 2006 and 2007 were
1.539, 1.18 and .74, respectively, reflecting strong (but
decreasing) profitability, but lagging growth compared to recent
experience and our pre-established targets. Throughout the
14-year
history of our company-wide Gainsharing program (including
2007), the performance factor for the Core Business has averaged
about 1.34. These results confirm that our Gainsharing plans
operate not only to reward excellent performance, but also to
withhold or temper cash bonuses if our actual performance
results fail to achieve pre-defined goals.
Effect of Any Future Financial
Restatement. Under the 2007 Executive Bonus Plan,
bonuses paid to executives will be subject to recoupment by
Progressive if operating or financial results that are used in
the bonus calculation are later restated. If an executive
engages in fraud or other misconduct leading to the restatement,
he or she would be required to repay the entire bonus paid for
the year(s) in question, plus interest and the costs of
collection, and there is no time limit on our ability to recover
such amounts other than limits imposed by law. In addition, we
would have the right to require repayment from an executive who
does not engage in misconduct, but nonetheless receives a bonus
that was artificially high due to the use of incorrect financial
results, but only to the extent that the potential recovery
would exceed the lesser of 5% of the bonus paid or $20,000 and
the restatement occurs within three years after the bonus is
paid. Plans covering bonuses paid to executives in prior years
do not include such a provision, however, and our ability to
recoup any bonuses paid under the prior plans if such a
restatement were to occur would depend on the availability of
general legal and equitable remedies under state or federal law.
Restricted Stock Awards. Our executive
compensation program includes long-term incentives through an
annual grant of restricted stock awards. Under a restricted
stock grant, the executive receives an award of
Progressives common shares, subject to restrictions on
vesting and transferability. Annual awards of restricted stock
to executive officers are intended to tie the amount of
compensation ultimately earned by the executive to our long-term
performance and the market value of our common shares. Until
2002, we issued stock options annually to our executives (and
certain other employees), but that program was terminated in
2003 when the restricted stock program was instituted.
Each executive officer receives a restricted stock award on an
annual basis. All executive officers receive a time-based
restricted stock award that will vest in three equal
installments in the third, fourth and fifth years after the
grant. The value of these awards is based on a percentage of the
individuals salary at the time of the award, which is
determined by the Committee on an annual basis. Time-based
restricted stock awards align the interests of executives with
our shareholders and serve as a strong retention device,
encouraging our senior executives to stay with Progressive until
future vesting dates occur.
In addition, our CEO and the executive officers who report
directly to him, each receives an annual award of
performance-based restricted stock. The number of shares granted
to each executive, and the objective performance criteria that
govern if and when the performance shares will vest, are
approved each year by the Committee at the time the awards are
granted and are not thereafter modified. The performance
criteria are established by the Committee each year, with
managements input, based on then-current market conditions
and our long-term strategic goals. If the applicable performance
conditions are not satisfied within the time frame established
by the Committee (typically 10 years), the awards will be
forfeited by the executives. Performance-based awards operate as
an additional incentive for executives to achieve long-term
business objectives, thus further aligning the interests of
shareholders and our executives, while also supporting retention
of critical employees. In addition, these awards increase the
at risk nature of our executives compensation.
Ownership Guidelines for Executives. Under
guidelines recently approved by our Board of Directors, within
five years after becoming our CEO and at all times while serving
as CEO thereafter, the CEO must acquire and hold Progressive
stock (or equivalent vested interests, such as shares held on
the CEOs behalf in our 401(k) or equivalent units held in
our executive deferred compensation plan, but excluding
unexercised stock options and unvested restricted stock) with a
minimum value of five times the CEOs base salary.
Executive officers who report directly to the CEO are expected
to hold meaningful amounts of Progressive stock at levels that
their respective compensation and financial circumstances
permit. To support this goal, each executives annual
compensation is heavily weighted towards equity compensation,
such that 35% or more of the annual potential compensation for
each executive is in the form of restricted stock, both time and
performance based, typically valued at between
175-225% of
the executives base salary. As a result, within three
years of becoming an executive, each executive
25
is expected to hold restricted or unrestricted stock with a
value of at least three times his or her base salary, and
potentially significantly more depending on the performance of
the Companys common shares. Management and the Committee
believe that stock holdings under these guidelines, as well as
executives additional, voluntary holdings in our stock
option, 401(k) and deferral plans or in personal accounts,
appropriately ensure that the interests of management will be
aligned with those of our long-term shareholders.
Timing of Awards. We expect that, consistent
with our actions in recent years, annual restricted stock awards
will be made in March of each year, unless a legal or plan
requirement causes us to adopt a change for a specific year. We
believe that the March timing is appropriate because it follows
shortly after annual performance evaluations and salary
adjustments for executives and other equity eligible employees,
thus providing an administratively convenient time to calculate
the awards and communicate them to the recipients. Historically,
interim awards have been made to executive officers only at the
time of his or her appointment to the executive team; any such
interim award to an executive officer would require the approval
of the Compensation Committee.
Qualified Retirement Rights. Executive
officers, along with other equity award recipients, are eligible
for qualified retirement treatment (sometimes
referred to as the Rule of 70) under our equity
compensation plans. Under this arrangement, executives who leave
their employment with Progressive after satisfying certain age
and years-of-service requirements, generally (i) are
permitted to exercise outstanding stock options (all of which
are now vested) at any time prior to their stated expiration
date (instead of being required to exercise such options within
60 days of the termination of employment, as is typically
the case), (ii) receive 50% of the unvested time-based
restricted shares then outstanding (with the remaining 50% being
forfeited), and (iii) retain 50% of unvested
performance-based restricted stock awards, although such awards
will vest, if at all, only upon satisfaction of the performance
objectives associated with those awards (and the other 50% of
the performance-based shares are forfeited). The Rule of 70
provisions are intended to provide a limited benefit for
long-tenured employees who retire from Progressive after
satisfying the age and service requirements.
The named executive officers participate in these arrangements
on the same terms and conditions as are available to other
equity award participants, except that if the CEO or one of the
executives who directly reports to him provides at least one
full year of notice of his or her intention to leave employment
after qualifying for a qualified retirement, he or
she will retain 100% of his or her unvested performance-based
restricted stock awards (not just 50% as stated above), although
such performance-based shares still will vest only if and when
the applicable performance goals are achieved prior to
expiration. This advantage is available to executives in order
to facilitate a smooth transition of personnel at the senior
executive level of the company.
None of our current named executive officers was eligible for
qualified retirement treatment at year end 2007.
Mr. Renwick, our CEO, will become eligible for such
treatment if he remains employed through May 2010.
Mr. Forrester, our former Chief Financial Officer, retired
in March 2007 after qualifying for Rule of 70 benefits and after
giving more than one-years notice of his intent to leave
the company. As a result, upon his retirement:
(i) Mr. Forrester retained all of his outstanding
stock options (all of which had previously vested and which
entitled him to purchase 900,756 shares as of March
2007) through their respective termination dates;
(ii) one-half of his time-based restricted shares
(33,128 shares) were forfeited and the other half
(33,128 shares) vested immediately; and (iii) all of
his unvested performance-based restricted shares
(74,740 shares) remained outstanding and will vest if the
company satisfies the applicable performance criteria for each
such award prior to the applicable expiration date for that
award.
For additional information on the qualified
retirement provisions, see Potential Payments upon
Termination or Change in Control beginning on
page 45.
Effect of Any Future Financial
Restatement. Under our 2003 Incentive Plan, as
amended, performance-based restricted stock awards made in or
after March 2007 will be subject to recoupment by Progressive in
the event of a financial restatement of the operating or
financial results which caused those performance-based shares to
vest, in certain circumstances. An executive who engages in
fraud or other misconduct leading to the restatement would be
required to repay all such shares or an equivalent dollar
amount, at our election, plus interest and the costs of
collection, and there would be no time limit on our ability to
recover those amounts other than limits imposed by law. In
addition, we would have the right to require repayment from an
executive who does not engage in misconduct, but nonetheless has
his or her shares vest due to the use of incorrect financial
results, but without interest and only if the restatement occurs
within three years after the vesting date. Equity awards made
prior to March 2007 are not subject to this plan amendment, and
our ability to recoup any such awards that vest under similar
circumstances would depend on the availability of general legal
and equitable remedies under state or federal law.
Wealth Accumulation. The Committee does not
review wealth accumulation analyses from prior
equity awards when making current compensation decisions. Such
analyses have been advanced by some commentators as a way to
determine when an executive has received enough
equity compensation from Progressive and to justify limiting or
eliminating future
26
grants. Our focus, however, is to make appropriate executive
compensation decisions annually, so that executives are paid at
competitive levels with a significant component that is at
risk and performance based. Given that, in general, at
least 35% of each named executive officers potential
annual compensation consists of equity awards, the elimination
of such awards likely would make our current compensation
uncompetitive, thus risking the loss of valuable executives or
requiring us to make other compensation arrangements with
individual executives to retain his or her services, which would
be inconsistent with our compensation program and our company
culture. If equity awards from prior years increase
significantly in value in future years, we do not believe that
this positive development, which rewards all of our long-term
shareholders, should negatively impact current compensation
decisions. Finally, since we do not provide separate pension or
retirement benefits in addition to the executives annual
compensation, we believe that the value of equity awards in many
cases will be used by executives to fund their retirement,
effectively replacing such benefits that other companies may
offer. Under these circumstances, we do not believe that such
artificial limitations on compensation levels are appropriate or
in the best interests of Progressive or our shareholders.
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4.
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2007
Compensation Decisions and Results
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Market Comparisons. In the first quarter of
2007, the Compensation Committee set each named executives
2007 salary, bonus opportunity and restricted stock awards. For
CEO comparisons, we used a group of 61 public companies with
annual revenues from $10 billion to $20 billion, as
identified in compensation surveys purchased by the Company from
Towers Perrin. Given our 2006 revenue of approximately
$14.8 billion, we believe that this range provided
appropriate data for comparison purposes. The 2007 comparisons
for our other named executive officers were taken from similar
compensation surveys produced by Towers Perrin and Mercer
Consulting (although the number of companies and revenue ranges
varied from position to position based on responsibilities,
availability of comparison matches and other factors).
The salaries of our named executive officers during 2007 were
close to the median
(50th percentile)
for their respective comparison group, other than
Mr. Renwick, whose situation is discussed in more detail
below, and Mr. Domeck, whose salary reflected that he was
in the first year of his new role as CFO. With the addition of
variable compensation (i.e., the potential for cash bonuses and
the possibility of restricted stock vesting in future years),
one of our named executive officers had the opportunity to earn
total potential compensation that would rank above the
50th percentile
but below the
75th percentile
of the comparison groups, while in three instances the total
potential compensation could exceed the
75th percentile
and in one instance it was below the
50th percentile
based on the compensation survey information presented to the
Committee when the decisions were made. Variations from the
50th to
75th percentile
range were caused by a number of factors, including the length
of the named executives tenure in the specific job, the
absence of similar positions at comparable companies, individual
performance and expected future contributions, as well as our
business needs.
It must be emphasized, however, that other than the base salary
comparisons, the percentile rankings set forth above assume that
the executive would earn the maximum value of their cash bonus
and equity awards and, therefore, may be overstated. Maximum
cash bonuses have been earned under our Gainsharing program only
twice in its
14-year
history, and our final Gainsharing score for 2007 was .74 (as
discussed in more detail below), or approximately 37% of the
potential maximum (other than for 10% of the potential bonus for
Mr. Voelker, our Chief Information Officer, which was
determined under the IT Bonus Plan, as discussed below). Using
this actual bonus data for 2007, Messrs. Domeck and Jarrett
each earned total cash compensation (salary plus bonus) that was
below the
50th percentile
for their respective comparison group, while
Mr. Passell2
was slightly above the
50th percentile,
reflecting the companys performance for the year. In
addition, the vesting of the restricted stock awards, which is a
large component of potential compensation, is not guaranteed.
The named executive officer will receive the entire value of the
time-based awards only if he remains with Progressive throughout
the three, four and five year vesting periods (and, even then,
only if the stock price does not decrease), and the
performance-based awards will vest only if Progressive satisfies
the performance criteria established by the Committee (which, as
discussed below, are very aggressive performance targets). Thus,
for each named executive officer, a substantial portion of the
compensation used to establish his potential percentile rank
will remain at risk for years before it is earned by
the executive, and some of the restricted stock in fact may
never vest.
Decisions Regarding CEOs
Compensation. In the case of Glenn Renwick, our
CEO, his salary level has been maintained at $750,000 since
February 2002, a level estimated to be $470,000 below the
50th percentile
of $1,220,000 for CEO salaries at comparable companies in 2007.
Mr. Renwicks cash bonus (Gainsharing) potential has
also remained at the same level since February 2002. The
Compensation Committee has determined that Mr. Renwick
should receive, instead of additional cash compensation, a
larger proportion of his potential compensation in the form of
restricted stock and that his restricted stock awards should be
equally weighted between time-based and performance-based
shares. In this way, we are able to keep Mr. Renwicks
overall compensation at a competitive level, while further
keeping a very high portion of his potential
2 Mr. Passells
employment with the Company terminated in February 2008.
27
compensation at risk and dependent
on Progressives performance, increasing his equity
participation and aligning his interests with those of long-term
shareholders. The following table shows the development of
Mr. Renwicks compensation since 2001:
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2001
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2002
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2003
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2004
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2005
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2006
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2007
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Base Salary
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$
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676,923
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$
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744,231
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$
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750,000
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$
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750,000
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$
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750,000
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$
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750,000
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$
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750,000
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Gainsharing
Target1
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150%
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150%
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150%
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150%
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150%
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150%
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150%
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Time-Based Equity
Target2
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230%
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300%
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300%
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500%
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500%
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500%
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500%
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Performance-Based Equity
Target2
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120%
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200%
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300%
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500%
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500%
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500%
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500%
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1Percent
of base salary. Actual Gainsharing payouts can vary from 0.0 to
2.0 times the target percentage in each year depending on
operating results.
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2 |
Percent of base salary. In 2003, we began awarding restricted
stock as our equity form of compensation. Prior to 2003, equity
awards were made in the form of stock options.
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The result of these determinations for 2007 was that, despite
his below median salary and bonus potential,
Mr. Renwicks total potential compensation was ranked
above the
50th percentile
and could approach the
75th percentile
of comparable CEO compensation if performance-based compensation
were to be maximized. However, with our Core Business achieving
a Gainsharing performance score of .74, Mr. Renwicks
actual cash compensation (salary plus bonus) was $1,582,500 for
2007, which represents less than 55% of the average total cash
compensation
(50th percentile)
of his comparison group based on the comparison data used by the
Committee in early 2007. Although his restricted stock award
potentially increases his total compensation to near the
50th percentile
level, the ultimate value of the 2007 restricted stock awards
will remain at risk for some time.
In the Compensation Committees and the Boards view,
Mr. Renwicks performance as CEO clearly has justified
the continuation of his pay package in the same format from
prior years. Although he has the potential for above-market pay
in the aggregate, the below-market base salary combined with the
heavy reliance on performance-based bonus potential ties total
cash compensation to our operating results, as was demonstrated
in 2007. Moreover, the proportionately large restricted stock
component, and the 50/50 split between time-based and
performance-based restricted stock awards, was determined by the
Committee to be an appropriate allocation to balance encouraging
Mr. Renwicks retention, providing incentives to drive
company performance and maximizing the extent to which
Mr. Renwicks interests will be aligned with the
interests of shareholders. If the aggressive performance growth
target for the performance-based restricted stock award is not
ultimately achieved, Mr. Renwicks actual total
compensation attributable to 2007 will be well below the median
compensation for CEOs at comparable companies. The
Committee believes that this program presents a rational and
strongly performance-based pay package for an outstanding CEO.
Salary for Other Named Executive Officers. For
the other named executive officers, their 2007 salaries
reflected increases of between 3.5% and 6.7% when compared with
the end of the prior year. These increases for
Messrs. Jarrett and Passell were at the lower end of this
range and were consistent with market-based salary increases for
our employees as a whole. Mr. Voelkers increase,
which was approximately 6%, also resulted from market-based
adjustments, as well as an effort to bring his compensation in a
range reflecting the Chief Information Officers importance
to the organization. Mr. Domecks salary increase from
year end 2006 was about 6.7% and reflected the increased
responsibilities and higher market comparisons for a chief
financial officer, the new role he was starting in early 2007.
In each case, the salary increases further evidenced continuing
satisfactory performance and contribution to the executive team.
Salaries were near the
50th percentile
ranking for similarly situated executives at comparable
companies, except that Mr. Domecks salary was well
below the
50th percentile
for CFOs of comparable companies, due to the fact that
2007 was his first year in that role.
Gainsharing Bonuses Core
Business. For 2007, Gainsharing target
percentages for the named executive officers were determined by
the Compensation Committee. Mr. Renwicks target
percentage was set at 150%, while each of the other named
executive officers had his target set at 100%. In each case,
under the Gainsharing plans, the actual bonus could vary from
0.0 to 2.0 times the targeted amount, depending on company
performance.
The 2007 performance factors were determined using Gainsharing
standards approved by the Compensation Committee for our Core
Business, consisting of the Agency Auto, Direct Auto, Special
Lines and Commercial Auto businesses, as described below under
Narrative Disclosure to Summary Compensation Table and
Grants of Plan-Based Awards Table, beginning on
page 39. The 2007 growth and performance targets were tied
to our companywide strategic goals of growing policies in force
as fast as possible at a 96 combined ratio or better. For 2007,
we adopted policies in force as the basis to measure growth for
each of our businesses (as opposed to net premiums written,
which had been used to measure growth in prior years), to better
align our Gainsharing program with our companywide strategic
goal of growing policies in force as fast as possible at a 96
combined ratio or better. Under these revised standards, a 2007
Gainshare performance factor of 1.0 for the
28
Core Business as a whole would
result from growth and profitability levels that met our
expectations for the year, and which we believed were reasonably
attainable results when these decisions were made in early 2007,
which is consistent with how this program has operated
historically.
For Messrs. Renwick, Domeck, Passell and Jarrett, as well
as most of our other employees, 2007 bonuses were determined
solely by the performance of the Core Business. For these
executives and employees, the Gainsharing calculation resulted
in a performance factor of .74 (out of a possible 2.0).
Mr. Voelkers bonus was determined by a weighted
combination of the performance score of the Core Business (90%)
and the performance score under the IT Bonus Plan (10%), as
discussed in more detail below.
The following table presents the overall growth and
profitability data for the businesses that comprised our Core
Business in 2007. The growth figures were determined by the
percentage change in policies in force at year end 2007, as
compared with the 2006 year-end policy count for that
business unit. Profitability was determined by the underwriting
performance of the business unit, as measured by the applicable
GAAP combined ratio.
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GAAP
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Growth of
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Combined
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Policies in Force
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Business
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Ratio1
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Increase (Decrease)
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Agency Auto
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93.5
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(1)%2
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Direct Auto
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92.2
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7%2
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Special Lines
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8%
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Commercial Auto
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89.9
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7%
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1 |
Consistent with the presentation of underwriting results (i.e.,
combined ratio) of our Personal Lines segment in our monthly
earnings releases and quarterly and annual reports, the combined
ratio results for our Special Lines business unit are not
presented separately and, instead, are included in either the
Agency or Direct results in the table above, depending on
whether the underlying policy is written through agents/brokers
or directly by Progressive. See Note 9, Segment
Information, in the 2007 Annual Report to Shareholders,
which is attached as an appendix to this Proxy Statement, for
how the combined ratio is calculated.
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2Includes
only Auto policies in force.
Based on performance results, we determined the performance
score for each business unit comprising the Core Business, and
those scores are set forth in the table below. See
Narrative Disclosure to Summary Compensation Table and
Grants of Plan-Based Awards Table, beginning on
page 39, for a more detailed discussion of the Gainsharing
matrices and the calculation of performance scores.
The business unit performance scores were then weighted, based
on each business units relative contribution to the
overall net earned premium of the Core Business, and the
weighted scores were added to determine the final performance
factor for the Core Business, as follows:
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Weighted
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Performance
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Business
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Score
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Agency Auto
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.21
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Direct Auto
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.33
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Special Lines
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.08
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Commercial Auto
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.12
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Performance Factor
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.74
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As can be seen, our performance in 2007 resulted in a
performance factor for our Core Business equal to .74 out of a
possible 2.00. Although our profitability remained strong for
another year (albeit with increasing combined ratios compared to
the prior year), our growth rates failed to meet our goals,
particularly in our Agency Auto business. Our performance failed
to achieve a combination of growth and profitability that would
produce a target 1.0 score, resulting in an overall
Gainshare factor of less than 1.0 for the first time since 2000.
Most Progressive employees, including the named executive
officers (other than the 10% of Mr. Voelkers bonus
that was determined under the IT Bonus Plan, as described in the
next section), thus earned a cash bonus equal to approximately
74% of their target bonus amount, in a year where our
performance did not match our goals.
Cash Bonus IT Bonus Plan. For
Raymond Voelker, our Chief Information Officer, 90% of his
performance factor was determined by the Core Business
performance score, as described above, and the remaining 10% was
determined under our IT Bonus Plan, as approved by the
Compensation Committee in early 2007. The performance score
under the IT Bonus
29
Plan was determined by the outage-free availability of certain
significant computer and related systems during the course of
the year, under specific rules established by the plan, as
compared with performance standards established by the plan. The
intent of the IT Bonus Plan was to motivate IT employees,
including Mr. Voelker, to keep these systems operational on
a 24 x 7 basis, subject to certain events
specified in the plan, such as scheduled maintenance time.
For 2007, the IT Bonus Plan generated a performance score of
1.01 out of a possible 2.0, reflecting overall performance at
the target level. When this result (for 10% of
Mr. Voelkers bonus) is combined with the result he
earned under the Core Business Component (for the remaining
90%), his total cash compensation for the year (salary plus
bonus) ranked him slightly above the
50th percentile
for comparable positions, based on the comparison data presented
to the Committee at the beginning of the year.
Restricted Stock Awards. In 2007, two forms of
restricted stock awards were granted to executive officers and
certain other senior level employees. Time-based restricted
stock awards were granted to all named executive officers and
846 other senior level employees. The time-based restricted
stock awards will vest in three equal annual installments, on
January 1 of 2010, 2011 and 2012, subject to the vesting and
forfeiture provisions in the applicable plan and grant
agreement. In addition, the named executive officers and 39
other senior managers received performance-based restricted
stock grants, with the vesting date tied to the achievement of
specific business results that are defined by our long-term
growth and profitability objectives.
CEO Glenn Renwick received a time-based restricted stock award
with a value equal to 500% of his salary and a performance-based
restricted stock award equal in value to 500% of his salary. As
indicated above, Mr. Renwicks equity award was
proportionally larger than other executives awards due, in
part, to the below-market level of his base salary, putting more
of his compensation at risk and dependent on Progressives
operating performance over the next several years.
The other named executive officers received in 2007 time-based
awards with a value equal to 100% of their respective salaries,
and performance-based awards with a value of 100% of salary.
Performance-based awards to the executives who report directly
to the CEO typically range from 75% to 125% of salary per year.
As with the CEO, in recent years we have increased the weighting
of performance-based shares that are awarded to other senior
executives to provide appropriate performance incentives to
these executives. The Committee, after considering the
recommendations of and discussions with the CEO and the Chief
Human Resource Officer, determines the value of each
executives performance-based award based on individual
factors, such as past performance, skills and competencies and
expected future contributions.
Performance-based restricted stock awarded in 2007 will vest
only if Progressives insurance subsidiaries generate net
earned premiums of $19.0 billion or more over a period of
twelve (12) consecutive months while maintaining an average
combined ratio of 96 or less over the same period. If we do not
satisfy these criteria prior to December 31, 2016, the
performance shares will be forfeited. While the profitability
target of this standard is within our recent performance
experience, the growth target was very aggressive when made (and
remains very aggressive at this time). Our net earned premiums
for 2007 were approximately $13.9 billion, and the
$19.0 billion target thus represents about a 36.7% increase
(or an annual increase of about 3.55%, on a compounded basis,
from year-end 2007) from that level. It should be noted,
however, that as of year-end 2006, shortly before these
decisions were made, we had year-over-year growth of net earned
premium of approximately 2.6%, and our net earned premiums
decreased by approximately 1.7% in 2007 as compared with
2006. In view of these recent growth levels, therefore, there is
a significant risk that the performance-based restricted shares
will not vest prior to the end of their
10-year life.
5. Changes for 2008
Our compensation program for 2008 includes a number of changes
from prior years. The changes are summarized as follows:
Salary Decisions. Mr. Renwicks
salary for 2008, as well as his potential bonus and the value of
his restricted stock awards, were maintained at the same levels
as in 2007. Compensation decisions for the other named executive
officers for 2008, other than Mr. Domeck, also have been in
line with their historical compensation, with market
adjustments. Salaries were increased from 3.4% to 4.3% for
Messrs. Jarrett, Passell (whose employment has since
terminated) and Voelker. Mr. Domecks salary has been
increased by approximately 18.75%, reflecting a successful first
year as our CFO and an attempt to bring his compensation more in
line with CFOs at comparable companies. Percentage targets
for Gainsharing and restricted stock awards were not changed for
those executive officers from the targets used in 2007.
Shareholders should note that the actual amounts to be paid in
salary to the named executive officers (and all other salaried
employees of the company) in 2008 will be higher than their
respective annual salary figures, because we will issue 27
30
paychecks in 2008 versus 26 paychecks in most years. Such a
27-paycheck year is a situation that arises in bi-weekly payroll
systems, such as ours, about every 10 or 11 years.
Gainsharing Decisions. In 2008, each executive
officer will have his or her Gainsharing bonus determined 100%
by the performance score of our Core Business (except for our
Chief Investment Officer, who will continue to earn his bonus
based on the relative performance of our fixed-income portfolio
as compared with the designated benchmark). This same change was
implemented for virtually all other employees of the company for
2008. In 2007 and recent years, certain executives (and other
employees) would earn a bonus from a combination of the
respective performance scores generated by the Core Business and
by their assigned business units. With our changes to the
structure of the Personal Lines group during 2007 and a desire
to focus employees on the performance of the business as a
whole, management and the Compensation Committee decided that
this change would better reflect our current operational focus
and our culture. Also for 2008, consistent with this focus on
the overall business, we have terminated the IT Bonus Plan,
which accounted for 10% of Mr. Voelkers (and certain
other IT employees) potential bonuses in 2007 and prior
years.
Additional Gainsharing Matrices. For 2008, the
Gainsharing program was also modified so that each of the
business units comprising our Core Business (Agency Auto, Direct
Auto, Commercial Auto and Special Lines) will be evaluated
separately on their respective new and
renewal businesses. This focus, which represents an
extension of the program used in our Direct business in 2007 to
the other business units, is intended to support our strategic
initiatives to improve retention of current customers, while at
the same time maintaining our ability to bring in new customers,
which, if successful, would be expected to drive an increase in
overall
policy-in-force
growth rates.
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C.
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Elements Of
Compensation Other
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1. Perquisites
We provide limited perquisites to our executives and only do so
when the Board or the Compensation Committee determines that
such benefits are in the interests of Progressive and our
shareholders. We own an aircraft that is used primarily for the
CEOs business travel, to maximize the efficiency of his
travel and reduce his unproductive down-time, allow him to
manage effectively our many remote locations, and to enhance his
personal security and the confidentiality of his travel.
At the request of the Board of Directors, the CEO also uses the
company aircraft for his personal travel and some of his
spouses or other guests personal travel when they
accompany him. Such personal use of the aircraft, which is a
perquisite under SEC regulations to the extent of the
incremental costs to the company for such travel, is provided to
enhance the CEOs and his familys personal security
and the confidentiality of their travel. Other executives
occasionally accompany the CEO on his personal trips, at the
CEOs discretion, and such personal trips would likewise be
a perquisite for a named executive officer traveling with the
CEO, if we were to incur costs in addition to the costs for the
CEOs travel.
In addition, the CEO is provided with a company car and driver
for his business needs to facilitate his transportation to and
among our headquarters and many other local facilities, and to
allow him to use that travel time for work purposes. To the
extent that the CEO uses the company car for personal matters,
including commuting to and from work, he receives a perquisite.
In 2007 and prior years, our directors, the named executive
officers and certain other senior executives, and their spouses
or guests, were invited to attend a
2-day
off-site strategy session, which includes a series of meetings
between management and the Board and a regular Board meeting, at
an off-site location. Personal travel for the spouses and
certain costs for meals and other activities during the retreat
constitutes perquisites to the directors and executives who
attend.
Otherwise, we do not provide perquisites to our executives. The
required disclosure of the incremental costs of these
perquisites to Progressive is included in the All Other
Compensation column of the Summary Compensation Table on
page 37.
2. Retirement
We do not provide a pension program, supplemental executive
retirement plan or other post-retirement payments or benefits to
executives. Executives are eligible to participate in our
retirement security program (401(k) plan) on the same terms and
conditions as are available to all other regular employees,
subject to limitations under applicable law. Executives who
satisfy certain age and years-of-service requirements when they
retire may be eligible to receive 50% of their unvested
time-based restricted stock awards at retirement and to retain
rights under certain performance-based restricted stock awards,
subject to the satisfaction of the applicable performance
criteria, after retirement. These rights are described generally
above
31
under Qualified Retirement Rights and in greater
detail below under Potential Payments Upon Termination or
Change in Control, beginning on page 45.
3. Deferral Arrangements
The named executive officers and certain other senior-level
employees are given the opportunity to defer the receipt of
annual cash bonus awards and restricted stock awards under our
Executive Deferred Compensation Plan (EDCP). This plan is made
available to executives in order to keep our executive
compensation program competitive and to allow executives to
manage their receipt of compensation to better fit their life
circumstances, to manage their tax obligations and to allow the
executive to arrange for a portion of his or her income to be
paid in post-employment years. In addition, to the extent that
the top executives elect to defer time-based restricted stock
until after they leave Progressive, we may benefit to the extent
we otherwise might have lost a tax deduction upon the vesting of
those shares under IRC § 162(m) (see related
discussion under Section 162(m) of the Internal
Revenue Code below).
These deferral mechanisms operate solely as a vehicle for the
executive to delay receipt of bonus income or restricted stock
awards that he or she otherwise would have earned as of a
specific date under the applicable plan. We do not contribute
additional amounts to an executives deferral accounts,
either in the year of deferral or in future years. We also do
not guaranty a specific investment return to executives who
elect to participate in the deferral plan. Deferred amounts are
deemed invested in specific investments selected by the
executive, including an option to invest in Progressive shares
(subject to limitations included in the deferral plan), except
that deferrals of restricted stock awards made in or after March
2005 are required to be invested in Progressive shares
throughout the deferral period. The value of each
executives deferred account thus varies based on the
executives investment choices and market factors; these
deferred amounts are at risk and may decrease in value if the
investments selected by the executive do not perform well during
the deferral period. Additional details concerning this plan,
including the named executive officers respective holdings
in the plan, can be found under the Nonqualified Deferred
Compensation table and related disclosures, beginning on
page 44.
In March 2007, Mr. Thomas Forrester retired as the
companys CFO. At that time, Mr. Forrester had an EDCP
balance of approximately $9,683,000. His retirement triggered
the commencement of distributions under the plan and,
accordingly, during 2007 he received cash distributions valued
at approximately $996,000, plus the in-kind distribution of
2,054 shares of Progressive stock. The remainder of his
account will be distributed in installments over the next
9 years in accordance with Mr. Forresters prior
elections. These deferral arrangements were also affected by the
enactment of Section 409A of the Internal Revenue Code and
the recent promulgation of regulations under Section 409A
by the Internal Revenue Service, as discussed below in more
detail under Related Considerations; Section 409A of
the Internal Revenue Code.
4. Severance and
Change-in-Control
Arrangements
Severance and
change-in-control
arrangements are intended to provide compensation and a fair
financial transition for an executive when an adverse change in
his or her employment situation is required due to our company
needs or results from certain unexpected corporate events, and
to recognize past contributions by such executives, who are
typically long-tenured employees. These arrangements allow the
executive to focus on performance, and not his or her personal
financial situation, in the face of uncertain or difficult times
or events beyond his or her control. Each of these programs is
discussed in more detail immediately below and under
Potential Payments upon Termination or Change in
Control beginning on page 45.
Severance. Our executive separation allowance
plan is designed to provide executives with well-defined
financial payments if the executives employment is
terminated for any reason other than resignation (including
retirement), death, disability, leave of absence or discharge
for cause, if certain conditions are satisfied. For our
executives, including the named executive officers, the
severance payment would equal three years of the
executives base salary only at the time of termination,
plus medical, dental and vision benefits for up to
18 months at regular employee costs. This same level of
benefits is payable to the named executives upon any qualifying
separation from Progressive, whether in a
change-in-control
situation or otherwise.
We believe that this level of severance payment (equal to three
times the executives base salary), whether or not
triggered by a change in control, is well below the market
averages based on available market data. The severance payments
do not take into account the value of cash bonuses or
equity-based awards in determining the executives
severance payment, which substantially limits the amount of the
severance payment when compared with severance plans offered by
many other companies. In addition, an executive who qualifies
for a severance payment under this plan does not receive
accelerated vesting of equity awards (although, in a
change-in-control
scenario, those awards may vest separately under the terms of
our equity incentive plans, as discussed immediately below).
Finally, the executive will receive no tax
gross-up
payment to compensate him or her for any taxes which he or she
may be required to pay in connection with such payment.
Management and the Committee accordingly believe that such
severance rights provide executives with a fair, but not
excessive, financial transition when an executive is asked to
leave the company.
32
Change in Control Benefits under Equity
Plans. Benefits are also provided to named
executive officers and other recipients of equity awards under
our equity plans upon the occurrence of a Change in
Control or a Potential Change in Control, as
defined in those plans (collectively, a Change in
Control). The Board of Directors has the authority under
the plans to override the Change in Control
benefits, in an appropriate case, if the Board gives its prior
approval to a transaction that would have otherwise triggered
the benefits to be paid. If the Boards prior approval is
not obtained, our equity plans include provisions providing for
the immediate vesting of, and payments to the holders of equity
awards in an amount equal to the value of, the outstanding
equity awards upon the occurrence of one of the specified
triggering events. These provisions apply to both outstanding
stock options, which we issued prior to 2003, and unvested
restricted stock awards, including both time-based and
performance-based awards. The Change in Control benefits would
be paid upon the occurrence of a triggering event, even if an
executives continued employment with the company (or a
successor company) is not terminated or threatened. Details
concerning these provisions, including the definitions of
Change in Control and Potential Change in
Control, are provided beginning on page 46 under
Change in Control Provisions under Equity
Plans.
For restricted stock awards made in March 2007 or thereafter,
the Board of Directors has modified our 2003 Incentive Plan (our
only equity plan under which awards may currently be made to
executives and other eligible employees) to remove from the
definition of Potential Change in Control the
approval by shareholders of an agreement that would give rise to
a Change in Control. This change was viewed as appropriate by
the Board and management for future awards to avoid a potential
scenario in which rights are triggered under the plan, cash
payouts are made as required, but the underlying transaction is
not consummated as anticipated for some reason. This change was
made on a going-forward basis only, and it does not affect
rights under outstanding awards, which accrued under the plan
before the change was made.
These Change in Control provisions have been included in our
equity incentive plans since at least 1989. We believe that
these provisions are similar to the
change-in-control
provisions included by many public companies in their equity
plans. The provisions of our plans are designed to be triggered
when a transaction occurs or is in process, without the prior
approval of our Board of Directors that would be expected to
result in an actual or effective change in control of the
company. The Change in Control provisions are intended to
protect the interests of the company if we are faced with such a
Change in Control scenario.
Any such change, or the impending prospect of such a change,
would likely result in a significant alteration of, or at a
minimum, cause tremendous uncertainty regarding, the employment
situations of the most senior executives in the company. The
loss of executive talent at such a critical juncture could be
problematic for the company and its shareholders. By removing
the additional uncertainty regarding outstanding equity plan
benefits, these provisions are designed to enhance retention of
executives and keep them focused on their business
responsibilities in the face of such uncertain corporate events.
Moreover, this process would also avoid executives
legitimate concerns that, after the Change in Control, they
could be subject to adverse employment actions, such as possible
job loss or other actions intended to induce the executive to
resign and forego benefits under the equity plans. While some of
these adverse actions might be readily identifiable, such as a
significant decrease in compensation or change in
responsibilities, others might be more subtle and difficult to
prove, such as exclusion from management meetings and policy
decision-making. For these reasons, we believe that Change in
Control benefits triggered by the
change-in-control
event, without requiring prior job loss, is appropriate. If a
new controlling person desires to retain the services one or
more of the executives, it would be free to attempt to negotiate
appropriate terms and conditions for their continuing employment.
Finally, it should be noted that although these provisions can
operate automatically in a situation where the Change in Control
is undertaken unilaterally, the Change in Control benefits may
be withdrawn by the Board of Directors, in an appropriate case,
if the persons seeking to acquire control of the company were to
first come to the Board and negotiate to obtain the Boards
consent to the triggering transaction. In this way, the plan
provisions are further intended to foster a consensual process
and a more orderly change in control, if such consent is
requested and the transaction is approved. The Board believes
such a process would inure to the benefit of our shareholders,
customers, employees and other interested parties.
5. Health and Welfare Benefits
Named executive officers are also eligible to participate in our
health and welfare plans. These plans are available on the same
basis to all of our regular employees who satisfy minimum
eligibility requirements.
III. RELATED
CONSIDERATIONS
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A.
|
Section 162(m)
of the Internal Revenue Code
|
Section 162(m) of the Internal Revenue Code limits to
$1 million per year (Deduction Limit) the
deduction allowed for Federal income tax purposes for
compensation paid to the chief executive officer and the three
other most highly compensated executives of a public company
other than the chief financial officer (Covered
Executives). This Deduction Limit does not
33
apply to compensation paid under a plan that meets certain
requirements for performance-based compensation.
Generally, to qualify for this exception: (a) the
compensation must be payable solely on account of the attainment
of one or more pre-established objective performance goals;
(b) the performance goals must be established by a
compensation committee of the board of directors that is
comprised solely of two or more outside directors;
(c) the material terms of the performance goals must be
disclosed to and approved by shareholders before payment; and
(d) the compensation committee must certify in writing
prior to payment that the performance goals and any other
material terms have been satisfied.
Our policy is to structure incentive compensation programs for
Covered Executives to satisfy the requirements for the
performance-based compensation exception to the
Deduction Limit, and, thus, to preserve the deductibility of
compensation paid to Covered Executives, to the extent
practicable. Our equity incentive plans, as well as the 2004 and
2007 Executive Bonus Plans, have been submitted to and approved
by Progressives shareholders. The applicable performance
criteria (and in the case of cash bonuses, the amount of bonus
payouts that would result from various levels of performance
when measured against specific performance criteria) are
approved in advance by the Committee each year and are
thereafter not subject to change by Progressive or the
Committee. Thus, performance-based restricted stock awards that
vest, and cash bonus awards under the Executive Bonus Plans
which are paid out, based on the achievement of such performance
criteria are structured to be performance-based
compensation, and compensation arising from such awards
would not be subject to the Deduction Limit, provided that each
of the other requirements described above are satisfied.
Compensation that is earned by the Covered Executives upon the
exercise of stock option awards likewise has been designed to
satisfy the requirements for performance-based
compensation, based on how we implemented our stock option
program prior to its termination in 2003.
Several elements of our compensation program, however, may give
rise to income for a Covered Executive that is not considered
performance-based and, therefore, subject to the
Deduction Limitation, including the following:
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Salary;
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Bonuses earned under plans other than the 2004 and 2007
Executive Bonus Plans;
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The income recognized upon the vesting of time-based restricted
stock awards (unless the executive defers the receipt of such
awards under our executive deferral plan, described above);
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Income arising from perquisites;
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Dividends paid to Covered Executives on account of unvested
restricted shares that have been awarded under our equity
incentive plans; and
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Certain distributions made to a Covered Executive in the current
year from our executive deferral plan (described above) arising
from the executives deferral elections in prior years.
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Accordingly, if the total of any Covered Executives
compensation that does not satisfy the performance-based
compensation exception exceeds $1 million in any
year, Progressive will not be entitled to deduct the amount that
exceeds $1 million. Progressive and the Committee will
continue to monitor the actual tax impact of such compensation
strategies each year and consider such impact in making
compensation decisions. We will not necessarily discontinue a
compensation plan, however, that has a potential negative tax
impact under Section 162(m). If we believe that the program
in question (e.g., the use of time-based restricted stock) is
appropriate and in the interest of shareholders, we will
continue to use that type of compensation even though there are
potential tax disadvantages to Progressive.
In 2007, the non-performance-based compensation earned by each
of the Covered Executives was less than $1 million, except
that for the CEO the Deduction Limit was exceeded by an amount
currently estimated to total $1,840,000, all of which resulted
from the companys payment of a $2 per share extraordinary
dividend in September 2007, which resulted in
non-performance-based compensation to executives to the extent
that the dividend was paid on unvested restricted stock. Other
than this overage, all compensation earned by the Covered
Executives was fully deductible for Federal income tax purposes.
For 2008, we are currently estimating that the CEO may exceed
the $1,000,000 limit by an amount of under $75,000.
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B.
|
Section 409A
of the Internal Revenue Code
|
Section 409A of the Internal Revenue Code sets forth
requirements for non-qualified deferred compensation
arrangements. The new requirements apply to deferrals of
compensation earned or vested after 2004. If deferrals do not
comply with
34
the new requirements, the amount deferred is immediately
includable in taxable income, subject to an additional 20% tax
and interest.
Section 409A generally requires that elections to defer
compensation must be made no later than the end of the year
preceding the year the compensation is earned. Distributions of
deferred compensation may be made only upon certain specified
events, including death, disability, separation from service,
unforeseeable emergency, change in control of the employer and
expiration of a fixed deferral period. Section 409A also
includes provisions restricting a deferred compensation plan
participants ability to accelerate, delay or change the
form of a scheduled distribution of deferred compensation.
Deferred compensation arrangements that meet certain conditions
may qualify for an exemption from Section 409A
requirements. For example, an arrangement is exempt from
Section 409A if it requires all payments to be made to a
participant no later than
21/2 months
following the end of the year in which the right to the payments
was earned and vested. In addition, the arrangement will qualify
for exemption if payments under the arrangement do not exceed
certain limits and are payable no later than the end of the
second year following the year the participant involuntarily
separates from service.
All of our compensation plans, programs and arrangements either
qualify for exemption from Section 409A or have been
amended to comply with Section 409A requirements. During
2007, we modified our executive deferred compensation plan and
our director deferral plans so that all deferrals of
compensation earned or vested after 2004 satisfy
Section 409A, and to implement certain features permitted
by the regulations with respect to such deferrals. For our
executive deferred compensation plan, these changes included the
following:
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|
|
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The definition of change in control (the occurrence
of which would trigger certain distributions under the plan) was
modified to comply with the requirements of Section 409A.
Significant aspects of this change included:
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|
|
a change in control will occur if 30% of our shares are
acquired, as opposed to the 20% standard in our prior plan;
|
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a change in control will occur if the majority of our Board of
Directors is replaced during a
12-month
period, instead of the
24-month
period imposed by the prior plan;
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|
The Board has no discretion to override
change-in-control
events under the revised plan, whereas it did have such
discretion under the prior plan; and
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|
The concept of potential change in control, which
under the prior plan could include shareholders approval
of certain transaction or the Boards determination that
the acquisition of 5% ownership by a third party constituted a
potential change in control, has been removed from the plan;
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The definition of disability was conformed to
Section 409As definition, which is somewhat more
strict than the prior definition;
|
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|
Early withdrawals (which were permitted under the prior plan,
with a 10% penalty) are no longer allowed;
|
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Unscheduled withdrawals are permitted in the event of certain
unforeseeable emergencies;
|
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Participants are permitted to change certain distribution
schedules if they do so with at least 12 months notice and
delay distributions for at least 5 years; and
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|
Distributions made on account of termination of employment will
not be made until 6 months after the date of termination.
|
The modifications to our director deferral plans involved some
of the same topics, including implementation of the new
change-in-control
definitions, the addition of a
change-in-control
distribution event to one of the plans, provisions allowing
distribution schedules to be changed (at least 12 months in
advance with a
5-year or
longer delay in distributions) and certain administrative
changes.
Prior to the effectiveness of these amendments, we had operated
our deferral plans in good faith compliance with
Section 409A as to all deferrals made after 2004.
35
COMPENSATION
COMMITTEE REPORT
The following Compensation Committee Report does not
constitute soliciting material and should not be deemed filed or
incorporated by reference into any other Progressive filing
under the Securities Act of 1933 or the Securities Exchange Act
of 1934, except to the extent Progressive specifically
incorporates this Report by reference therein.
The Compensation Committee (the Committee) of the
Board of Directors of The Progressive Corporation
(Progressive) has reviewed and discussed with
Progressives management the Compensation Discussion and
Analysis set forth above. Based on the review and discussions
noted above, the Committee recommended to the Board that the
Compensation Discussion and Analysis be included in
Progressives Proxy Statement for 2008, and incorporated by
reference into Progressives Annual Report on
Form 10-K
for the year ended December 31, 2007.
COMPENSATION COMMITTEE
Charles A. Davis, Chairman
Norman S. Matthews
Bradley T. Sheares, Ph.D.
36
EXECUTIVE
COMPENSATION
The following information is set forth with respect to the total
compensation of our named executive officers (NEOs) for 2007,
who include each person who served as the Chief Executive
Officer (CEO) or the Chief Financial Officer (CFO) during the
year and our three other most highly compensated executive
officers. The titles set forth below reflect positions held at
December 31, 2007.
SUMMARY
COMPENSATION TABLE
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Non-Equity
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Incentive
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|
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Stock
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Option
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|
Plan
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All Other
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Name and
|
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|
Salary
|
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Awards1
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Awards2
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Compensation3
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Compensation4
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Total
|
Principal Position
|
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Year
|
|
($)
|
|
($)
|
|
|
($)
|
|
($)
|
|
($)
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|
($)
|
|
|
Glenn M. Renwick
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2007
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$
|
750,000
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$
|
3,309,221
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|
$
|
|
|
$
|
832,500
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|
$
|
102,400
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|
$
|
4,994,121
|
President and Chief
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2006
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750,000
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3,144,318
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|
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132,052
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|
|
1,327,500
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81,009
|
|
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5,434,879
|
Executive Officer
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Brian C. Domeck
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2007
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$
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317,693
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$
|
229,395
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|
|
$
|
|
|
$
|
235,092
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|
$
|
11,625
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|
$
|
793,805
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Vice President and
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2006
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259,655
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|
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126,691
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6,288
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|
|
216,095
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|
|
10,660
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|
|
619,389
|
Chief Financial Officer
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|
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|
|
|
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|
|
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W. Thomas
Forrester5
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2007
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$
|
197,013
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|
$
|
(23,228
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)
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|
$
|
|
|
$
|
|
|
$
|
10,785
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|
$
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184,570
|
Former Vice President and
|
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2006
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500,002
|
|
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384,734
|
|
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13,166
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590,002
|
|
|
11,310
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|
|
1,499,214
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Chief Financial Officer
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Brian J.
Passell6
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2007
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$
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438,270
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$
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523,435
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$
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|
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$
|
324,319
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|
$
|
12,059
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$
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1,298,083
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Claims Group President
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2006
|
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422,693
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|
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465,021
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|
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21,121
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|
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498,777
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|
|
11,310
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|
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1,418,922
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Raymond M. Voelker
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2007
|
|
$
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347,692
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|
$
|
400,972
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|
|
$
|
|
|
$
|
268,071
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|
$
|
11,625
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|
$
|
1,028,360
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Chief Information Officer
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|
|
2006
|
|
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328,269
|
|
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352,715
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|
|
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16,143
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|
|
398,190
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|
|
11,310
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|
|
1,106,627
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|
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Charles E. Jarrett
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2007
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|
$
|
393,269
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|
$
|
332,225
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|
|
$
|
|
|
$
|
291,019
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|
$
|
8,700
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|
$
|
1,025,213
|
Vice President, Secretary and
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|
|
2006
|
|
|
378,269
|
|
|
318,337
|
|
|
|
19,083
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|
|
446,358
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|
|
8,484
|
|
|
1,170,531
|
Chief Legal Officer
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|
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1 |
Represents expense recognized with respect to restricted stock
awards granted from 2003 through 2007, in accordance with
Statement of Financial Accounting Standards 123 (revised 2004)
(SFAS 123(R)), Share-Based Payment. For awards
granted in 2007, see the Grants of Plan-Based Awards
table below.
|
Messrs. Renwick, Forrester and Jarrett, elected to defer
the receipt of their 2003 and 2004 restricted stock awards
pursuant to The Progressive Corporation Executive Deferred
Compensation Plan (EDCP), under which such awards
are accounted for as liability awards during the period prior to
vesting. Under liability award accounting, the amount expensed
reflects the fluctuations in the market price during the year,
which results in a reduction in expense in years in which the
stock price declines, such as in 2006 and 2007.
See Narrative Disclosure to Summary Compensation Table and
Grants of Plan-Based Awards Table for a description of the
timing and vesting terms of the 2007 restricted stock awards.
Also see the Compensation Discussion and Analysis
beginning on page 22, as well as Note 8
Employee Benefit Plans in Progressives 2007 Annual
Report to Shareholders included as an appendix to this Proxy
Statement, for further discussion of the restricted stock awards
and our recognition of expense relating to such awards.
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2
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Represents expense recognized in accordance with
SFAS 123(R) for nonqualified stock option awards granted in
2002. In 2003, we began granting restricted stock awards in lieu
of stock options. All remaining stock options vested on
January 1, 2007. Unless there is a modification to the
unexercised stock option awards, we will not incur any
additional expense relating to currently outstanding stock
options in years subsequent to 2006.
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3
|
2007 amounts were earned under The Progressive Corporation 2007
Executive Bonus Plan (the 2007 Executive Plan),
except that for Mr. Voelker, a portion was earned under The
Progressive Corporation 2007 Information Technology Incentive
Plan (the 2007 IT Bonus Plan). As discussed in more
detail below, Mr. Voelkers opportunity to earn
non-equity incentive compensation was allocated between the 2007
Executive Plan (90%) and the 2007 IT Bonus Plan (10%).
|
2006 amounts were earned under The Progressive Corporation 2004
Executive Bonus Plan (the 2004 Executive Plan) for
Messrs. Renwick, Forrester and Passell; The Progressive
Corporation 2006 Gainsharing Plan (2006 Gainsharing
Plan) for Messrs. Domeck and Jarrett; and The Progressive
Corporation 2006 Information Technology Incentive Plan (the
2006 IT Bonus Plan) and the 2006 Gainsharing Plan
for Mr. Voelker under a 90/10 split as described above.
Payments under the 2007 Executive Plan and the 2004 Executive
Plan were made entirely in the year after the bonus amounts were
earned (i.e., amounts earned for 2007 were paid in 2008). For
the 2007 IT Bonus Plan, the 2006 IT Bonus Plan and the 2006
Gainsharing Plan, 75% of an estimated amount of the award was
paid in the year earned and the balance was paid in the next
year. Amounts reported include, if any, non-equity incentive
plan compensation that will be deferred under the EDCP in 2008
when the bonuses would otherwise be paid.
37
4All
Other Compensation is comprised of the following:
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|
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Employer
|
|
Anniversary
|
|
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|
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Total All Other
|
Name
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Contributionsa
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|
Awardsb
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|
Perquisitesc
|
|
|
Compensation
|
|
|
Glenn M. Renwick
|
|
$
|
11,625
|
|
$
|
|
|
$
|
90,775
|
d
|
|
$102,400
|
Brian C. Domeck
|
|
|
11,625
|
|
|
|
|
|
|
|
|
11,625
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W. Thomas Forrester
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|
|
10,785
|
|
|
|
|
|
|
|
|
10,785
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Brian J. Passell
|
|
|
11,625
|
|
|
434
|
|
|
|
|
|
12,059
|
Raymond M. Voelker
|
|
|
11,625
|
|
|
|
|
|
|
|
|
11,625
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Charles E. Jarrett
|
|
|
8,700
|
|
|
|
|
|
|
|
|
8,700
|
|
|
|
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a
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Represents employer contributions made during 2007 under our
Retirement Security Program. Amounts contributed vary based on
level of employee contribution and years of service, with a
maximum annual employer contribution of $11,625.
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b
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Represents service anniversary awards paid to all employees upon
every five-year anniversary of employment with Progressive. The
maximum service anniversary award is $300, on a post-tax basis,
for 25 years of service and each 5-year increment
thereafter.
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c
|
For further information on the limited perquisites we offered to
our NEOs, see the Perquisites discussion in
Compensation and Discussion Analysis on page 31.
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d
|
Includes $86,713 in incremental costs for his personal use of
our company airplane. We calculate incremental costs to include
the cost of fuel and oil per flight; trip related inspections,
repairs and maintenance; crew travel expenses; on-board
catering; trip related flight planning services; landing,
parking and hangar fees; supplies; passenger ground
transportation; and other variable costs. Since the airplane is
used primarily for business travel, we do not include the fixed
costs that do not change based on personal usage, such as
pilots salaries, the depreciation of the airplane and the
cost of maintenance not related to personal trips. In addition,
the perquisite amount includes the incremental costs
attributable to: (i) Mr. Renwicks personal use
of a company car, which is primarily limited to commuting to and
from work; and (ii) non-business related activities
associated with an annual retreat attended by the Board of
Directors and senior executives in 2007, including the NEOs
(e.g., meals for his spouse and other activities).
|
|
|
5 |
W. Thomas Forrester, our former CFO, retired in March 2007 and
was eligible for the Rule of 70 benefits contained in our equity
incentive plans. See Potential Payments upon Termination
or Change in Control; Qualified Retirement Provisions under
Equity Plans, beginning on page 47, for a discussion
of the Rule of 70 benefits. Accordingly, when he retired,
Mr. Forrester received 50% of his unvested time-based
restricted shares (33,128 shares, valued at $756,147 as of
his retirement date), and the other 50% were forfeited, which
resulted in a reversal of prior expense recognized by the
company and accounted for the negative stock award
value for 2007 in the Summary Compensation Table to the extent
such amounts were previously reported as an expense in the
Summary Compensation Table in 2006. In addition, he retained
100% of his unvested performance-based restricted shares
(74,740 shares), which are valued at approximately
$1.4 million as of December 31, 2007, but each of
which will vest (if at all) only when we achieve the required
performance objectives for each outstanding award. Further,
pursuant to the provisions of our stock option plan,
Mr. Forrester will be allowed to retain his outstanding
stock options, all of which had previously vested, until their
scheduled expiration. At retirement, Mr. Forrester held
options covering 900,756 shares, with an average exercise
price of $8.40 per share; the options are scheduled to expire in
annual increments between December 31, 2007 and
December 31, 2011, unless exercised before their scheduled
expiration dates.
|
|
|
6 |
Mr. Passells employment terminated in February 2008.
|
38
Grants of
Plan-Based Awards
The following table summarizes awards that were eligible to be
earned during 2007 under the 2007 Executive Bonus Plan, as well
as restricted shares awarded in 2007 under the 2003 Incentive
Plan, including both time-based and performance-based awards
(equity incentive plan awards).
GRANTS
OF PLAN-BASED AWARDS IN 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Future
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payouts Under
|
|
|
|
|
|
|
|
Estimated Possible Payouts Under Non-Equity
|
|
Equity Incentive
|
|
|
Grant Date Fair
|
|
|
|
|
Incentive Plan
Awards1
|
|
Plan Awards
|
|
|
Value of Stock
|
|
|
|
|
Threshold
|
|
Target
|
|
Maximum
|
|
Target
|
|
|
Awards2
|
Name
|
|
Grant Date
|
|
($)
|
|
($)
|
|
($)
|
|
(#)
|
|
|
($)
|
|
|
Glenn M. Renwick
|
|
|
N/A
|
|
$
|
0
|
|
$
|
1,125,000
|
|
$
|
2,250,000
|
|
|
|
|
|
|
|
|
|
|
3/15/2007
|
|
|
|
|
|
|
|
|
|
|
|
178,659
|
3
|
|
$
|
3,750,052
|
|
|
|
3/15/2007
|
|
|
|
|
|
|
|
|
|
|
|
178,655
|
4
|
|
|
3,749,968
|
|
Brian C. Domeck
|
|
|
N/A
|
|
$
|
0
|
|
$
|
317,693
|
|
$
|
635,386
|
|
|
|
|
|
|
|
|
|
|
3/15/2007
|
|
|
|
|
|
|
|
|
|
|
|
15,246
|
3
|
|
$
|
320,014
|
|
|
|
3/15/2007
|
|
|
|
|
|
|
|
|
|
|
|
15,245
|
4
|
|
|
319,993
|
|
W. Thomas
Forrester5
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Brian J. Passell
|
|
|
N/A
|
|
$
|
0
|
|
$
|
438,270
|
|
$
|
876,540
|
|
|
|
|
|
|
|
|
|
|
3/15/2007
|
|
|
|
|
|
|
|
|
|
|
|
20,964
|
3
|
|
$
|
440,034
|
|
|
|
3/15/2007
|
|
|
|
|
|
|
|
|
|
|
|
20,965
|
4
|
|
|
440,055
|
|
Raymond M. Voelker
|
|
|
N/A
|
|
$
|
0
|
|
$
|
347,692
|
|
$
|
695,384
|
|
|
|
|
|
|
|
|
|
|
3/15/2007
|
|
|
|
|
|
|
|
|
|
|
|
16,677
|
3
|
|
$
|
350,050
|
|
|
|
3/15/2007
|
|
|
|
|
|
|
|
|
|
|
|
16,675
|
4
|
|
|
350,008
|
|
Charles E. Jarrett
|
|
|
N/A
|
|
$
|
0
|
|
$
|
393,269
|
|
$
|
786,538
|
|
|
|
|
|
|
|
|
|
|
3/15/2007
|
|
|
|
|
|
|
|
|
|
|
|
18,819
|
3
|
|
$
|
395,011
|
|
|
|
3/15/2007
|
|
|
|
|
|
|
|
|
|
|
|
18,820
|
4
|
|
|
395,032
|
|
N/A = Grant Date is not applicable to non-equity incentive plan
awards.
|
|
1 |
Non-equity incentive plan awards were earned in 2007 under The
2007 Executive Bonus Plan for all executives except
Mr. Voelker, 90% of whose potential bonus derived from this
plan and the remaining 10% derived from the 2007 IT Bonus Plan.
Payments under these plans can range from 0.0 to 2.0 times the
targeted amount. The targeted amount represents the product of
the executives salary and his target percentage, both of
which are set by the Compensation Committee at the beginning of
the plan year. The actual amount of non-equity incentive plan
compensation earned by the NEOs during 2007 is included in the
Summary Compensation Table on page 37. Further description
of these plans is provided in the Compensation Discussion
and Analysis beginning on page 22 and the
accompanying Narrative Disclosure.
|
2Awards
are valued at the closing price on the date of grant,
March 15, 2007, of $20.99.
3Represents
number of shares covered by time-based restricted stock awards.
4Represents
number of shares covered by performance-based restricted stock
awards.
|
|
5 |
Mr. Forrester retired on March 2, 2007. As a result,
he did not earn, nor was he awarded, any plan-based awards
during 2007.
|
Narrative
Disclosure to Summary Compensation Table and Grants of
Plan-Based Awards Table
Employment Agreements. As of December 31,
2007, none of the named executive officers had employment
agreements with Progressive.
Summary Compensation Comments. In total,
salary and non-equity incentive plan compensation comprised
approximately 60% to 70% of total compensation for the named
executive officers other than Mr. Renwick, whose salary and
non-equity incentive compensation comprised 32% of his total
compensation for the year and Mr. Forrester who retired in
March 2007. For additional discussion of our compensation
policies, 2007 compensation decisions, and non-equity incentive
plans and the performance criteria thereunder, see the
Compensation Discussion and Analysis beginning on
page 22.
39
Non-Equity Incentive Compensation. Non-equity
incentive compensation for the NEOs is available under the
companys 2007 Executive Bonus Plan (except as noted below)
and is determined using the following formula:
|
|
|
|
|
|
|
|
|
|
|
|
|
Paid
Salary
|
|
X
|
|
Target
Percentage
|
|
X
|
|
Performance
Factor
|
|
=
|
|
Annual
Bonus
|
For each executive, the salary and the target percentage (as a
percent of salary) are established by the Compensation Committee
on an annual basis during the first quarter of the year. When
the participants annual salary is multiplied by his or her
assigned target percentage, the product is referred to as the
participants target bonus or target
bonus amount for the year. For 2007,
Mr. Renwicks target percentage for non-equity
incentive compensation was 150% of salary and for
Messrs. Domeck, Passell, and Jarrett, the target percentage
was 100% of salary. Mr. Voelkers target percentage
was 100% of salary; however, only 90% of his potential bonus was
calculated under the 2007 Executive Bonus Plan. The remaining
10% of his potential bonus was calculated under the 2007 IT
Bonus Plan.
Under the 2007 Executive Bonus Plan, the performance factor is
determined for all NEOs after the end of each year based on the
actual operating performance of our principal business units for
that year, when compared to growth and profitability criteria
that were established by the Compensation Committee during the
first quarter of the year. The performance factor can range from
0.0 to 2.0 each year, depending on the extent to which
Progressive
and/or
assigned business unit results meet, exceed or fall short of the
objective performance goals established by the Committee. As a
result, each participant can earn an annual cash bonus of
between 0.0 and 2.0 times his or her target bonus amount (with
an amount equal to 2.0 times an executives target bonus
thus being the executives maximum potential bonus). The
executives annual cash bonus would equal the target bonus
amount if the applicable performance factor equals a 1.0 for the
year.
Generally, the performance factors for executives (and most
other employees) under our Gainsharing plans, including the 2007
Executive Bonus Plan, are determined by reference to either
(i) the overall operating performance of our core insurance
businesses, excluding our investment results (the Core
Business), or (ii) a combination of the performance
of the Core Business and the performance of the respective
executives assigned business unit. For 2007, each of the
NEOs earned his bonus under the 2007 Executive Bonus Plan solely
under the Core Business calculation (other than that portion of
Mr. Voelkers bonus that was determined under the 2007
IT Bonus Plan, as described below). The Core Business was
defined to include the Agency Business, the Direct Business, the
Special Lines Business and Commercial Auto Business. The
performance factor for the Core Business for 2007 was calculated
as follows:
|
|
|
|
|
Separate Gainsharing matrices were established for
the Agency, Direct, Commercial Auto and Special Lines business
units (or an applicable
sub-unit) by
the Committee in the first quarter of 2007. Each matrix assigned
a performance score between 0.0 and 2.0 to various combinations
of growth and profitability in the applicable business unit or
sub-unit, as
follows:
|
|
|
|
|
|
For the Agency and Special Lines units, growth was measured by
the change in policies in force for the business unit as
compared with the prior year, and profitability was measured by
the calendar year combined ratio determined in accordance with
accounting principles generally accepted in the United States of
America (GAAP).
|
|
|
|
For the Direct business, two matrices were used. One was based
on new policy growth and the GAAP combined ratio (Direct-New),
and the other was based on the retention rate for policies in
existence at the beginning of the year and the GAAP combined
ratio (Direct-Renewal).
|
|
|
|
For the Commercial Auto business, two matrices also were used,
one for the Light Local market and one for the Specialty
business, in each case measuring growth in policies in force
over the prior year and the GAAP combined ratio.
|
|
|
|
|
|
Actual growth and profitability performance results for each
business unit were determined after year-end and then compared
to the applicable matrix to produce a performance score for the
business unit. Where more than one matrix was used for a
business unit, the results were combined based on a formula
pre-established
by the Committee to calculate the overall score for the
applicable business unit.
|
|
|
|
The performance scores achieved by each of the business units
were weighted, based on the percentage of net premiums earned in
the respective business unit during the year as compared to the
Core Business as a whole.
|
|
|
|
The weighted scores for the business units were then added
together to produce a performance factor for the Core Business
as a whole.
|
40
In 2007, the performance factor for the Core Business determined
according to these criteria was .74, which was used to calculate
the annual bonus for Messrs. Renwick, Domeck, Passell and
Jarrett.
For Mr. Voelker, our Chief Information Officer, 90% of his
performance factor was determined by the Core Business
performance score (.74 as described above), and the remaining
10% was determined under our 2007 IT Bonus Plan, as approved by
the Compensation Committee in early 2007. The performance score
under the 2007 IT Bonus Plan was determined by the outage-free
availability of certain significant computer and related systems
during the course of the year, under specific rules established
by the plan, as compared with performance standards established
by the plan. System downtime resulted in a lower performance
score under this plan. The intent of the 2007 IT Bonus Plan was
to motivate IT employees, including Mr. Voelker, to keep
these systems operational on a 24x7 basis, subject to certain
events specified in the plan, such as scheduled maintenance time.
For 2007, the 2007 IT Bonus Plan generated a performance score
of 1.01 out of a possible 2.0, reflecting overall performance at
about the target level. When this result (for 10% of
Mr. Voelkers potential bonus) was combined with the
result he earned under the Core Business Component (for the
remaining 90%), Mr. Voelkers overall performance
factor for the year was .77.
Equity Incentive Plan Awards. In 2007, all of
the equity incentive plan awards were granted pursuant to the
2003 Incentive Plan. We granted both time-based and
performance-based restricted stock awards to the named executive
officers. All restricted stock awards for 2007 have voting
rights equivalent to those of our other outstanding common
shares. Restricted stock awards made in March 2007 and
thereafter will not entitle the holder to receive dividend
payments at the time those payments are made to other common
shareholders. Instead, the dividend payments will be retained by
the company and will be paid to the NEOs (and other recipients),
with interest, only if and when the restricted shares vest.
Awards made prior to March 2007 have dividend and voting rights
equivalent to those of our other outstanding common shares.
In 2007, we granted time-based restricted stock awards to the
named executive officers, based on a percentage of the
individuals salary at the time of grant, as determined by
the Compensation Committee. The time-based awards will vest in
three equal installments in the third, fourth and fifth years
after the date of grant (i.e., January 1, 2010, 2011 and
2012 for awards granted in 2007).
We also granted performance-based restricted stock awards to the
named executive officers in 2007. The value of the
performance-based awards was determined by the Compensation
Committee, also based on a percentage of the individuals
annual salary. The performance-based awards will vest upon the
satisfaction of objective performance criteria. For 2007 awards,
vesting will occur only if Progressives insurance
subsidiaries generate net premiums earned of $19 billion or
more over a period of 12 consecutive months, while maintaining
an average combined ratio of 96 or less over the same period. If
the objectives are not achieved by December 31, 2016, the
awards will be forfeited.
All restricted stock awards are made subject to accelerated
vesting pursuant to the qualified retirement (also
known as the Rule of 70) and change in control
provisions in the 2003 Incentive Plan (see Potential
Payments Upon Termination or Change in Control beginning
on page 45).
Further discussion of our compensation strategy and plans can be
found in the Compensation Discussion and Analysis
beginning on page 22.
41
Outstanding
Equity Awards at Fiscal Year-End
The following table summarizes stock option awards exercisable
and outstanding under the 1995 Incentive Plan, as well as the
unvested restricted stock awards outstanding under the 2003
Incentive Plan. The value of the stock awards is calculated
using $19.16, which represents the closing price of Progressive
shares on the last business day of 2007.
OUTSTANDING
EQUITY AWARDS AT DECEMBER 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Option
Awards1
|
|
|
Stock Awards
|
|
|
|
|
|
|
|
|
|
Equity
|
|
|
Equity
|
|
|
|
|
|
|
|
|
|
Incentive Plan
|
|
|
Incentive Plan
|
|
|
Number of
|
|
|
|
|
|
|
Awards:
|
|
|
Awards: Market
|
|
|
Securities
|
|
|
|
|
|
|
Number of
|
|
|
Value of
|
|
|
Underlying
|
|
|
|
|
|
|
Unearned
|
|
|
Unearned
|
|
|
Unexercised
|
|
Option
|
|
|
|
|
Shares That
|
|
|
Shares That
|
|
|
Options
|
|
Exercise
|
|
Option
|
|
|
Have Not
|
|
|
Have Not
|
|
|
(#)
|
|
Price
|
|
Expiration
|
|
|
Vested
|
|
|
Vested
|
Name
|
|
Exercisable
|
|
($)
|
|
Date
|
|
|
(#)
|
|
|
($)
|
|
Glenn M. Renwick
|
|
|
147,505
|
|
$
|
10.78
|
|
|
12/31/2008
|
|
|
|
651,199
|
3
|
|
$
|
12,476,973
|
|
|
|
653,029
|
|
|
4.38
|
|
|
12/31/2009
|
|
|
|
664,835
|
4
|
|
|
12,738,239
|
|
|
|
712,123
|
|
|
6.99
|
|
|
12/31/2010
|
|
|
|
|
|
|
|
|
|
|
|
597,385
|
|
|
11.86
|
|
|
12/31/2011
|
|
|
|
|
|
|
|
|
|
Brian C. Domeck
|
|
|
33,329
|
|
|
4.38
|
|
|
12/31/2009
|
|
|
|
34,330
|
3
|
|
|
657,763
|
|
|
|
41,986
|
|
|
6.99
|
|
|
12/31/2010
|
|
|
|
23,165
|
4
|
|
|
443,841
|
|
|
|
21,677
|
|
|
11.86
|
|
|
12/31/2011
|
|
|
|
|
|
|
|
|
|
W. Thomas Forrester
|
|
|
138,286
|
|
|
10.78
|
|
|
12/31/2008
|
|
|
|
0
|
3
|
|
|
|
|
|
|
332,441
|
|
|
4.38
|
|
|
12/31/2009
|
|
|
|
74,740
|
4
|
|
|
1,432,018
|
|
|
|
249,956
|
|
|
6.99
|
|
|
12/31/2010
|
|
|
|
|
|
|
|
|
|
|
|
144,107
|
|
|
11.86
|
|
|
12/31/2011
|
|
|
|
|
|
|
|
|
|
Brian J.
Passell2
|
|
|
205,450
|
|
|
4.38
|
|
|
12/31/2009
|
|
|
|
74,976
|
3
|
|
|
1,436,540
|
|
|
|
185,527
|
|
|
6.99
|
|
|
12/31/2010
|
|
|
|
77,125
|
4
|
|
|
1,477,715
|
|
|
|
103,424
|
|
|
11.86
|
|
|
12/31/2011
|
|
|
|
|
|
|
|
|
|
Raymond M. Voelker
|
|
|
43,817
|
|
|
11.86
|
|
|
12/31/2011
|
|
|
|
58,525
|
3
|
|
|
1,121,339
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55,595
|
4
|
|
|
1,065,200
|
|
Charles E. Jarrett
|
|
|
52,140
|
|
|
7.22
|
|
|
12/31/2009
|
|
|
|
67,387
|
3
|
|
|
1,291,135
|
|
|
|
139,905
|
|
|
6.99
|
|
|
12/31/2010
|
|
|
|
65,140
|
4
|
|
|
1,248,082
|
|
|
|
97,893
|
|
|
11.86
|
|
|
12/31/2011
|
|
|
|
|
|
|
|
|
|
|
|
1
|
All awards are exercisable at December 31, 2007. We stopped
issuing stock option awards after December 31, 2002. In
conjunction with the $2.00 per common share special dividend
paid in September 2007 and pursuant to the antidilution
provisions of our incentive plans, we were required to increase
the number of shares and reduce the exercise price of any of the
then outstanding stock option awards.
|
|
2
|
All of Mr. Passells unvested restricted stock awards
were forfeited upon his termination of employment in February
2008.
|
|
3
|
Represents time-based restricted stock awards. In conjunction
with the qualified retirement provisions of the incentive plans,
Mr. Forresters time-based restricted stock awards
either vested or were forfeited upon his retirement in March
2007. Following are the applicable vesting dates for the other
NEO awards:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name
|
|
1/1/2008
|
|
|
1/1/2009
|
|
|
1/1/2010
|
|
|
1/1/2011
|
|
|
1/1/2012
|
|
|
Total
|
|
|
|
|
Glenn M. Renwick
|
|
|
160,616
|
|
|
|
162,064
|
|
|
|
162,197
|
|
|
|
106,769
|
|
|
|
59,553
|
|
|
|
651,199
|
|
Brian C. Domeck
|
|
|
5,928
|
|
|
|
6,212
|
|
|
|
9,450
|
|
|
|
7,658
|
|
|
|
5,082
|
|
|
|
34,330
|
|
Brian J. Passell
|
|
|
19,800
|
|
|
|
17,520
|
|
|
|
18,328
|
|
|
|
12,340
|
|
|
|
6,988
|
|
|
|
74,976
|
|
Raymond M. Voelker
|
|
|
15,312
|
|
|
|
13,568
|
|
|
|
14,371
|
|
|
|
9,715
|
|
|
|
5,559
|
|
|
|
58,525
|
|
Charles E. Jarrett
|
|
|
17,864
|
|
|
|
15,732
|
|
|
|
16,457
|
|
|
|
11,061
|
|
|
|
6,273
|
|
|
|
67,387
|
|
42
|
|
4 |
Represents performance-based restricted stock awards.
Performance-based restricted stock awards vest upon
Progressives insurance subsidiaries achieving both a
minimum level of net premiums earned (NPE) and a predetermined
combined ratio (CR) over the same period of 12 consecutive
months. Following are the performance criteria that must be
achieved to enable the performance-based restricted stock awards
to vest for the year of grant indicated:
|
|
|
|
|
|
2004 NPE of $15.0 billion and CR of 97
|
|
|
|
2005 NPE of $17.5 billion and CR of 96
|
|
|
|
2006 NPE of $20.0 billion and CR of 96
|
|
|
|
2007 NPE of $19.0 billion and CR of 96
|
If these objectives are not achieved by December 31, 2013,
2014, 2015 or 2016 for the 2004, 2005, 2006 and 2007 awards,
respectively, the awards will be forfeited. The number of
performance-based restricted shares awarded to each of the NEOs
for such years are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Name
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
Total
|
|
|
|
|
Glenn M. Renwick
|
|
|
178,260
|
|
|
|
166,280
|
|
|
|
141,640
|
|
|
|
178,655
|
|
|
|
664,835
|
|
Brian C. Domeck
|
|
|
2,760
|
|
|
|
2,800
|
|
|
|
2,360
|
|
|
|
15,245
|
|
|
|
23,165
|
|
W. Thomas
Forrestera
|
|
|
25,640
|
|
|
|
25,500
|
|
|
|
23,600
|
|
|
|
0
|
|
|
|
74,740
|
|
Brian J. Passell
|
|
|
18,740
|
|
|
|
19,760
|
|
|
|
17,660
|
|
|
|
20,965
|
|
|
|
77,125
|
|
Raymond M. Voelker
|
|
|
13,820
|
|
|
|
13,260
|
|
|
|
11,840
|
|
|
|
16,675
|
|
|
|
55,595
|
|
Charles E. Jarrett
|
|
|
15,780
|
|
|
|
16,180
|
|
|
|
14,360
|
|
|
|
18,820
|
|
|
|
65,140
|
|
|
|
|
|
a
|
Pursuant to the retirement provisions under the incentive plans,
Mr. Forrester retained his performance-based restricted
stock awards upon his qualified retirement, which remain subject
to the same vesting provisions as the other executives
awards.
|
Option Exercises
and Stock Vested
The following table summarizes the exercise of stock options and
the vesting of restricted stock awards during 2007. The stock
options were exercised at various dates during the year, while
all of the restricted stock awards vested on January 1,
2007, at a price of $24.32 per common share, except for
Mr. Forrester, who had additional restricted stock awards
vest upon his retirement on March 2, 2007 at a price of
$22.825.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPTION EXERCISES AND STOCK VESTED DURING 2007
|
|
|
Option Awards
|
|
|
Restricted Stock Awards
|
|
|
Number of
|
|
|
|
|
Number of
|
|
|
|
|
|
Shares
|
|
Value
|
|
|
Shares
|
|
|
Value
|
|
|
Acquired on
|
|
Realized on
|
|
|
Acquired on
|
|
|
Realized on
|
|
|
Exercise
|
|
Exercise
|
|
|
Vesting
|
|
|
Vesting
|
Name
|
|
(#)
|
|
($)
|
|
|
(#)
|
|
|
($)
|
|
Glenn M. Renwick
|
|
|
123,799
|
|
$
|
1,057,838
|
|
|
|
105,188
|
1
|
|
$
|
2,558,172
|
Brian C. Domeck
|
|
|
|
|
|
|
|
|
|
4,136
|
|
|
|
100,588
|
W. Thomas Forrester
|
|
|
112,800
|
|
|
1,507,967
|
|
|
|
50,556
|
1
|
|
|
1,179,996
|
Brian J. Passell
|
|
|
|
|
|
|
|
|
|
13,812
|
|
|
|
335,908
|
Raymond M. Voelker
|
|
|
|
|
|
|
|
|
|
10,656
|
|
|
|
259,154
|
Charles E. Jarrett
|
|
|
|
|
|
|
|
|
|
12,468
|
1
|
|
|
303,222
|
|
|
1 |
Represents restricted stock awards that were deferred in their
entirety pursuant to the EDCP immediately prior to the vesting
event. These deferred awards are deemed invested in one or more
investment funds, including Progressives common shares, as
recommended by the NEO, and are eligible to be transferred among
the funds in the EDCP, except that deferrals of restricted stock
awarded in March 2005 or thereafter are automatically deemed
invested in Progressive common shares and are not eligible to be
transferred to other investments. Distribution of these deferred
awards will be made in cash, based on the election of the
participant, except that distributions attributable to
restricted stock awards made in or after March 2005 will be made
in Progressive common shares. Mr. Renwick elected to
receive payment of this deferred award in a lump sum upon
separation from Progressive. Mr. Forrester elected to
receive payment in 10 installments on the earlier of reaching
age 59 or the date he separated from Progressive.
Mr. Jarrett elected to receive payment of this deferred
award in 10 installments upon separation from Progressive. The
deferred amounts are included in the Nonqualified Deferred
Compensation table below.
|
43
Nonqualified
Deferred Compensation
The following table summarizes amounts contributed to, earned
within and distributed from The Progressive Corporation
Executive Deferred Compensation Plan (EDCP) during 2007, as well
as the aggregate ending balance in the EDCP at December 31,
2007.
NONQUALIFIED
DEFERRED COMPENSATION DURING 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Executive
|
|
Registrant
|
|
Aggregate
|
|
|
|
|
Aggregate
|
|
|
Contributions
|
|
Contributions
|
|
Earnings in
|
|
|
Aggregate
|
|
Balance at
|
|
|
in Last Fiscal
|
|
in Last Fiscal
|
|
Last Fiscal
|
|
|
Withdrawals/
|
|
Last Fiscal
|
|
|
Year1
|
|
Year2
|
|
Year
|
|
|
Distributions3
|
|
Year-end1
|
Name
|
|
($)
|
|
($)
|
|
($)
|
|
|
($)
|
|
($)
|
|
|
Glenn M. Renwick
|
|
$
|
3,885,672
|
|
$
|
0
|
|
$
|
(571,554
|
)
|
|
$
|
165,986
|
|
$
|
24,155,129
|
Brian C. Domeck
|
|
|
50,877
|
|
|
0
|
|
|
97,522
|
|
|
|
0
|
|
|
1,451,427
|
W. Thomas Forrester
|
|
|
1,769,998
|
|
|
0
|
|
|
340,466
|
|
|
|
1,035,912
|
|
|
9,835,314
|
Brian J. Passell
|
|
|
0
|
|
|
0
|
|
|
33,593
|
|
|
|
0
|
|
|
487,084
|
Raymond M. Voelker
|
|
|
0
|
|
|
0
|
|
|
0
|
|
|
|
0
|
|
|
0
|
Charles E. Jarrett
|
|
|
390,224
|
|
|
0
|
|
|
73,826
|
|
|
|
0
|
|
|
3,549,621
|
|
|
1 |
The table below identifies amounts of deferred compensation
reported as compensation for the 2007 fiscal year in the Summary
Compensation Table in this Proxy Statement, as well as the
aggregate amount of deferred compensation reported in the
Summary Compensation Tables in our proxy statements for all
prior years, including this Proxy Statement. Prior to 2007,
non-equity incentive compensation awards were disclosed as
Bonus in the Annual Compensation Section of the
Summary Compensation Table. Under our plans, the non-equity
incentive plan compensation that was earned in 2007 (which is
shown in the Summary Compensation Table in this Proxy Statement)
will not be paid until 2008. As a result, the deferral of the
amounts earned in 2007 also will not occur until 2008, and no
amounts are shown below as Contributions Reported in
Current Summary Compensation Table Earned in Last Fiscal
Year.
|
|
|
|
|
|
|
|
|
|
Contributions
|
|
|
|
|
Reported in
|
|
Aggregate Balance
|
|
|
Current Summary
|
|
(Contributions
|
|
|
Compensation
|
|
Reported in Prior Years
|
|
|
Table Earned
|
|
Summary Compensation
|
Name
|
|
in 2007
|
|
Tables)
|
|
|
Glenn M.
Renwicka
|
|
$
|
|
|
$
|
12,680,334
|
W. Thomas
Forresterb
|
|
|
|
|
|
6,345,152
|
Brian J.
Passellc
|
|
|
|
|
|
333,806
|
Charles E.
Jarrettd
|
|
|
|
|
|
357,086
|
|
|
|
|
a
|
Mr. Renwick has deferred receipt of his non-equity
incentive plan awards in their entirety since 1995, the year the
EDCP began. All awards have been disclosed when earned in the
applicable Summary Compensation Tables for prior years.
|
|
|
|
|
b
|
Mr. Forrester has deferred receipt of his non-equity
incentive plan awards in their entirety since 1995, the year the
EDCP began. All awards have been disclosed when earned in the
applicable Summary Compensation Tables for prior years.
|
|
|
|
|
c
|
Mr. Passell has deferred a portion of his non-equity
compensation at various times since 1995. All deferred awards
since 2000 have been disclosed in the applicable Summary
Compensation Tables for prior years.
|
|
|
|
|
d
|
Mr. Jarrett has deferred a portion of his non-equity
compensation at various times since 2001. All deferred awards
since 2006 have been disclosed in the applicable Summary
Compensation Tables for prior years.
|
|
|
2
|
Progressive makes no supplemental contributions to the EDCP in
the year of deferral or in subsequent years.
|
|
3
|
Represents scheduled distributions based on the executives
elections in prior years, except that as to Mr. Forrester,
distributions resulted from his retirement in March 2007.
|
The named executive officers are eligible to defer all or part
of the non-equity incentive compensation earned under either the
Executive Plan, Gainsharing Plan, IT Bonus Plan or other similar
plans, as well as their restricted stock awards that were
deferred immediately prior to vesting, in full, granted under
the 2003 Incentive Plan. We have established an irrevocable
grantor trust to provide a source of funds to assist us in
meeting our liabilities under the EDCP. The trust has 18 mutual
funds, as well as Progressive common shares, as deemed
investment choices under the plan. The participant recommends
the deemed investment choices for contributions and transfers.
Fund transfers are limited to twice per quarter. All deferrals
are eligible for transfer, except that deferrals of restricted
stock awarded in March 2005 or thereafter are automatically
deemed invested in Progressive common shares until the date of
distribution under the plan.
44
Amounts equal to the deferred cash bonuses or restricted stock
grants are deposited by Progressive into the trust at the time
that the bonus or grant otherwise would have been earned by the
participant; we make no matching contributions or additional
deposits on behalf of any participant. To secure our future
payment obligations to participants, the trust holds investments
equivalent in kind and number to the aggregate deemed investment
elections selected by participants. Participants have no
proprietary rights or interests in the trusts assets,
including such securities, all of which remain subject to the
claims of our general creditors. The rights of participants and
their beneficiaries under the EDCP are merely unsecured
contractual rights against us. We do not guaranty any specific
rate of return to participants who defer amounts into the EDCP.
Following is a listing of deemed investment choices including
the annual rate of return on each investment alternative during
2007:
|
|
|
|
|
|
|
One-Year
|
|
|
|
Performance
|
|
|
|
As of 12/31/07
|
|
Fund
|
|
(%)
|
|
|
|
|
American Advantage Small Cap Value
|
|
|
(6.64
|
)
|
Fidelity Diversified International Fund
|
|
|
16.03
|
|
Fidelity Dividend Growth Fund
|
|
|
1.11
|
|
Fidelity Mid-Cap Stock Fund
|
|
|
8.20
|
|
Fidelity Retirement Money Market
|
|
|
5.12
|
|
FMA Small Company Portfolio
|
|
|
.61
|
|
Janus Worldwide Fund
|
|
|
9.23
|
|
Oakmark Equity and Income Fund
|
|
|
11.97
|
|
PIMCO Total Return Fund
|
|
|
8.81
|
|
Templeton World Fund Class A
|
|
|
8.50
|
|
The Progressive Corporation
|
|
|
(12.60
|
)
|
Vanguard Growth Index Fund Institutional Class
|
|
|
12.73
|
|
Vanguard Institutional Index Fund
|
|
|
5.47
|
|
Vanguard Mid-Cap Index Fund Institutional Class
|
|
|
6.22
|
|
Vanguard Small-Cap Index Fund Institutional Class
|
|
|
1.29
|
|
Vanguard Total International Stock Fund Investor
Class
|
|
|
15.52
|
|
Vanguard Value Index Fund Institutional Class
|
|
|
.21
|
|
Wasatch Small Cap Growth Fund
|
|
|
8.36
|
|
Washington Mutual Investors Fund Class A
|
|
|
3.97
|
|
Distributions from the EDCP are made in accordance with an
irrevocable election made by the participant prior to earning
the deferred award. Distributions are made in a lump-sum or in
three, five or ten annual installments at the earlier of the
date selected by the participant or upon his or her termination
from Progressive. For deferrals made after 2004, distributions
resulting from termination of employment will be made six months
after the participant leaves the company. In addition,
distributions may be triggered by certain change in
control events. For deferrals occurring in and prior to
2004, the events triggering such distributions would be the same
as the events triggering
change-in-control
payments under our equity incentive plans, as described in the
next section. For post-2004 deferrals, the plan has been revised
to reflect the
change-in-control
definition required by Section 409A of the Internal Revenue
Code. See Section 409A of the Internal Revenue
Code, beginning on page 34, for a further discussion
of the change in control events under Section 409A, and
certain other changes to the plan that were recently
implemented. Participants are permitted to change the schedule
for certain distributions if they give at least 12 months
notice and, with respect to post-2004 deferrals, they delay
those distributions by at least five years. All distributions
are made in cash, with the exception of deferred restricted
stock awards granted in or after March 2005, which awards will
be deemed invested in Progressive common shares for the entire
deferral period and distributed in common shares. The
participants respective rights and interests under the
plan may not be assigned or transferred under any circumstances.
Potential
Payments Upon Termination or Change In Control
Under our executive separation allowance plan, a unified
approach has been taken to potential severance payments and
other benefits payable to named executive officers (and other
covered employees) upon certain termination events, including a
change-in-control
scenario. In addition, our equity plans include separate
change-in-control
and qualified retirement provisions for equity award
holders, including named executive officers. Details concerning
these plan provisions are discussed below. Payments to be made
under our executive deferred compensation plan upon an
executives termination of employment or a change in
control are discussed under the Nonqualified
Deferred Compensation section above.
45
Severance. Our executive separation allowance
plan is designed to provide executives with defined financial
payments if we ask the executive to leave under certain
circumstances. The plan covers our CEO, other NEOs and executive
officers and all other equity-eligible employees of Progressive.
Among other terms and conditions, we will pay a separation
allowance (severance) payment to an executive if (i) his or
her employment terminates for reasons other than resignation
(including retirement), death, disability, leave of absence or
discharge for Cause (as defined in the plan), and (ii) the
employee signs a termination and release agreement as required
by the plan. The amount of the severance payment will vary among
employees based on position and years of service. For the named
executive officers, the severance payment would equal three
years of the executives base salary only, at the time of
termination. In addition, under the plan, the executive would be
entitled to continue medical, dental and vision benefits for a
period not to exceed eighteen months at our cost, except that
the terminated executive would be required to make contributions
to the cost of those benefits to the same extent as he or she
did prior to termination.
In addition, the plan provides that executives and other covered
employees will have the right to receive a severance payment in
accordance with the formula described above, if during the
three-year period after any Change in Control of Progressive,
either (i) the participants employment is terminated
for reasons other than resignation (including retirement),
death, disability, leave of absence or discharge for Cause, or
(ii) the participant resigns due to a Job Change (defined
below). For purposes of the plan, the definition of Change
in Control incorporates the definition of that term from
our equity incentive plans for employees (described below). The
term Job Change is defined as either a decrease in
the individuals total pay package, whether in the same job
or after a job transfer, or the imposition of significantly
different job duties, shift, work location or number of
scheduled work hours. Upon the occurrence of either of such
events, each named executive officer would be entitled to
receive a severance payment equal to three years of base salary
and the continuation of health benefits, on the same basis as
described above.
The following table summarizes the severance payments that would
have been made to the named executive officers, and the
estimated value of health and welfare benefits for which the
executive would have been eligible, if the executive had
separated from Progressive at December 31, 2007, under
circumstances requiring payments under the executive separation
allowance plan (whether as a result of a Change in Control or
otherwise):
|
|
|
|
|
|
|
|
|
Amount of
|
|
Estimated Value of
|
Name
|
|
Severance Payment
|
|
Health Benefits
|
|
|
Glenn M. Renwick
|
|
$
|
2,250,000
|
|
$
|
13,817
|
Brian C. Domeck
|
|
|
960,000
|
|
|
19,158
|
Brian J. Passell
|
|
|
1,320,000
|
|
|
13,816
|
Raymond M. Voelker
|
|
|
1,095,000
|
|
|
19,159
|
Charles E. Jarrett
|
|
|
1,185,000
|
|
|
19,159
|
Change in Control Provisions under Equity
Plans. Benefits are also provided to NEOs and
other holders of equity awards under our equity plans upon the
occurrence of a Change in Control or a Potential Change in
Control, as defined in those plans (described below). The Board
of Directors has the authority under the plans to
override the Change in Control benefits, however, if
the Board has given its prior approval to a transaction that
would otherwise trigger the benefits to be paid. If the
Boards prior consent is not obtained, our equity plans
include provisions providing for the immediate vesting of, and
payments to the holders of equity awards in an amount equal to
the value of, the outstanding equity awards upon the occurrence
of any of the specified triggering events. These provisions
apply to both outstanding stock options, which we issued prior
to 2003, and unvested restricted stock awards, including both
time-based and performance-based awards. The triggering events
are described below.
A Change in Control would be deemed to occur under our equity
incentive plans upon the occurrence of any of the following
events, unless the Board approves the change prior to either
(i) the commencement of the applicable event, or
(ii) the commencement of a tender offer for our stock:
|
|
|
|
|
Acquisition of 20% or more of the voting power of our
outstanding shares, with certain exceptions including
acquisitions by a passive investor with only an investment
intent;
|
|
|
|
Turnover of a majority of the Board of Directors during a
24-month
period, without the approval of the prior Board members; or
|
|
|
|
Occurrence of a transaction requiring shareholder approval for
the acquisition of Progressive, or any portion of our shares,
through purchase of shares or assets, by merger or otherwise.
|
46
Except as noted below with respect to awards of restricted
shares granted in or after March 2007, a Potential Change in
Control would be deemed to occur upon:
|
|
|
|
|
The approval by shareholders of an agreement, the consummation
of which would constitute a Change in Control (as described
above), unless the Board approved such change prior to the
commencement thereof; or
|
|
|
|
Acquisition of 5% or more of Progressives voting power,
together with a resolution by the Board of Directors that a
Potential Change in Control has occurred.
|
For restricted stock awards made in March 2007 or thereafter,
the Board modified our 2003 Incentive Plan (our only equity plan
under which awards may currently be made to executives and other
eligible employees) to remove from the definition of
Potential Change in Control the language described
in the first bullet in the immediately preceding paragraph. This
change was made on a going forward basis only, and it does not
affect rights under outstanding awards that were granted under
the plan before the change was made.
The following table quantifies the payments that would have been
made to the NEOs under our equity incentive plans if a Change in
Control had occurred on December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
Payments on Unvested
|
|
Payments on
|
|
|
|
|
Restricted Stock
|
|
Outstanding Stock
|
|
|
Name
|
|
Awards1
|
|
Options2
|
|
Total Payments
|
|
|
Glenn M. Renwick
|
|
$
|
25,993,312
|
|
$
|
23,915,308
|
|
$
|
49,908,620
|
Brian C. Domeck
|
|
|
1,168,003
|
|
|
1,161,814
|
|
|
2,329,817
|
W. Thomas Forrester
|
|
|
1,432,018
|
|
|
10,166,260
|
|
|
11,598,278
|
Brian J. Passell
|
|
|
3,005,561
|
|
|
6,049,410
|
|
|
9,054,971
|
Raymond M. Voelker
|
|
|
2,259,168
|
|
|
319,864
|
|
|
2,579,032
|
Charles E. Jarrett
|
|
|
2,621,182
|
|
|
3,039,814
|
|
|
5,660,996
|
|
|
1
|
Includes, with respect to restricted stock awards made in or
after March 2007, amount equal to dividends paid on common
shares, plus accrued interest, which amounts will be paid under
the plan only upon the vesting of the underlying restricted
stock awards.
|
|
2
|
As of January 1, 2007, all stock options are vested.
|
Qualified Retirement Provisions under Equity
Plans. Executive officers, along with other
equity award recipients, are eligible for the qualified
retirement treatment (sometimes referred to as the
Rule of 70) under our incentive compensation plans.
Under this arrangement, executives who leave their employment
with Progressive after satisfying certain age and
years-of-service requirements (described below), generally
(i) are permitted to exercise outstanding stock options
(all of which are now vested) at any time prior to their stated
expiration date (instead of being required to exercise such
options within 60 days of the termination of employment, as
is typically the case), (ii) receive 50% of unvested
time-based restricted shares then outstanding (with the
remaining 50% being forfeited), and (iii) retain 50% of
unvested performance-based restricted stock awards which will
vest, if at all, only upon satisfaction of the performance
objectives associated with those awards (and the other 50% of
the performance-based shares are forfeited). For all awards made
prior to March 2008, a qualified retirement requires
an executive to be age 55 or older, and the total of his or
her age plus years of service with Progressive must be at least
70, at the time of retirement. Under an amendment to our
restricted stock plan approved by the Committee in February
2007, for awards made in or after March 2008, the qualification
standard was changed to require the employee to be age 55
or over and have at least 15 years of service with
Progressive at the time of retirement.
Generally, an executives participation in these
arrangements is on the same terms and conditions as are
available to other equity award participants, except that if the
CEO or one of the executives who directly reports to him
provides at least one full year of notice of his or her
intention to leave employment after qualifying for the
Rule of 70, he or she will retain 100% of his or her
unvested performance-based restricted stock awards (not just 50%
as stated above), although such performance-based shares will
vest only if and when the applicable performance goals are
achieved prior to expiration. During 2007, Mr. Forrester
retired from the company with full Rule of 70 benefits. See
Note 5 to the Summary Compensation Table for specific
information concerning these benefits to Mr. Forrester. As
of December 31, 2007, no other NEO is eligible for Rule of
70 treatment under our plans.
The rights conferred by these provisions may be limited or
forfeited if the Committee determines that the executive has
engaged in any disqualifying activity, which is
defined to include, among other activities, the following:
|
|
|
|
|
directly or indirectly being an owner, officer, employee,
advisor or consultant to a company that competes with
Progressive or its subsidiaries or affiliates to an extent
deemed material by the Committee;
|
47
|
|
|
|
|
disclosure to third parties or misuse of any confidential
information or trade secrets of Progressive, its subsidiaries or
affiliates;
|
|
|
|
any material violation of Progressives Code of Business
Conduct and Ethics or any other agreement between Progressive
and the executive; or
|
|
|
|
failing in any material respect to perform the executives
assigned responsibilities as an employee of Progressive or any
of its subsidiaries or affiliates, as determined by the
Committee, in its sole judgment, after consulting with the Chief
Executive Officer.
|
The ownership of less than 2% of the outstanding voting
securities of a publicly traded corporation which competes with
Progressive or any of its subsidiaries or affiliates will not
constitute a disqualifying activity.
Compensation of
Directors
Total compensation of our non-employee directors for the year
ended December 31, 2007 was comprised only of restricted
stock awards.
Director
Compensation
Year ended December 31, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock
|
|
|
|
|
|
|
Awards1
|
|
Option
Awards1
|
|
Total
|
Name
|
|
($)
|
|
($)
|
|
($)
|
|
|
Charles A. Davis
|
|
$
|
164,646
|
|
$
|
|
|
$
|
164,646
|
Stephen R. Hardis
|
|
|
159,651
|
|
|
|
|
|
159,651
|
Bernadine P. Healy, M.D.
|
|
|
154,967
|
|
|
|
|
|
154,967
|
Jeffrey D. Kelly
|
|
|
154,656
|
|
|
|
|
|
154,656
|
Abby F. Kohnstamm
|
|
|
158,831
|
|
|
|
|
|
158,831
|
Philip A.
Laskawy2
|
|
|
43,363
|
|
|
|
|
|
43,363
|
Peter B. Lewis
|
|
|
199,579
|
|
|
|
|
|
199,579
|
Norman S. Matthews
|
|
|
164,646
|
|
|
|
|
|
164,646
|
Patrick H. Nettles, Ph.D.
|
|
|
154,656
|
|
|
|
|
|
154,656
|
Donald B. Shackelford
|
|
|
149,678
|
|
|
|
|
|
149,678
|
Bradley T. Sheares, Ph.D.
|
|
|
150,917
|
|
|
|
|
|
150,917
|
|
|
1 |
Represents expense recognized with respect to restricted stock
awards in accordance with SFAS 123(R).
|
All non-employee director stock option awards vested in or prior
to March 2003; therefore, no expense was recognized under
SFAS 123(R) in 2007.
48
The following table presents the time-based restricted stock
awards granted to non-employee directors in 2007, along with the
grant date fair value of such awards, and the antidilution
adjustments made to the outstanding option awards in connection
with our $2.00 per common share special dividend paid in
September 2007. The final two columns show the aggregate number
of common shares covered by time-based restricted stock awards
outstanding and the aggregate number of shares covered by stock
option awards at December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aggregate Number of
|
|
|
|
|
|
|
Shares at December 31,
|
|
|
|
Awarded in 2007
|
|
|
2007
|
|
|
|
|
|
|
|
Restricted
|
|
|
|
|
Restricted
|
|
|
|
|
|
Stock
|
|
Grant Date
|
|
|
Stock
|
|
Option
|
|
|
|
Awards
|
|
Fair Value
|
|
|
Awards
|
|
Awardsa
|
|
Name
|
|
(#)
|
|
($)
|
|
|
(#)
|
|
(#)
|
|
|
|
Charles A. Davis
|
|
|
7,052
|
|
$
|
165,017
|
|
|
|
7,052
|
|
|
99,945
|
|
Stephen R. Hardis
|
|
|
6,838
|
|
|
160,009
|
|
|
|
6,838
|
|
|
82,337
|
|
Bernadine P. Healy, M.D.
|
|
|
6,624
|
|
|
155,002
|
|
|
|
6,624
|
|
|
|
|
Jeffrey D. Kelly
|
|
|
6,624
|
|
|
155,002
|
|
|
|
6,624
|
|
|
65,493
|
|
Abby F. Kohnstamm
|
|
|
6,411
|
|
|
150,017
|
|
|
|
6,411
|
|
|
|
|
Philip A. Laskawy
|
|
|
7,479
|
|
|
175,009
|
|
|
|
|
|
|
11,497
|
|
Peter B. Lewis
|
|
|
8,548
|
|
|
200,023
|
|
|
|
8,548
|
|
|
|
b
|
Norman S. Matthews
|
|
|
7,052
|
|
|
165,017
|
|
|
|
7,052
|
|
|
99,945
|
|
Patrick H. Nettles, Ph.D.
|
|
|
6,624
|
|
|
155,002
|
|
|
|
6,624
|
|
|
|
|
Donald B. Shackelford
|
|
|
6,411
|
|
|
150,017
|
|
|
|
6,411
|
|
|
99,945
|
|
Bradley T. Sheares, Ph.D.
|
|
|
6,411
|
|
|
150,017
|
|
|
|
6,411
|
|
|
|
|
|
|
|
|
a
|
Reflects an increase in the number of shares subject to options
outstanding under the antidilution provisions of the
1998 Directors Incentive Plan in conjunction with the $2.00
per common share special dividend that was paid in September
2007. A corresponding decrease in the exercise price for each
option was also made.
|
|
|
b
|
Mr. Lewis did not receive stock options as a director of
Progressive. His option awards were granted prior to February
2003 when he was an executive officer of Progressive. His
outstanding option awards are set forth in Note 3 on
page 19.
|
|
|
|
|
2
|
Mr. Laskawy resigned from our Board in December 2007.
|
Narrative
Disclosure to Director Compensation Table
Equity-based Awards. Each non-employee
director is eligible to receive awards under The Progressive
Corporation 2003 Directors Equity Incentive Plan (the
Directors Equity Plan). The Directors Equity Plan
originally authorized the issuance of up to 350,000 common
shares. After adjusting for prior awards granted and our
4-for-1
stock split in May 2006, 1,101,754 shares remained
available for issuance at December 31, 2007. The restricted
stock grant value per common share equals the fair market value
of the common shares awarded on the date of grant. Restricted
stock awards vest on the date established by the Compensation
Committee for the respective awards and are not transferable.
Upon the death of a participating director, his or her estate
will be entitled to receive any unvested restricted stock held
by such director at the time of his or her death, which stock
will vest on the vesting dates specified in the related
agreements.
Currently, our non-employee directors are compensated only by
time-based restricted stock awards. Each non-employee director
(other than Mr. Lewis) receives an annual award of
restricted stock, which is valued to include a specified
retainer amount plus a variable component tied to such
directors Committee assignments. Mr. Lewis receives a
lump sum restricted stock award as his sole compensation for
service as Chairman. Restricted stock awards to directors are
made under The Directors Equity Plan and are expected to be made
in April of each year with an
11-month
vesting period. If a new director is appointed to the Board or a
director changes Committee assignments during the year,
appropriate adjustments to his or her award may be made. The
following table sets forth targeted compensation for each
component in 2007:
|
|
|
|
|
Compensation Component
|
|
Dollar Value
|
|
|
|
|
Board Retainer
|
|
$
|
110,000
|
|
Audit Committee Chair Retainer
|
|
|
65,000
|
|
Audit Committee Member Retainer
|
|
|
45,000
|
|
Compensation Committee Chair Retainer
|
|
|
45,000
|
|
Compensation Committee Member Retainer
|
|
|
40,000
|
|
Investment Committee Chair Retainer
|
|
|
45,000
|
|
Investment Committee Member Retainer
|
|
|
40,000
|
|
Additional Committee Chair
Retainer1
|
|
|
15,000
|
|
Additional Committee Member
Retainer1
|
|
|
10,000
|
|
Chairman of the Board
|
|
|
200,000
|
|
1Excludes
Executive Committee
49
Directors Equity Deferral Plan. Directors
receiving awards of restricted stock under the Directors Equity
Plan also have the right to defer the receipt of the common
shares covered by each such award under The Progressive
Corporation Directors Restricted Stock Deferral Plan (the
Directors Equity Deferral Plan). If a director
elects to defer a restricted stock award under this plan,
immediately prior to vesting of the applicable award, the
restricted shares are converted to units equivalent in value to
Progressive common shares and credited to the participating
directors plan account. The participating directors
plan account will further be credited with amounts equal to
dividends and other distributions, if and when authorized by the
Board, which are paid on Progressive common shares. There are no
other investment options under the Directors Equity Deferral
Plan. All such accounts will be distributed in common shares
(with any partial shares being distributed in cash), in a lump
sum or installments, at the time(s) designated by the
participating director at the time of election, subject to
accelerated distribution provisions under the plan in the event
of the participants death, the participant leaving
Progressive, or a change in control of Progressive.
Participating directors are permitted to change the schedule for
certain distributions if they give at least 12 months
notice and they delay those distributions by at least five years.
Directors Deferral Plan. Seven non-employee
directors participate in The Progressive Corporation Directors
Deferral Plan, as amended (the Directors Deferral
Plan). Each participant in the Directors Deferral Plan was
a director prior to April 2006 and elected to defer receipt of
all or a portion of his or her meeting fees until the date
designated by the director in accordance with the plan. Deferred
meeting fees were credited into a stock account under which the
units are equivalent in value and dividend rights to Progressive
common shares. All such accounts will be distributed in cash, in
a lump sum or installments, when and as designated by the
participating director at the time of election or, if earlier,
upon the death of the director or upon a change in control of
the company. All retainer fees were deferred, credited to a
stock account and will be distributed in cash on a date
designated by the participating director in accordance with the
terms of the plan. All account balances of a director will be
distributed to a designated beneficiary upon his or her death.
However, if any director ceases to serve as such for any reason
other than death, disability or removal without cause prior to
the expiration of his or her current term, all retainer fees
credited to his or her stock account for the unexpired portion
of his or her term are forfeited. Participating directors are
permitted to change the schedule for certain distributions if
they give at least 12 months notice and they delay those
distributions by at least five years.
Perquisites. In 2007, directors and their
spouses or guests were invited to attend an annual retreat with
management at an off-site location. Personal travel for a spouse
or guest and the costs of certain other activities held during
the retreat may constitute perquisites to the attending
directors. Otherwise, we do not provide perquisites to our
non-employee directors.
50
ITEM 2:
APPROVAL OF AMENDMENTS TO THE COMPANYS AMENDED
ARTICLES OF INCORPORATION AND CODE OF REGULATIONS TO ADOPT
A MAJORITY VOTING STANDARD IN UNCONTESTED ELECTIONS OF
DIRECTORS
Our Board of Directors has approved, subject to the approval of
our shareholders, amendments to our Amended Articles of
Incorporation and Code of Regulations to adopt a majority voting
standard in uncontested elections of directors. The Board of
Directors recommends that shareholders vote FOR this proposal.
The full text of new Article TENTH of the Amended Articles
of Incorporation and revised Section 2 of Article II
of the Code of Regulations reflecting these amendments are
attached to this Proxy Statement as Exhibit A. The
following description of the amendments is qualified in its
entirety by reference to Exhibit A.
Current Election
Standard; Proposed Amendments
Section 2 of Article II of our Code of Regulations
currently provides for a plurality voting standard in all
director elections. Prior to 2008, Ohio law required that the
plurality standard apply in all such elections. Under the
plurality voting standard, a candidate for director is elected
to the Board so long as he or she receives more votes cast
for his or her election than the number of votes
cast for any other candidate. Our Articles of
Incorporation currently do not address the voting standard that
applies in director elections.
Effective January 1, 2008, Ohio Revised Code
§ 1701.55(B) was amended to give Ohio corporations
discretion to adopt alternative voting standards for director
elections by modifying their Articles of Incorporation. Due to
this change in Ohio law, the Board of Directors proposes to add
a new Article TENTH to the Articles of Incorporation and
amend existing Section 2 of Article II of our Code of
Regulations to adopt a majority voting standard in uncontested
elections of directors. The Board of Directors believes that
adopting this majority voting standard will give shareholders a
greater voice in determining the composition of our Board of
Directors and, therefore, recommends that our shareholders adopt
this majority standard.
Reasons for and
Effects of Proposed Amendments
This recent change in Ohio law now allows Ohio corporations to
adopt an alternative voting standard for director elections.
Currently, our Articles of Incorporation are silent regarding
the voting standard that applies to elections of directors. The
Code of Regulations, however, provides for a plurality voting
standard in all director elections. In an uncontested election
(an election in which the number of candidates equals or is less
than the number of available director seats), plurality voting
results in a candidate being elected if he or she receives even
a single for vote. Thus, under the plurality
standard, withhold votes have no effect on the
election, except in the unlikely event that no votes
for the candidate are cast.
Under our proposed majority voting standard, in order for a
candidate to be elected to the Board in an uncontested election,
the number of votes cast for the candidate must
exceed the number of votes cast against his or her
election. Shareholder abstentions would not count either
for or against a candidate. The Board of
Directors believes that the adoption of this majority voting
standard will give shareholders a greater voice in determining
the composition of the Board of Directors by giving effect to
shareholder votes against a candidate for a Board
seat, and by requiring a higher level of shareholder votes for a
candidate to obtain or retain a seat on the Board. The adoption
of this more challenging standard in uncontested elections is
thus intended to make the Board of Directors more accountable to
shareholders.
The Board of Directors believes, however, that the plurality
voting standard should still apply in all contested director
elections (elections in which the number of candidates exceeds
the number of available director seats), as reflected in the
proposed amendment to our Articles of Incorporation in
Exhibit A. Employing a majority voting standard in a
contested election could make it more difficult for any
candidate, whether proposed by the Board or by a shareholder, to
obtain the number of votes necessary to secure a seat on the
Board. If there were a close vote in such a contested election,
it is possible that no candidate would achieve the requisite
majority. Accordingly, our proposal retains plurality voting in
those circumstances to avoid such a result.
If the proposed amendment to our Articles of Incorporation
addressing the election of directors is adopted, our Code of
Regulations also must be amended to prevent the Code from
conflicting with the Articles. To ensure conformity, the
attached Exhibit A reflects amendments to the text of the
relevant provisions of both our Articles of Incorporation and
Code of Regulations regarding the adoption of the proposed
majority voting standard.
The adoption of a majority voting standard for uncontested
director elections raises an issue with respect to the continued
service of any incumbent director who fails to win re-election
by receiving the requisite majority vote. Together, Ohio
51
corporation law and our current Code of Regulations provide that
each director serves for his or her term and until his or her
successor is elected and qualified. As such, if a director
candidate fails to achieve a majority vote and then fails to
tender his or her resignation, the directors term would
still continue until his or her successor were elected and
qualified. To address this possibility, we are also proposing to
amend our Code of Regulations, as described in Item 3 of
this Proxy Statement, to provide that if an unsuccessful
director candidate fails to tender his or her resignation within
10 days after such an election, the directors term
will end, at the latest, on the last day of such
10-day
period. The effectiveness of the amendment set forth in
Item 3 of this Proxy Statement is expressly conditioned
upon shareholders approval of this Item 2.
Vote Required for
Approval
Under our Amended Articles of Incorporation and Code of
Regulations, the vote of a majority of our outstanding common
shares is required for approval of this proposal to amend the
Amended Articles of Incorporation and Section 2 of
Article II of the Code of Regulations.
The Board of
Directors recommends that shareholders vote FOR this
proposal.
52
ITEM 3:
APPROVAL OF AN AMENDMENT TO THE COMPANYS CODE OF
REGULATIONS TO MODIFY THE DEFINITION OF A DIRECTORS
TERM OF OFFICE
Our Board of Directors has approved, subject to the approval of
our shareholders, an amendment to our Code of Regulations to
modify the definition of a directors term of office. The
Board of Directors recommends that shareholders vote FOR this
proposal.
The full text of revised Section 3 of Article II of
the Code of Regulations reflecting this amendment is attached to
this Proxy Statement as Exhibit B. The following
description of the amendment is qualified in its entirety by
reference to Exhibit B.
Current Code of
Regulations Term of Office Definition; Proposed
Amendment
Section 3 of Article II of our Code of Regulations
currently provides that each director shall hold office until
the annual meeting of shareholders coinciding with the
expiration of the term of the class of directors to which the
director was elected and until his or her successor is elected
and qualified, or until his or her earlier resignation, removal
from office, or death. Under such a provision, a director who is
not re-elected at a shareholder meeting at which his or her term
expires remains a director until a successor is elected and
qualified. This is sometimes referred to as a holdover
period.
If shareholders approve the majority voting standard proposed in
Item 2 of this Proxy Statement, the Board of Directors
recommends that the shareholders also approve this proposal to
amend our Code of Regulations to modify the definition of a
directors term of office. This amendment would prevent a
director candidates term from continuing indefinitely in
the event that the director fails to achieve the requisite
majority vote and fails to resign pursuant to the resignation
requirement to be established by the Board (described in greater
detail below).
The effectiveness of shareholders approval of this
proposal is expressly conditioned upon the concurrent approval
by the shareholders of the proposal described in Item 2 of
this Proxy Statement.
Reasons for and
Effects of Proposed Amendment
Our Code of Regulations currently creates the possibility of a
holdover period if an existing director is not re-elected at the
end of his or her term and no successor is elected at that time.
Historically, the possible occurrence of a director holdover has
been only a remote concern, because the plurality voting
standard in uncontested director elections virtually ensures
that a director, once nominated, will in fact be elected. If we
move to a majority voting standard in uncontested director
elections, as proposed above in Item 2, however, a holdover
situation could arise if an existing director fails to win
re-election by receiving less than a majority vote in such an
election. Specifically, if the director-nominee does not resign
after failing to achieve the requisite majority vote, the
directors term nevertheless would continue, perhaps for an
extended period, until his or her successor was elected and
qualified.
To address this unintended consequence of the operation of the
holdover period in the majority voting system, the Board plans
to adopt a procedure in the Companys Corporate Governance
Guidelines by which the director who fails to receive the
required majority vote would be required to tender his or her
resignation to the Board within 10 days after the election.
After receiving the resignation, the Board would have a
specified amount of time to consider the resignation and to
determine whether any circumstances existed that would justify
the retention of the director until his or her successor was
elected and qualified. This procedure would provide the Board
with the flexibility to retain a director whose continued
service may be important to the Board and the Company, even
though he or she did not achieve the required majority vote,
until a successor could be elected.
To ensure that the term of a director who fails to achieve the
requisite majority vote would not continue indefinitely if the
director does not comply with the resignation requirement
described above, the Board is proposing to amend the definition
of a directors term of office in Section 3 of
Article II of the Code of Regulations. Similar to our
current Code provisions, the proposed amendment would provide
that a directors term continues until the next annual
meeting of shareholders at which the directors term ends
or until the director otherwise is scheduled to stand for
re-election (each, an End-of-Term Date), and until
that directors successor is elected, unless the director
first resigns, is removed or dies. The proposed amendment also
provides a mechanism to address the holdover scenario, however,
as follows:
|
|
|
|
|
if a director is nominated for re-election in an election in
which a majority voting standard applies, and
|
|
|
|
he or she fails to achieve a majority of votes cast but does not
tender his or her resignation within 10 days after the
election in accordance with the Board-established procedures,
then
|
|
|
|
that directors term will end on the earlier of the date on
which a successor is elected or the expiration of the
10-day
period.
|
53
Under this provision, the holdover portion of the term of a
director who fails to resign in accordance with the Boards
requirement could not extend for more than 10 days after
the shareholder meeting. The Board of Directors believes that
this combination of a director resignation requirement and
modified definition of a directors term of office is the
appropriate mechanism to give effect to shareholder votes under
a majority voting standard, provide the Board with the
flexibility it may need and prevent a recalcitrant director from
holding over.
In addition, the proposed amendment would add a second exception
to the definition of a directors term of office by
providing that if a director is not nominated for re-election by
the Board of Directors, his or her term will continue only until
his or her End-of-Term Date. The purpose of this second
exception is to clarify that the term of office of any incumbent
director who has not been nominated for re-election will expire
on his or her End-of-Term Date, with no possibility of a
holdover period, even if a successor is not elected at that time.
If shareholders approve this proposal to amend Section 3 of
Article II of the Code of Regulations, the approval will
not take effect unless the shareholders concurrently approve the
proposal set forth in Item 2 of this Proxy Statement.
Vote Required for
Approval
Under Ohio corporation law and the Companys Code of
Regulations, the affirmative vote of 75% of the outstanding
common shares is required for approval of the proposal to amend
Section 3 of the Code of Regulations.
The Board of
Directors recommends that shareholders vote FOR this
proposal.
54
ITEM 4:
PROPOSAL TO APPROVE AN AMENDMENT TO THE COMPANYS CODE
OF REGULATIONS TO INCREASE THE MAXIMUM NUMBER OF DIRECTOR
POSITIONS FROM 12 TO 13 AND TO FIX THE NUMBER OF DIRECTORS AT
13
Our Board of Directors has approved, subject to the approval of
our shareholders, amendments to our Code of Regulations to
increase the maximum number of director positions from 12 to 13
and seeks to have shareholders fix the number of directors at
13. The Board of Directors recommends that shareholders vote FOR
this proposal.
The full text of revised Section 1 of Article II of
the Code of Regulations reflecting this amendment is attached to
this Proxy Statement as Exhibit C. The following
description of the amendment is qualified in its entirety by
reference to Exhibit C.
Proposed
Amendment
Our Board of Directors currently has 12 positions, the number
previously fixed by shareholders and the maximum number allowed
by our Code of Regulations. In reviewing the needs of the Board,
our directors have determined that an increase in the number of
director positions from 12 to 13 would provide an appropriate
level of flexibility to recruit new director candidates, while
at the same time maintaining an effective number of experienced
directors on the Board.
As stated in our Corporate Governance Guidelines, the Board
believes that its current size (12 members) is about the right
number for our company. Approval of this proposal will result in
there being 13 positions on our Board. Nonetheless, the Board
expects that even if this proposal is approved, there will be
periods when the Board operates with at least one vacancy.
Having such a vacancy available will provide the Boards
Nominating and Governance Committee with the ability to
recruit one or more new director candidates, even at times when
we have 12 experienced directors. The ability to add a Board
member in these circumstances could prove advantageous, for
example, if the Committee learns of an exceptional candidate who
has specific talents or experiences that the Board values, and
the Board deems it prudent to add the candidate to the Board
without waiting for a Board seat to become vacant or for a
shareholder vote to expand the Board. Similarly, if we are
expecting a director to retire or not to stand for re-election
in the foreseeable future, the Board may desire to recruit and
elect a new director prior to such a vacancy being created, in
order to smooth the transition for the new director and keep the
Board running at full capacity. Such flexibility may be critical
to attracting new directors in this very competitive market for
quality candidates.
It has also been the Boards experience that new directors,
particularly those from outside the industry, tend to require
several years of experience on the Board to develop a full
understanding of our insurance businesses and begin to maximize
their contributions to the Board and its committees. The Board
believes that the ability to have a new director begin this
development process while we retain our base of 12 more seasoned
directors will benefit the company and its shareholders.
In addition, it should be noted that, if a new director is
elected by the Board to fill a vacancy between our annual
meetings of shareholders, our Code of Regulations requires that
the directors term will end at the next annual meeting, at
which time (assuming that the Board were to nominate the new
director for re-election), he or she would be required to stand
for a shareholder vote to continue in office.
If shareholders approve this proposal, the Board will
temporarily have two vacancies. At this time, the Board does not
have an individual in mind to fill either of those vacancies.
However, a search process is underway, and one or both of the
vacancies could be filled by the Board in accordance with the
provisions of the Code of Regulations. Alternatively, the Board
could choose to nominate new candidates to be voted on by
shareholders at a future shareholder meeting. Any new director
who is so elected would be added by the Board to one of its
three classes of directors, as appropriate to keep the number of
each class as nearly equal as possible.
Vote Required for
Approval
Under Ohio corporation law and the Companys Code of
Regulations, the affirmative vote of 75% of the outstanding
common shares is required for approval of this proposal.
The Board of Directors recommends that shareholders vote FOR
this proposal.
55
ITEM 5:
PROPOSAL TO RATIFY THE APPOINTMENT OF
PRICEWATERHOUSECOOPERS LLP AS THE COMPANYS INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM FOR 2008
On March 6, 2008, the Audit Committee of the Board of Directors
appointed PricewaterhouseCoopers LLP (PWC) as the independent
registered public accounting firm to examine the financial
statements of The Progressive Corporation and its subsidiaries
for the year ending December 31, 2008. Pursuant to this
proposal, we are asking shareholders to ratify the Audit
Committees selection of PWC. If shareholders do not ratify
the appointment of PWC, the selection of the independent
registered public accounting firm will be reconsidered by the
Audit Committee, but the Committee may decide to continue the
engagement of PWC for 2008, due to difficulties in making such a
transition after the year has begun.
Vote Required for
Approval
The affirmative vote of a majority of the votes cast on this
proposal, provided the total number of votes cast represents a
majority of the outstanding common shares, is required for
approval. Broker non-votes will not be treated as votes cast.
Abstentions will be treated as votes cast and, consequently,
will have the same effect as votes against the proposal.
The Board of
Directors recommends that shareholders vote FOR this
proposal.
OTHER INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM INFORMATION
Approval of Audit
and Non-Audit Services
The Audit Committee of the Board of Directors requires that each
engagement of PWC to perform any audit or non-audit services,
including the fees and terms of the engagement, must be approved
by the Committee, or by the Chairman of the Committee (who has
authority to approve engagements not to exceed $50,000 in the
aggregate between Committee meetings), before we engage PWC for
the particular service. The Committee has not adopted any other
policies or procedures that would permit us to engage PWC for
non-audit services without the specific prior approval of the
Committee or the Chairman.
Independent
Registered Public Accounting Firm Fees
Following are the aggregate fees billed to us by PWC during the
fiscal years ended December 31, 2007 and 2006:
|
|
|
|
|
|
|
|
|
Fees
|
|
2007
|
|
|
2006
|
|
|
|
|
Audit
|
|
$
|
1,481,160
|
|
|
$
|
1,760,955
|
|
Audit-related
|
|
|
83,827
|
|
|
|
27,261
|
|
Tax
|
|
|
61,915
|
|
|
|
50,093
|
|
All other
|
|
|
0
|
|
|
|
0
|
|
|
Total
|
|
$
|
1,626,902
|
|
|
$
|
1,838,309
|
|
|
|
|
|
Audit fees. Includes professional services
rendered for the audit of Progressives consolidated
financial statements, statutory audits and the audit of our
internal control over financial reporting. Prior year audit fees
are often billed in the subsequent year.
Audit-related fee. Includes assistance in the
assessment of Progressives internal control structure and
the issuance of our 6.70% Fixed-to-Floating Rate Junior
Subordinated Debentures due 2067.
Tax fees. Includes fees for tax planning,
consultation and advice.
All of these fees were pre-approved by the Audit Committee
pursuant to the procedures described above.
Representatives of PWC are expected to be present at the Annual
Meeting with the opportunity to make a statement about
Progressives financial condition, if they desire to do so,
and to respond to appropriate questions.
56
SHAREHOLDER
PROPOSALS
Any shareholder who intends to present a proposal at the 2009
Annual Meeting of Shareholders for inclusion in the Proxy
Statement and form of proxy relating to that meeting may do so
in accordance with Securities and Exchange Commission
Rule 14a-8
and is advised that the proposal must be received by the
Secretary at the Companys principal executive offices
located at 6300 Wilson Mills Road, Mayfield Village, Ohio 44143,
not later than November 10, 2008. For those shareholder
proposals that are not submitted in accordance with
Rule 14a-8,
the proxies designated by the Board may exercise their
discretionary voting authority, without any discussion of the
proposal in the Companys proxy materials, with respect to
any proposal that is received by the Company after
January 24, 2009.
HOUSEHOLDING
Securities and Exchange Commission regulations permit a single
set of the Annual Report to Shareholders and Proxy Statement to
be sent to any household at which two or more shareholders
reside if they appear to be members of the same family. Each
shareholder will continue to receive a separate proxy card. This
procedure, referred to as householding, reduces the volume of
duplicate information shareholders receive and reduces our
mailing and printing costs. A number of brokerage firms have
also instituted householding procedures. In accordance with a
notice sent to certain beneficial shareholders who share a
single address, only one copy of this Proxy Statement and the
attached Annual Report will be sent to that address, unless any
shareholder residing at that address gives contrary instructions.
We will deliver promptly, upon written or oral request, a
separate copy of this Proxy Statement and the attached Annual
Report to a shareholder at a shared address to which a single
copy of the documents was delivered. A shareholder who wishes to
receive a separate copy of the Proxy Statement and Annual
Report, now or in the future, should submit this request by
calling toll-free
1-800-542-1061,
or by writing to The Progressive Corporation, Investor
Relations, at 6300 Wilson Mills Road, Box W33, Mayfield Village,
Ohio 44143. Shareholders sharing an address who are receiving
multiple copies of these materials may request to receive a
single copy of such materials in the future by contacting us at
the phone number or address provided above.
CHARITABLE
CONTRIBUTIONS
Within the preceding three years, Progressive has not made a
contribution to any charitable organization in which any of our
directors serves as an executive officer. The Progressive
Insurance Foundation, which is a charitable foundation that
receives contributions from Progressive, contributes to the
Insurance Institute for Highway Safety and to qualified
tax-exempt organizations that are financially supported by our
employees. These contributions are made on a matching basis, and
for 2007 did not exceed $5,000 for each employee in the
aggregate. Thus, in matching an employees gift, the
Foundation may have contributed to charitable organizations in
which one or more of our directors may be affiliated as an
executive officer, director or trustee.
OTHER
MATTERS
The cost of this solicitation, including the reasonable expenses
of brokerage firms and other record holders for forwarding these
proxy materials to beneficial owners, will be paid by
Progressive. In addition to solicitation by mail, proxies may be
solicited by telephone, facsimile, other electronic means or in
person. We have engaged the firm of Morrow & Co.,
New York, New York, to assist us in the solicitation of
proxies at an estimated cost of $15,000. Proxies may also be
solicited by our directors, officers and employees without
additional compensation.
If any other matters shall properly come before the meeting, the
persons named in the proxy, or their substitutes, will vote
thereon in accordance with their judgment. The Board of
Directors does not know at this time of any other matters that
will be presented for action at the meeting.
57
AVAILABLE
INFORMATION
Progressives Corporate Governance Guidelines, Board of
Director Committee Charters and Code of Business Conduct and
Ethics for directors, officers and employees is available at
progressive.com/governance, or may be requested in print by
writing to The Progressive Corporation, Investor Relations, 6300
Wilson Mills Road, Box W33, Mayfield Village, Ohio 44143.
We will furnish, without charge, to each person to whom a
Proxy Statement is delivered, upon oral or written request, a
copy of our Annual Report on
Form 10-K
for 2007 (other than certain exhibits). Requests for such
documents should be submitted in writing to Jeffrey W. Basch,
Chief Accounting Officer, The Progressive Corporation, 6300
Wilson Mills Road, Box W33, Mayfield Village, OH 44143, by
telephone at
(440) 395-2258
or e-mail at
investor_relations@progressive.com.
By Order of the Board of Directors,
Charles E. Jarrett, Secretary
March 7, 2008
58
EXHIBIT A
The following is the full text of new Article TENTH of the
Amended Articles of Incorporation of The Progressive
Corporation, as amended, and revised Section 2 of
Article II of the Code of Regulations of The Progressive
Corporation, reflecting the proposed amendments described in
Item 2 of the Companys Proxy Statement dated
March 7, 2008.
Article TENTH of the Amended Articles of
Incorporation, as amended:
At each meeting of shareholders for the election of directors,
each nominee who receives a majority of the votes cast with
respect to his or her nomination shall be elected as a director;
provided, however, that, in the event the number of nominees
exceeds the number of directors to be elected, the nominees
receiving the greatest number of votes shall be elected. In
determining which voting standard will apply in an election of
directors, the number of nominees and number of directors to be
elected at such meeting shall be determined as of the date that
is fourteen (14) days prior to the date the corporation
files its definitive proxy statement relating to such meeting
(regardless of whether or not thereafter revised or
supplemented) with the Securities and Exchange Commission. For
purposes of this Article TENTH, a majority of votes cast
means that the number of shares voted for a
directors election must exceed the number of shares voted
against his or her election.
Section 2 of Article II of the Code of
Regulations
Section 2. Election of
Directors. Directors shall be elected at the
annual meeting of shareholders, but when the annual meeting is
not held or directors are not elected thereat, they may be
elected at a special meeting called and held for that purpose.
Such election shall be by ballot whenever requested by any
shareholder entitled to vote at such election; but, unless such
request is made, the election may be conducted in any manner
approved at such meeting.
Article TENTH of the Companys Amended Articles of
Incorporation, as amended, sets forth voting standards
applicable in the election of directors at each meeting of
shareholders to elect directors.
A-1
EXHIBIT B
The following is the full text of revised Section 3 of
Article II of the Code of Regulations of The Progressive
Corporation, reflecting the proposed amendments described in
Item 3 of the Companys Proxy Statement dated
March 7, 2008.
Section 3. Term of Office. The
term of office for each director shall be three years, and the
members of one class of directors shall be elected annually to
serve for such term; except that (i) initially or whenever
necessary, a director may be elected for a shorter term in order
to provide for a proper rotation of directors, and (ii) a
director elected to fill a vacancy pursuant to Section 5 of
this Article shall serve for the term specified therein. Each
director shall hold office until the date of the annual meeting
of shareholders coinciding with the termination of the term of
the class of directors to which he or she was elected, or until
the termination of the period specified in Section 5 of
this Article (if applicable), (End-of-Term Date) and
until his or her successor shall be elected or until his or her
earlier resignation, removal from office or death; provided that:
(a) a director that has not been nominated by the Board of
Directors for re-election in an election of directors at an
annual meeting of shareholders coinciding with his or her
End-of-Term Date (End-of-Term Election) shall hold
office only until such End-of-Term Date; and
(b) a director that has been nominated for re-election by
the Board of Directors in an End-of-Term Election in which a
majority vote is required for his or her re-election by the
Amended Articles of Incorporation, as amended, but such director
fails to achieve a majority of votes cast with respect to his or
her nomination and fails to tender his or her resignation to the
Board of Directors or an appropriate committee thereof, in
accordance with applicable procedures adopted by the Board of
Directors or a committee thereof, within 10 days after the
results of the vote have been certified, shall hold office only
until the earlier of (i) the date that his or her successor
shall be elected or (ii) the expiration of such 10 day
period.
B-1
EXHIBIT C
The following is the full text of revised Section 1 of
Article II of the Code of Regulations of The Progressive
Corporation, reflecting the proposed amendments described in
Item 4 of the Companys Proxy Statement dated
March 7, 2008.
Section 1. Number and Classification of
Directors. The number of directors of the
corporation, none of whom need to be a shareholder or resident
of the State of Ohio, shall be thirteen, and such directors
shall be divided into three classes as nearly equal in number as
possible, to be known as Class I, Class II and Class
III. The classes shall be elected to staggered terms. The
shareholders, acting by the affirmative vote of the holders of
record of shares representing 75% of the voting power of the
corporation on such proposal, may, from time to time, increase
or decrease the number of directors, but in no case shall the
number of directors be fewer than five or more than thirteen,
nor shall any decrease in the number of directors shorten the
term of any director then in office. In case of any increase in
the number of directors, the directors then in office may select
the class or classes to which the additional directors shall be
assigned, provided that the directors shall be distributed among
the several classes as nearly equally as possible.
C-1
THE PROGRESSIVE
CORPORATION
2007
ANNUAL REPORT TO SHAREHOLDERS
App.-A-1
The Progressive
Corporation and Subsidiaries
Consolidated Statements of Income
For the years ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
(millions except per share amounts)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
Revenues
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums earned
|
|
$
|
13,877.4
|
|
|
$
|
14,117.9
|
|
|
$
|
13,764.4
|
|
Investment income
|
|
|
680.8
|
|
|
|
647.8
|
|
|
|
536.7
|
|
Net realized gains (losses) on securities
|
|
|
106.3
|
|
|
|
(9.7
|
)
|
|
|
(37.9
|
)
|
Service revenues
|
|
|
22.3
|
|
|
|
30.4
|
|
|
|
40.2
|
|
|
Total revenues
|
|
|
14,686.8
|
|
|
|
14,786.4
|
|
|
|
14,303.4
|
|
|
Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
Losses and loss adjustment expenses
|
|
|
9,926.2
|
|
|
|
9,394.9
|
|
|
|
9,364.8
|
|
Policy acquisition costs
|
|
|
1,399.9
|
|
|
|
1,441.9
|
|
|
|
1,448.2
|
|
Other underwriting expenses
|
|
|
1,526.2
|
|
|
|
1,402.8
|
|
|
|
1,312.2
|
|
Investment expenses
|
|
|
12.4
|
|
|
|
11.9
|
|
|
|
12.1
|
|
Service expenses
|
|
|
20.5
|
|
|
|
24.4
|
|
|
|
24.6
|
|
Interest expense
|
|
|
108.6
|
|
|
|
77.3
|
|
|
|
82.6
|
|
|
Total expenses
|
|
|
12,993.8
|
|
|
|
12,353.2
|
|
|
|
12,244.5
|
|
|
Net Income
|
|
|
|
|
|
|
|
|
|
|
|
|
Income before income taxes
|
|
|
1,693.0
|
|
|
|
2,433.2
|
|
|
|
2,058.9
|
|
Provision for income taxes
|
|
|
510.5
|
|
|
|
785.7
|
|
|
|
665.0
|
|
|
Net income
|
|
$
|
1,182.5
|
|
|
$
|
1,647.5
|
|
|
$
|
1,393.9
|
|
|
|
|
|
Computation of Earnings Per Share
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic:
|
|
|
|
|
|
|
|
|
|
|
|
|
Average shares outstanding
|
|
|
710.4
|
|
|
|
774.3
|
|
|
|
787.7
|
|
|
|
|
|
Per share
|
|
$
|
1.66
|
|
|
$
|
2.13
|
|
|
$
|
1.77
|
|
|
|
|
|
Diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
Average shares outstanding
|
|
|
710.4
|
|
|
|
774.3
|
|
|
|
787.7
|
|
Net effect of dilutive stock-based compensation
|
|
|
8.1
|
|
|
|
9.5
|
|
|
|
11.6
|
|
|
Total equivalent shares
|
|
|
718.5
|
|
|
|
783.8
|
|
|
|
799.3
|
|
|
|
|
|
Per share
|
|
$
|
1.65
|
|
|
$
|
2.10
|
|
|
$
|
1.74
|
|
|
|
|
|
All share and per share amounts were adjusted for the
May 18, 2006,
4-for-1
stock split.
See notes to consolidated financial statements.
App.-A-2
The Progressive
Corporation and Subsidiaries
Consolidated Balance Sheets
December 31,
|
|
|
|
|
|
|
|
|
(millions)
|
|
2007
|
|
|
2006
|
|
|
|
|
Assets
|
|
|
|
|
|
|
|
|
Investments - Available-for-sale, at fair value:
|
|
|
|
|
|
|
|
|
Fixed maturities (amortized cost: $9,135.6 and $9,959.6)
|
|
$
|
9,184.9
|
|
|
$
|
9,958.9
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
Preferred stocks (cost: $2,578.1 and $1,761.4)
|
|
|
2,270.3
|
|
|
|
1,781.0
|
|
Common equities (cost: $1,361.0 and $1,469.0)
|
|
|
2,327.5
|
|
|
|
2,368.1
|
|
Short-term investments (amortized cost: $382.4 and $581.0)
|
|
|
382.4
|
|
|
|
581.2
|
|
|
Total investments
|
|
|
14,165.1
|
|
|
|
14,689.2
|
|
Cash
|
|
|
5.8
|
|
|
|
5.6
|
|
Accrued investment income
|
|
|
142.1
|
|
|
|
134.4
|
|
Premiums receivable, net of allowance for doubtful accounts of
$118.1 and $122.0
|
|
|
2,395.1
|
|
|
|
2,498.2
|
|
Reinsurance recoverables, including $47.6 and $72.4 on paid
losses
|
|
|
335.1
|
|
|
|
433.8
|
|
Prepaid reinsurance premiums
|
|
|
69.8
|
|
|
|
89.5
|
|
Deferred acquisition costs
|
|
|
426.3
|
|
|
|
441.0
|
|
Income taxes
|
|
|
106.0
|
|
|
|
16.8
|
|
Property and equipment, net of accumulated depreciation of
$605.7 and $557.0
|
|
|
1,000.4
|
|
|
|
973.4
|
|
Other assets
|
|
|
197.4
|
|
|
|
200.2
|
|
|
Total assets
|
|
$
|
18,843.1
|
|
|
$
|
19,482.1
|
|
|
|
|
|
Liabilities and Shareholders Equity
|
|
|
|
|
|
|
|
|
Unearned premiums
|
|
$
|
4,210.4
|
|
|
$
|
4,335.0
|
|
Loss and loss adjustment expense reserves
|
|
|
5,942.7
|
|
|
|
5,725.0
|
|
Accounts payable, accrued expenses and other
liabilities1
|
|
|
1,580.6
|
|
|
|
1,390.0
|
|
Debt2
|
|
|
2,173.9
|
|
|
|
1,185.5
|
|
|
Total liabilities
|
|
|
13,907.6
|
|
|
|
12,635.5
|
|
|
Shareholders equity:
|
|
|
|
|
|
|
|
|
Common Shares, $1.00 par value (authorized 900.0; issued
798.1 and 798.7,
including treasury shares of 117.9 and 50.7)
|
|
|
680.2
|
|
|
|
748.0
|
|
Paid-in capital
|
|
|
834.8
|
|
|
|
847.4
|
|
Accumulated other comprehensive income:
|
|
|
|
|
|
|
|
|
Net unrealized gains on securities
|
|
|
465.0
|
|
|
|
596.8
|
|
Net unrealized gains on forecasted transactions
|
|
|
27.8
|
|
|
|
7.5
|
|
Retained earnings
|
|
|
2,927.7
|
|
|
|
4,646.9
|
|
|
Total shareholders equity
|
|
|
4,935.5
|
|
|
|
6,846.6
|
|
|
Total liabilities and shareholders equity
|
|
$
|
18,843.1
|
|
|
$
|
19,482.1
|
|
|
|
|
|
1See
Note 11 Litigation and
Note 12 Commitments and Contingencies for
further discussion.
2Consists
of long-term debt. See Note 4 Debt for
further discussion.
See notes to consolidated financial statements.
App.-A-3
The Progressive
Corporation and Subsidiaries
Consolidated Statements of Changes in Shareholders
Equity
For the years ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(millions except per share amounts)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
Retained Earnings
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, Beginning of year
|
|
$
|
4,646.9
|
|
|
|
|
|
|
$
|
4,726.0
|
|
|
|
|
|
|
$
|
3,812.9
|
|
|
|
|
|
Net income
|
|
|
1,182.5
|
|
|
$
|
1,182.5
|
|
|
|
1,647.5
|
|
|
$
|
1,647.5
|
|
|
|
1,393.9
|
|
|
$
|
1,393.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash dividends declared on Common Shares ($2.1450, $.0325 and
$.0300 per
share)1
|
|
|
(1,507.6
|
)
|
|
|
|
|
|
|
(25.0
|
)
|
|
|
|
|
|
|
(23.7
|
)
|
|
|
|
|
Treasury shares
purchased2
|
|
|
(1,388.4
|
)
|
|
|
|
|
|
|
(1,111.6
|
)
|
|
|
|
|
|
|
(457.0
|
)
|
|
|
|
|
Capitalization of stock split
|
|
|
|
|
|
|
|
|
|
|
(585.9
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Other,
net3
|
|
|
(5.7
|
)
|
|
|
|
|
|
|
(4.1
|
)
|
|
|
|
|
|
|
(.1
|
)
|
|
|
|
|
|
Balance, End of year
|
|
$
|
2,927.7
|
|
|
|
|
|
|
$
|
4,646.9
|
|
|
|
|
|
|
$
|
4,726.0
|
|
|
|
|
|
|
Accumulated Other Comprehensive Income (Loss), Net of Tax
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, Beginning of year
|
|
$
|
604.3
|
|
|
|
|
|
|
$
|
398.7
|
|
|
|
|
|
|
$
|
444.8
|
|
|
|
|
|
Changes in:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net unrealized gains on securities
|
|
|
|
|
|
|
(131.8
|
)
|
|
|
|
|
|
|
206.7
|
|
|
|
|
|
|
|
(45.0
|
)
|
Net unrealized gains on forecasted transactions
|
|
|
|
|
|
|
20.3
|
|
|
|
|
|
|
|
(1.1
|
)
|
|
|
|
|
|
|
(1.1
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income
|
|
|
(111.5
|
)
|
|
|
(111.5
|
)
|
|
|
205.6
|
|
|
|
205.6
|
|
|
|
(46.1
|
)
|
|
|
(46.1
|
)
|
|
Balance, End of year
|
|
$
|
492.8
|
|
|
|
|
|
|
$
|
604.3
|
|
|
|
|
|
|
$
|
398.7
|
|
|
|
|
|
|
Comprehensive Income
|
|
|
|
|
|
$
|
1,071.0
|
|
|
|
|
|
|
$
|
1,853.1
|
|
|
|
|
|
|
$
|
1,347.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common Shares, $1.00 Par Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, Beginning of year
|
|
$
|
748.0
|
|
|
|
|
|
|
$
|
197.3
|
|
|
|
|
|
|
$
|
200.4
|
|
|
|
|
|
Stock options exercised
|
|
|
3.4
|
|
|
|
|
|
|
|
3.7
|
|
|
|
|
|
|
|
1.6
|
|
|
|
|
|
Treasury shares
purchased2
|
|
|
(72.9
|
)
|
|
|
|
|
|
|
(39.1
|
)
|
|
|
|
|
|
|
(5.2
|
)
|
|
|
|
|
Restricted stock issued, net of forfeitures
|
|
|
1.7
|
|
|
|
|
|
|
|
.2
|
|
|
|
|
|
|
|
.5
|
|
|
|
|
|
Capitalization of stock split
|
|
|
|
|
|
|
|
|
|
|
585.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, End of year
|
|
$
|
680.2
|
|
|
|
|
|
|
$
|
748.0
|
|
|
|
|
|
|
$
|
197.3
|
|
|
|
|
|
|
Paid-In Capital
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, Beginning of year
|
|
$
|
847.4
|
|
|
|
|
|
|
$
|
848.2
|
|
|
|
|
|
|
$
|
743.3
|
|
|
|
|
|
Stock options exercised
|
|
|
27.4
|
|
|
|
|
|
|
|
39.6
|
|
|
|
|
|
|
|
42.6
|
|
|
|
|
|
Tax benefits from exercise/vesting of stock-based compensation
|
|
|
15.5
|
|
|
|
|
|
|
|
38.8
|
|
|
|
|
|
|
|
41.2
|
|
|
|
|
|
Treasury shares
purchased2
|
|
|
(87.1
|
)
|
|
|
|
|
|
|
(63.8
|
)
|
|
|
|
|
|
|
(20.6
|
)
|
|
|
|
|
Restricted stock issued, net of forfeitures
|
|
|
(1.7
|
)
|
|
|
|
|
|
|
(.2
|
)
|
|
|
|
|
|
|
41.7
|
|
|
|
|
|
Amortization of stock-based compensation
|
|
|
28.0
|
|
|
|
|
|
|
|
27.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SFAS 123(R)
reclass4
|
|
|
|
|
|
|
|
|
|
|
(51.5
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Other3
|
|
|
5.3
|
|
|
|
|
|
|
|
8.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, End of year
|
|
$
|
834.8
|
|
|
|
|
|
|
$
|
847.4
|
|
|
|
|
|
|
$
|
848.2
|
|
|
|
|
|
|
Unamortized Restricted Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, Beginning of year
|
|
$
|
|
|
|
|
|
|
|
$
|
(62.7
|
)
|
|
|
|
|
|
$
|
(46.0
|
)
|
|
|
|
|
Restricted stock issued, net of forfeitures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(42.2
|
)
|
|
|
|
|
Restricted stock market value adjustment
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8.2
|
)
|
|
|
|
|
Amortization of restricted stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33.7
|
|
|
|
|
|
SFAS 123(R)
reclass4
|
|
|
|
|
|
|
|
|
|
|
62.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, End of year
|
|
$
|
|
|
|
|
|
|
|
$
|
|
|
|
|
|
|
|
$
|
(62.7
|
)
|
|
|
|
|
|
Total Shareholders Equity
|
|
$
|
4,935.5
|
|
|
|
|
|
|
$
|
6,846.6
|
|
|
|
|
|
|
$
|
6,107.5
|
|
|
|
|
|
|
|
|
|
1All
per share amounts were adjusted for the May 18, 2006,
4-for-1
stock split.
2Progressive
did not split its treasury shares in conjunction with the
May 18, 2006,
4-for-1
stock split. In 2006, we repurchased 3,182,497 common shares
prior to the stock split and 35,887,246 common shares subsequent
to the stock split.
3Primarily
reflects activity associated with our deferred compensation
plans.
|
|
4 |
Upon adoption of SFAS 123(R), companies were required to
eliminate any unearned compensation (i.e., contra-equity)
accounts against the appropriate equity accounts. As a result,
as of January 1, 2006, we were required to reclassify
$62.7 million of Unamortized restricted stock,
of which $51.5 million related to equity awards and
$11.2 million related to liability awards.
|
There are 20.0 million Serial Preferred Shares authorized;
no such shares are issued or outstanding.
There are 5.0 million Voting Preference Shares authorized;
no such shares have been issued.
See notes to consolidated financial statements.
App.-A-4
The Progressive
Corporation and Subsidiaries
Consolidated Statements of Cash Flows
For the years ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
(millions)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
Cash Flows From Operating Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
1,182.5
|
|
|
$
|
1,647.5
|
|
|
$
|
1,393.9
|
|
Adjustments to reconcile net income to net cash provided by
operating activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
106.9
|
|
|
|
103.4
|
|
|
|
92.4
|
|
Amortization of fixed maturities
|
|
|
284.1
|
|
|
|
225.6
|
|
|
|
189.6
|
|
Amortization of stock-based compensation
|
|
|
26.5
|
|
|
|
27.6
|
|
|
|
33.7
|
|
Net realized (gains) losses on securities
|
|
|
(106.3
|
)
|
|
|
9.7
|
|
|
|
37.9
|
|
Net loss on disposition of property and equipment
|
|
|
.4
|
|
|
|
.9
|
|
|
|
|
|
Changes in:
|
|
|
|
|
|
|
|
|
|
|
|
|
Premiums receivable
|
|
|
103.1
|
|
|
|
2.5
|
|
|
|
(213.5
|
)
|
Reinsurance recoverables
|
|
|
98.7
|
|
|
|
(28.1
|
)
|
|
|
(24.1
|
)
|
Prepaid reinsurance premiums
|
|
|
19.7
|
|
|
|
14.2
|
|
|
|
16.1
|
|
Deferred acquisition costs
|
|
|
14.7
|
|
|
|
3.8
|
|
|
|
(12.6
|
)
|
Income taxes
|
|
|
(30.3
|
)
|
|
|
10.1
|
|
|
|
(140.0
|
)
|
Unearned premiums
|
|
|
(124.6
|
)
|
|
|
(.1
|
)
|
|
|
227.1
|
|
Loss and loss adjustment expense reserves
|
|
|
217.7
|
|
|
|
64.7
|
|
|
|
374.7
|
|
Accounts payable, accrued expenses and other liabilities
|
|
|
2.4
|
|
|
|
7.1
|
|
|
|
49.5
|
|
Tax benefits from exercise/vesting of stock-based
compensation1
|
|
|
|
|
|
|
|
|
|
|
41.2
|
|
Other, net
|
|
|
(4.5
|
)
|
|
|
(64.3
|
)
|
|
|
(71.9
|
)
|
|
Net cash provided by operating activities
|
|
|
1,791.0
|
|
|
|
2,024.6
|
|
|
|
1,994.0
|
|
|
Cash Flows From Investing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities
|
|
|
(8,184.6
|
)
|
|
|
(6,294.9
|
)
|
|
|
(9,154.4
|
)
|
Equity securities
|
|
|
(1,490.3
|
)
|
|
|
(1,131.6
|
)
|
|
|
(852.9
|
)
|
Short-term investments auction rate securities
|
|
|
(7,156.6
|
)
|
|
|
(2,999.3
|
)
|
|
|
(7,935.3
|
)
|
Sales:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities
|
|
|
8,327.6
|
|
|
|
5,668.2
|
|
|
|
7,068.6
|
|
Equity securities
|
|
|
775.2
|
|
|
|
323.1
|
|
|
|
152.3
|
|
Short-term investments auction rate securities
|
|
|
7,325.4
|
|
|
|
3,215.5
|
|
|
|
8,053.4
|
|
Maturities, paydowns, calls and other:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities
|
|
|
557.9
|
|
|
|
686.1
|
|
|
|
572.6
|
|
Equity securities
|
|
|
10.7
|
|
|
|
223.5
|
|
|
|
114.4
|
|
Net sales (purchases) of short-term investments other
|
|
|
30.0
|
|
|
|
(22.3
|
)
|
|
|
491.8
|
|
Net unsettled security transactions
|
|
|
35.1
|
|
|
|
(116.6
|
)
|
|
|
126.6
|
|
Purchases of property and equipment
|
|
|
(136.3
|
)
|
|
|
(334.3
|
)
|
|
|
(219.3
|
)
|
Sale of property and equipment
|
|
|
2.0
|
|
|
|
15.4
|
|
|
|
36.1
|
|
|
Net cash provided by (used in) investing activities
|
|
|
96.1
|
|
|
|
(767.2
|
)
|
|
|
(1,546.1
|
)
|
|
Cash Flows From Financing Activities
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from exercise of stock options
|
|
|
30.8
|
|
|
|
43.3
|
|
|
|
44.2
|
|
Tax benefits from exercise/vesting of stock-based
compensation1
|
|
|
15.5
|
|
|
|
38.8
|
|
|
|
|
|
Proceeds from
debt2
|
|
|
1,021.7
|
|
|
|
|
|
|
|
|
|
Payment of debt
|
|
|
|
|
|
|
(100.0
|
)
|
|
|
|
|
Dividends paid to shareholders
|
|
|
(1,406.5
|
)
|
|
|
(25.0
|
)
|
|
|
(23.7
|
)
|
Acquisition of treasury shares
|
|
|
(1,548.4
|
)
|
|
|
(1,214.5
|
)
|
|
|
(482.8
|
)
|
|
Net cash used in financing activities
|
|
|
(1,886.9
|
)
|
|
|
(1,257.4
|
)
|
|
|
(462.3
|
)
|
|
Increase (decrease) in cash
|
|
|
.2
|
|
|
|
|
|
|
|
(14.4
|
)
|
Cash, Beginning of year
|
|
|
5.6
|
|
|
|
5.6
|
|
|
|
20.0
|
|
|
Cash, End of year
|
|
$
|
5.8
|
|
|
$
|
5.6
|
|
|
$
|
5.6
|
|
|
|
|
|
1Reclassified
as required under SFAS 123(R).
2Includes
a $34.4 million pretax gain received upon closing a
forecasted debt issuance hedge. See Note 4
Debt for further discussion.
See notes to consolidated financial statements.
App.-A-5
The Progressive Corporation and
Subsidiaries
Notes to Consolidated Financial Statements
December 31, 2007, 2006 and
2005
1. REPORTING
AND ACCOUNTING POLICIES
Nature of Operations The Progressive Corporation,
an insurance holding company formed in 1965, owned 64
subsidiaries and had 1 mutual insurance company affiliate as of
December 31, 2007. Our insurance subsidiaries provide
personal and commercial automobile insurance and other specialty
property-casualty insurance and related services throughout the
United States. Our Personal Lines segment writes insurance for
private passenger automobiles and recreational vehicles through
both an independent insurance agency channel and a direct
channel. Our Commercial Auto segment writes primary liability
and physical damage insurance for automobiles and trucks owned
by small businesses through both the independent agency and
direct channels.
Basis of Consolidation and Reporting The
accompanying consolidated financial statements include the
accounts of The Progressive Corporation, its subsidiaries and
affiliate. All of the subsidiaries and the mutual company
affiliate are wholly owned or controlled. We achieve control of
our mutual company affiliate through a 100% reinsurance contract
and a management service contract between a wholly-owned
insurance subsidiary and such affiliate. All intercompany
accounts and transactions are eliminated in consolidation.
Estimates We are required to make estimates and
assumptions when preparing our financial statements and
accompanying notes in conformity with accounting principles
generally accepted in the United States of America (GAAP). As
estimates develop into fact (e.g., losses are paid), results
may, and will likely, differ from those estimates.
Investments Progressives fixed-maturity,
equity securities and short-term investments are accounted for
on an available-for-sale basis.
Fixed-maturity securities include debt securities and redeemable
preferred stocks, which may have fixed or variable principal
payment schedules, may be held for indefinite periods of time,
and may be used as a part of our asset/liability strategy or
sold in response to changes in interest rates, anticipated
prepayments, risk/reward characteristics, liquidity needs or
other economic factors. These securities are carried at fair
value with the corresponding unrealized gains (losses), net of
deferred income taxes, reported in accumulated other
comprehensive income. Fair values are obtained from recognized
pricing services or other quoted sources. The asset-backed
portfolio is accounted for under the retrospective method;
prepayment assumptions are based on market expectations. The
prospective method is used for interest-only and
non-investment-grade asset-backed securities.
Equity securities include common stocks, nonredeemable preferred
stocks and other risk investments and are reported at quoted
fair values. Changes in fair value of these securities, net of
deferred income taxes, are reflected as unrealized gains
(losses) in accumulated other comprehensive income. Changes in
value of foreign equities due to foreign currency exchange rates
would be limited by foreign currency hedges, if any, and would
be recognized in income in the current period. We held no
foreign equities or foreign currency hedges during 2007 or 2006.
Short-term investments include auction rate securities (i.e.,
certain municipal bonds and preferred stocks). Due to the nature
of auction rate securities, these securities are classified as
short-term based upon their expected auction date (generally
7-49 days) rather than on their contractual obligation
(which are greater than one year at original issuance). We held
no auction rate securities at December 31, 2007. In
addition to auction rate securities, short-term investments
include Eurodollar deposits, commercial paper and other
securities expected to mature within one year. Changes in fair
value of these securities, net of deferred income taxes, are
reflected as unrealized gains (losses) in accumulated other
comprehensive income.
We did not hold any trading securities at December 31, 2007
or 2006. Trading securities are securities bought principally
for the purpose of sale in the near term. To the extent we have
trading securities, changes in fair value would be recognized in
income in the current period. Derivative instruments which may
be used for trading purposes or classified as trading
derivatives due to the characteristics of the transaction are
discussed below.
Derivative instruments may include futures, options, forward
positions, foreign currency forwards, interest rate swap
agreements and credit default swaps and may be used in the
portfolio for general investment purposes or to hedge the
exposure to:
|
|
|
Changes in fair value of an asset or liability (fair value
hedge);
|
App.-A-6
|
|
|
Foreign currency of an investment in a foreign operation
(foreign currency hedge); or
|
|
|
Variable cash flows of a forecasted transaction (cash flow
hedge).
|
To the extent we have derivatives held or issued for general
investment purposes, these derivative instruments are recognized
as either assets or liabilities and measured at fair value with
changes in fair value recognized in income as a component of net
realized gains (losses) on securities during the period of
change. At December 31, 2007, we held one credit default
swap position and two interest rate swap positions, compared to
one credit default swap position at December 31, 2006.
Derivatives designated as hedges are required to be evaluated on
established criteria to determine the effectiveness of their
correlation to, and ability to reduce the designated risk of
specific securities or transactions. Effectiveness is required
to be reassessed regularly. Hedges that are deemed to be
effective would be accounted for as follows:
|
|
|
Fair value hedge: changes in fair value of the
hedge, as well as the hedged item, would be recognized in income
in the period of change while the hedge was in effect.
|
|
|
Foreign currency hedge: changes in fair value
of the hedge, as well as the hedged item, would be reflected as
a change in translation adjustment as part of accumulated other
comprehensive income. Gains and losses on the foreign currency
hedge would offset the foreign exchange gains and losses on the
foreign investment as they are recognized into income.
|
|
|
Cash flow hedge: changes in fair value of the
hedge would be reported as a component of accumulated other
comprehensive income and subsequently amortized into earnings
over the life of the hedged transaction.
|
If a hedge is deemed to become ineffective, it would be
accounted for as follows:
|
|
|
Fair value hedge: the derivative instrument
would continue to be adjusted through income, while the
adjustment in the change in value of the hedged item would be
reflected as a change in unrealized gains (losses) as part of
accumulated other comprehensive income.
|
|
|
Foreign currency hedge: changes in the value
of the hedged item would continue to be reflected as a change in
translation adjustment as part of accumulated other
comprehensive income, but the derivative instrument would be
adjusted through income for the current period.
|
|
|
Cash flow hedge: changes in fair value of the
derivative instrument would be reported in income for the
current period.
|
We had no fair value or foreign currency hedges during 2007 or
2006. During May 2007, we entered into a forecasted debt
issuance hedge (cash flow hedge) that was deemed effective to
hedge against possible rises in interest rates in conjunction
with the prospective issuance of our debentures in June 2007
(see Note 4 Debt for further
discussion); we had no cash flow hedges in 2006.
For all derivative positions, net cash requirements are limited
to changes in fair 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;
collateral may be required to limit credit risk.
Investment securities are exposed to various risks such as
interest rate, market and credit risk. Fair values of securities
fluctuate based on the nature and magnitude of changing market
conditions; significant changes in market conditions could
materially affect the portfolios value in the near term.
We continually monitor our portfolio for price changes, which
might indicate potential impairments, and perform detailed
reviews of securities with unrealized losses based on
predetermined criteria. In such cases, changes in fair value are
evaluated to determine the extent to which such changes are
attributable to (i) fundamental factors specific to the
issuer, such as financial conditions, business prospects or
other factors, or (ii) market-related factors, such as
interest rates or equity market declines. When a security in our
investment portfolio has an unrealized loss in fair value that
is deemed to be other than temporary, we reduce the book value
of such security to its current fair value, recognizing the
decline as a realized loss in the income statement. Any future
changes in fair value, either increases or decreases, are
reflected as changes in unrealized gains (losses) as part of
accumulated other comprehensive income.
Realized gains (losses) on securities are computed based on the
first-in
first-out method and also include write-downs on
available-for-sale securities considered to have
other-than-temporary declines in fair value, as well as holding
period valuation changes on derivatives.
App.-A-7
Property and Equipment Property and equipment are
recorded at cost, less accumulated depreciation. Depreciation is
recognized over the estimated useful lives of the assets using
accelerated methods for computer equipment and the straight-line
method for all other fixed assets. The useful lives range from 3
to 4 years for computer equipment, 10 to 40 years for
buildings and improvements, and 3 to 10 years for all other
property and equipment. Land and buildings comprised 80% of
total property and equipment at both December 31, 2007 and
2006. Property and equipment include capitalized software
developed or acquired for internal use. Total interest
capitalized was $2.4 million in both 2007 and 2006, and
$1.3 million in 2005, relating to construction projects and
capitalized computer software costs.
Insurance Premiums and Receivables Insurance
premiums written are earned into income on a pro rata basis over
the period of risk, based on a daily earnings convention.
Accordingly, unearned premiums represent the portion of premiums
written that is applicable to the unexpired risk. We provide
insurance and related services to individuals and small
commercial accounts throughout the United States, and offer a
variety of payment plans. Generally, premiums are collected
prior to providing risk coverage, minimizing our exposure to
credit risk. We perform a policy level evaluation to determine
the extent to which the premiums receivable balance exceeds the
unearned premiums balance. We then age this exposure to
establish an allowance for doubtful accounts based on prior
experience.
Income Taxes The income tax provision is
calculated under the balance sheet approach. Deferred tax assets
and liabilities are recorded based on the difference between the
financial statement and tax bases of assets and liabilities at
the enacted tax rates. The principal assets and liabilities
giving rise to such differences are net unrealized gains
(losses) on securities, loss reserves, unearned premiums
reserves, deferred acquisition costs and non-deductible
accruals. We review our deferred tax assets for recoverability.
At December 31, 2007, we were able to demonstrate that the
benefit of our deferred tax assets was fully realizable and,
therefore, no valuation allowance was recorded.
Loss and Loss Adjustment Expense Reserves Loss
reserves represent the estimated liability on claims reported to
us, plus reserves for losses incurred but not recorded (IBNR).
These estimates are reported net of amounts estimated to be
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 are susceptible to
change in the near term.
Reinsurance Our reinsurance transactions primarily
include premiums written under state-mandated involuntary plans
for commercial vehicles (Commercial Auto Insurance
Procedures/Plans CAIP) and premiums
ceded to state-provided reinsurance facilities, for which we
retain no loss indemnity risk (see Note 6
Reinsurance for further discussion). We also
cede a portion of the premiums in our non-auto programs to limit
our exposure in those particular markets. Prepaid reinsurance
premiums are earned on a pro rata basis over the period of risk,
based on a daily earnings convention, which is consistent with
premiums written. Our primary line of business, auto insurance,
is written at relatively low limits of liability; as such, we do
not believe that we need to mitigate this risk through voluntary
reinsurance.
Deferred Acquisition Costs Deferred acquisition
costs include commissions, premium taxes and other variable
underwriting and direct sales costs incurred in connection with
writing business. These costs are deferred and amortized over
the policy period in which the related premiums are earned. We
consider anticipated investment income in determining the
recoverability of these costs. Management believes that these
costs will be fully recoverable in the near term. We do not
defer any direct-response advertising costs.
Guaranty Fund Assessments We are subject to
state guaranty fund assessments, which provide for the payment
of covered claims or other insurance obligations of insurance
companies deemed insolvent. These assessments are accrued after
a formal determination of insolvency has occurred, and we have
written the premiums on which the assessments will be based.
Service Revenues and Expenses Our service
businesses provide insurance-related services. Service revenues
consist primarily of fees generated from processing business for
involuntary CAIP plans and are earned on a pro rata basis over
the term of the related policies. Service expenses include
acquisition expenses for the involuntary plans, which are
deferred and amortized over the period in which the related
revenues are earned, and costs associated with our other service
products.
Stock-Based Compensation As of January 1,
2006, we adopted the provisions of Statement of Financial
Accounting Standards 123 (revised 2004), Share-Based
Payment (SFAS 123(R)), which requires the measurement
and recognition of compensation expense for all share-based
payment awards made to employees and directors, using the
modified prospective method. As a result, our consolidated
financial statements for the year ended December 31, 2006,
reflected
App.-A-8
the effect of SFAS 123(R), including the reclassification
of any unamortized restricted stock (i.e., unearned
compensation) against paid-in capital for restricted stock
awards accounted for as equity awards and against
other liabilities for the restricted stock awards accounted for
as liability awards (i.e., 2003 and 2004 restricted
stock awards deferred pursuant to our deferred compensation
plans). In accordance with the modified prospective transition
method, our consolidated financial statements for prior periods
have not been restated to reflect, and do not include, the
effect of SFAS 123(R).
Pursuant to the modified prospective application, we were
required to expense the fair value at the grant date of our
unvested outstanding stock options. No stock options have been
granted after December 31, 2002. We did not incur any
additional expense relating to currently outstanding stock
options subsequent to 2006, since the final vesting date of
stock options previously granted was January 1, 2007.
Beginning in 2003, we began issuing restricted stock awards as
our form of equity compensation to key members of management and
non-employee directors in lieu of stock options; our current
equity compensation program does not contemplate the issuance of
stock options. Compensation expense for restricted stock awards
is recognized over the respective vesting periods. Beginning in
2007, the expense for restricted stock is representative of the
effect on net income for future periods.
For the years ended December 31, 2007 and 2006, the pretax
expense of our stock-based compensation was $26.5 million
and $27.6 million, respectively, (tax benefit of
$9.3 million and $9.7 million), of which
$1.3 million of the 2006 expense related to our unvested
outstanding stock options. The following table shows the effects
on net income and earnings per share for prior periods had the
fair value based method been applied to all outstanding and
unvested stock option awards for the year ended
December 31, 2005. We used a modified Black-Scholes pricing
model to calculate the fair value of the options awarded as of
the date of grant.
|
|
|
|
|
(millions, except per share amounts)
|
|
2005
|
|
|
|
|
Net income, as reported
|
|
$
|
1,393.9
|
|
Deduct: Total stock-based employee compensation expense
determined under the fair value based method for all stock
option awards, net of related tax effects
|
|
|
(2.6
|
)
|
|
Net income, pro forma
|
|
$
|
1,391.3
|
|
|
|
|
|
|
|
Earnings per share
|
|
|
|
|
Basic as reported
|
|
$
|
1.77
|
|
Basic pro forma
|
|
|
1.77
|
|
Diluted as reported
|
|
$
|
1.74
|
|
Diluted pro forma
|
|
|
1.74
|
|
In addition, in conjunction with the Financial Accounting
Standards Board (FASB) Staff Position
No. FAS 123(R)-3, Transition Election Related to
Accounting for Tax Effects of Share-Based Payment Awards,
we elected to adopt the alternative transition method for
calculating the tax effects of stock-based compensation pursuant
to SFAS 123(R). The alternative transition method includes
simplified methods to establish the beginning balance of the
additional paid-in capital pool related to the tax effects of
employee stock-based compensation, and to determine the
subsequent effect on the paid-in capital pool and the
consolidated statements of cash flows of the tax effects of
employee stock-based compensation awards that were outstanding
upon the adoption of SFAS 123(R).
In 2006, under SFAS 123(R), we began to record an estimate
for expected forfeitures of restricted stock based on our
historical forfeiture rates. Prior to adoption, we accounted for
forfeitures as they occurred, as permitted under accounting
standards then in effect. In addition, we shortened the vesting
periods of certain stock-based awards based on the
qualified retirement provisions in our incentive
compensation plans, under which (among other provisions) the
vesting of 50% of outstanding time-based restricted stock awards
will accelerate upon retirement if the participant is
55 years of age or older and satisfies certain
years-of-service requirements. The cumulative effect of adopting
these changes under SFAS 123(R) was not material to our
financial condition, cash flows or results of operations for the
year ended December 31, 2006.
Earnings Per Share Basic earnings per share are
computed using the weighted average number of common shares
outstanding, excluding both time-based and performance-based
unvested restricted stock awards. Diluted earnings per share
include common stock equivalents assumed outstanding during the
period. Our common stock equivalents include stock options and
time-based restricted stock awards accounted for as equity
awards. In determining the denominator for our diluted earnings
per share, we include the impact of pro forma deferred tax
assets pursuant to the alternative transition method under
SFAS 123(R) for purposes of calculating assumed proceeds
under the treasury stock method.
App.-A-9
Supplemental Cash Flow Information Cash includes
only bank demand deposits. We paid income taxes of
$526.0 million, $739.0 million and $767.0 million
in 2007, 2006 and 2005, respectively. Total interest paid was
$110.1 million during 2007, $81.3 million during 2006
and $85.0 million during 2005. Non-cash activity includes
declared but unpaid dividends, the liability for deferred
restricted stock compensation (prior to the adoption of
SFAS 123(R)) and the changes in net unrealized gains
(losses) on investment securities.
Progressive effected a
4-for-1
stock split in the form of a stock dividend to shareholders on
May 18, 2006. We reflected the issuance of the additional
common shares by transferring $585.9 million from retained
earnings to the common stock account. All share, per share and
equivalent share amounts and stock prices were adjusted to give
effect to the split. Treasury shares were not split.
New Accounting Standards In February 2007, the
FASB issued SFAS 159, The Fair Value Option for
Financial Assets and Financial Liabilities, which permits
entities to choose to measure certain financial assets and
financial liabilities at fair value and recognize the unrealized
gains and losses on such items in earnings. SFAS 159 is
effective for fiscal years beginning after November 15,
2007 (January 1, 2008 for calendar year companies). We do
not plan to elect the provisions of SFAS 159, and,
therefore, this pronouncement will have no impact on our
financial condition, cash flows or results of operations.
App.-A-10
The composition of the investment portfolio at December 31 was:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Total
|
|
(millions)
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
Portfolio
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government
obligations1
|
|
$
|
1,166.7
|
|
|
$
|
40.4
|
|
|
$
|
|
|
|
$
|
1,207.1
|
|
|
|
8.5
|
%
|
State and local government obligations
|
|
|
3,706.3
|
|
|
|
44.0
|
|
|
|
(5.2
|
)
|
|
|
3,745.1
|
|
|
|
26.5
|
|
Foreign government obligations
|
|
|
29.9
|
|
|
|
.3
|
|
|
|
|
|
|
|
30.2
|
|
|
|
.2
|
|
Corporate and U.S. agency debt securities
|
|
|
1,075.0
|
|
|
|
12.1
|
|
|
|
(8.7
|
)
|
|
|
1,078.4
|
|
|
|
7.6
|
|
Asset-backed securities
|
|
|
2,503.6
|
|
|
|
35.9
|
|
|
|
(27.9
|
)
|
|
|
2,511.6
|
|
|
|
17.7
|
|
Redeemable preferred stock
|
|
|
654.1
|
|
|
|
4.4
|
|
|
|
(46.0
|
)
|
|
|
612.5
|
|
|
|
4.3
|
|
|
Total fixed maturities
|
|
|
9,135.6
|
|
|
|
137.1
|
|
|
|
(87.8
|
)
|
|
|
9,184.9
|
|
|
|
64.8
|
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other short-term investments
|
|
|
382.4
|
|
|
|
|
|
|
|
|
|
|
|
382.4
|
|
|
|
2.7
|
|
Preferred
stocks2
|
|
|
2,578.1
|
|
|
|
6.0
|
|
|
|
(306.4
|
)
|
|
|
2,270.3
|
|
|
|
16.0
|
|
Common equities
|
|
|
1,361.0
|
|
|
|
986.8
|
|
|
|
(20.3
|
)
|
|
|
2,327.5
|
|
|
|
16.5
|
|
|
Total
portfolio2,
3
|
|
$
|
13,457.1
|
|
|
$
|
1,129.9
|
|
|
$
|
(414.5
|
)
|
|
$
|
14,165.1
|
|
|
|
100.0
|
%
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. government obligations
|
|
$
|
3,195.1
|
|
|
$
|
23.3
|
|
|
$
|
(15.0
|
)
|
|
$
|
3,203.4
|
|
|
|
21.8
|
%
|
State and local government obligations
|
|
|
3,124.2
|
|
|
|
18.4
|
|
|
|
(22.9
|
)
|
|
|
3,119.7
|
|
|
|
21.2
|
|
Foreign government obligations
|
|
|
29.8
|
|
|
|
.1
|
|
|
|
(.1
|
)
|
|
|
29.8
|
|
|
|
.2
|
|
Corporate and U.S. agency debt securities
|
|
|
1,125.0
|
|
|
|
5.6
|
|
|
|
(13.8
|
)
|
|
|
1,116.8
|
|
|
|
7.6
|
|
Asset-backed securities
|
|
|
2,387.4
|
|
|
|
24.0
|
|
|
|
(21.3
|
)
|
|
|
2,390.1
|
|
|
|
16.3
|
|
Redeemable preferred stock
|
|
|
98.1
|
|
|
|
3.4
|
|
|
|
(2.4
|
)
|
|
|
99.1
|
|
|
|
.7
|
|
|
Total fixed maturities
|
|
|
9,959.6
|
|
|
|
74.8
|
|
|
|
(75.5
|
)
|
|
|
9,958.9
|
|
|
|
67.8
|
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auction rate municipal obligations
|
|
|
99.4
|
|
|
|
|
|
|
|
|
|
|
|
99.4
|
|
|
|
.7
|
|
Auction rate preferred stocks
|
|
|
69.2
|
|
|
|
.2
|
|
|
|
|
|
|
|
69.4
|
|
|
|
.5
|
|
Other short-term investments
|
|
|
412.4
|
|
|
|
|
|
|
|
|
|
|
|
412.4
|
|
|
|
2.8
|
|
|
Total short-term investments
|
|
|
581.0
|
|
|
|
.2
|
|
|
|
|
|
|
|
581.2
|
|
|
|
4.0
|
|
|
Preferred stocks
|
|
|
1,761.4
|
|
|
|
31.5
|
|
|
|
(11.9
|
)
|
|
|
1,781.0
|
|
|
|
12.1
|
|
Common equities
|
|
|
1,469.0
|
|
|
|
904.0
|
|
|
|
(4.9
|
)
|
|
|
2,368.1
|
|
|
|
16.1
|
|
|
Total
portfolio3
|
|
$
|
13,771.0
|
|
|
$
|
1,010.5
|
|
|
$
|
(92.3
|
)
|
|
$
|
14,689.2
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
1
|
Includes $53.8 million of gains on our open interest rate
swap positions. Also includes $34.1 million of collateral,
in the form of Treasury Notes that were delivered to the
counterparty on our open credit default swaps. See the
Derivative Instruments section below for further
discussion.
|
|
2
|
At December 31, 2007, the fair value included a
$7.4 million change in certain hybrid securities that was
recognized as a realized loss.
|
3Includes
net unsettled security acquisitions of $77.0 million and
$41.9 million at December 31, 2007 and 2006,
respectively.
Our fixed-maturity securities include debt securities and
redeemable preferred stocks. The preferred stock portfolio
includes nonredeemable preferred stocks, which contain certain
securities that have call features with fixed-rate coupons
(i.e., hybrid securities), whereby the change in value of the
call features is a component of the overall change in value of
the preferred stocks. Other short-term investments include
Eurodollar deposits, commercial paper and other investments
which are expected to mature within one year. Common equities
include common stock and other risk investments.
Our securities are reported at fair value, with the changes in
fair value of these securities (other than hybrid securities)
reported as a component of accumulated other comprehensive
income, net of deferred income taxes. The change in fair value
of the hybrid securities discussed above is recorded as a
component of net realized gains (losses) on securities. See
Note 10-Other Comprehensive Income for changes in
net unrealized gains (losses) during the period.
App.-A-11
At December 31, 2007, bonds in the principal amount of
$121.5 million were on deposit to meet state insurance
regulatory
and/or
rating agency requirements. We did not have any securities of
any one issuer with an aggregate cost or fair value exceeding
10% of total shareholders equity at December 31, 2007
or 2006. At December 31, 2007, we had fixed-maturity
securities with a fair value of $1.1 million that were
non-income producing during the preceding 12 months.
Net Investment Income The components of net
investment income for the years ended December 31 were:
|
|
|
|
|
|
|
|
|
|
|
|
|
(millions)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
Fixed maturities
|
|
$
|
478.6
|
|
|
$
|
481.7
|
|
|
$
|
399.0
|
|
Preferred stocks
|
|
|
126.9
|
|
|
|
84.4
|
|
|
|
61.5
|
|
Common equities
|
|
|
46.2
|
|
|
|
43.1
|
|
|
|
37.2
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Auction rate municipal obligations
|
|
|
2.6
|
|
|
|
1.8
|
|
|
|
5.4
|
|
Auction rate preferred stocks
|
|
|
.8
|
|
|
|
5.8
|
|
|
|
6.8
|
|
Other short-term investments
|
|
|
25.7
|
|
|
|
31.0
|
|
|
|
26.8
|
|
|
Investment income
|
|
|
680.8
|
|
|
|
647.8
|
|
|
|
536.7
|
|
Investment expenses
|
|
|
(12.4
|
)
|
|
|
(11.9
|
)
|
|
|
(12.1
|
)
|
|
Net investment income
|
|
$
|
668.4
|
|
|
$
|
635.9
|
|
|
$
|
524.6
|
|
|
|
|
|
Net Realized Gains (Losses) The components of net
realized gains (losses) for the years ended December 31 were:
|
|
|
|
|
|
|
|
|
|
|
|
|
(millions)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
Fixed maturities
|
|
$
|
113.3
|
|
|
$
|
37.9
|
|
|
$
|
47.4
|
|
Preferred stocks
|
|
|
3.1
|
|
|
|
.6
|
|
|
|
|
|
Common equities
|
|
|
55.4
|
|
|
|
24.7
|
|
|
|
15.6
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Auction rate municipal obligations
|
|
|
.1
|
|
|
|
.1
|
|
|
|
.1
|
|
Derivatives
|
|
|
63.1
|
|
|
|
10.0
|
|
|
|
|
|
|
Total gross realized gains
|
|
|
235.0
|
|
|
|
73.3
|
|
|
|
63.1
|
|
|
Fixed maturities
|
|
|
(23.6
|
)
|
|
|
(62.4
|
)
|
|
|
(68.6
|
)
|
Preferred stocks
|
|
|
(28.0
|
)
|
|
|
(11.1
|
)
|
|
|
(2.3
|
)
|
Common equities
|
|
|
(33.7
|
)
|
|
|
(9.2
|
)
|
|
|
(22.5
|
)
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Auction rate municipal obligations
|
|
|
|
|
|
|
(.1
|
)
|
|
|
|
|
Auction rate preferred stocks
|
|
|
|
|
|
|
(.2
|
)
|
|
|
|
|
Derivatives
|
|
|
(43.4
|
)
|
|
|
|
|
|
|
(7.6
|
)
|
|
Total gross realized losses
|
|
|
(128.7
|
)
|
|
|
(83.0
|
)
|
|
|
(101.0
|
)
|
|
Fixed maturities
|
|
|
89.7
|
|
|
|
(24.5
|
)
|
|
|
(21.2
|
)
|
Preferred stocks
|
|
|
(24.9
|
)
|
|
|
(10.5
|
)
|
|
|
(2.3
|
)
|
Common equities
|
|
|
21.7
|
|
|
|
15.5
|
|
|
|
(6.9
|
)
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Auction rate municipal obligations
|
|
|
.1
|
|
|
|
|
|
|
|
.1
|
|
Auction rate preferred stocks
|
|
|
|
|
|
|
(.2
|
)
|
|
|
|
|
Derivatives
|
|
|
19.7
|
|
|
|
10.0
|
|
|
|
(7.6
|
)
|
|
Total net realized gains (losses) on securities
|
|
$
|
106.3
|
|
|
$
|
(9.7
|
)
|
|
$
|
(37.9
|
)
|
|
|
|
|
Per share (diluted basis)
|
|
$
|
.10
|
|
|
$
|
(.01
|
)
|
|
$
|
(.03
|
)
|
|
|
|
|
App.-A-12
For 2007, 2006 and 2005, net realized gains (losses) on
securities include $19.6 million, $1.9 million and
$16.4 million, respectively, of write-downs in securities
determined to have had an other-than-temporary decline in fair
value for securities held at December 31.
Gross Unrealized Losses The components of gross
unrealized losses at December 31, 2007 and 2006 were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
Unrealized Losses
|
|
|
|
Fair
|
|
|
|
|
|
Less than 12
|
|
|
12 Months or
|
|
(millions)
|
|
Value
|
|
|
Total
|
|
|
Months
|
|
|
Greater1
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities
|
|
$
|
2,509.3
|
|
|
$
|
(87.8
|
)
|
|
$
|
(51.4
|
)
|
|
$
|
(36.4
|
)
|
Preferred stocks
|
|
|
1,975.3
|
|
|
|
(306.4
|
)
|
|
|
(245.3
|
)
|
|
|
(61.1
|
)
|
Common equities
|
|
|
160.5
|
|
|
|
(20.3
|
)
|
|
|
(18.3
|
)
|
|
|
(2.0
|
)
|
|
Total
|
|
$
|
4,645.1
|
|
|
$
|
(414.5
|
)
|
|
$
|
(315.0
|
)
|
|
$
|
(99.5
|
)
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities
|
|
$
|
6,128.4
|
|
|
$
|
(75.5
|
)
|
|
$
|
(6.7
|
)
|
|
$
|
(68.8
|
)
|
Preferred stocks
|
|
|
494.3
|
|
|
|
(11.9
|
)
|
|
|
(.4
|
)
|
|
|
(11.5
|
)
|
Common equities
|
|
|
97.2
|
|
|
|
(4.9
|
)
|
|
|
(4.3
|
)
|
|
|
(.6
|
)
|
|
Total
|
|
$
|
6,719.9
|
|
|
$
|
(92.3
|
)
|
|
$
|
(11.4
|
)
|
|
$
|
(80.9
|
)
|
|
|
|
|
|
|
1 |
The fair value for securities in an unrealized loss position for
12 months or greater was $2,038.9 million at
December 31, 2007 and $4,832.2 million at
December 31, 2006.
|
We completed a thorough review of the securities presented in
the table above and determined that none of the securities was
deemed to have any fundamental issues which would lead us to
believe that any were other-than-temporarily impaired.
Approximately two-thirds of the losses that are 12 months
or greater have had a decrease of less than 15% of their
original value; the remaining one-third experienced a
significant loss in value during the fourth quarter 2007,
reflecting the financial market disruption relating to the
sub-prime mortgage market that impacted the financial services
sector. During the fourth quarter 2007, the issuers of these
securities began efforts to stabilize their balance sheets by
raising additional capital. These issuers continue to pay
periodic dividends and we believe there is no evidence that
their liquidity is a concern. The significant increase in
unrealized losses less than one year occurred primarily during
the fourth quarter 2007. The increase was mainly in the
preferred stock portfolio and reflects the same issues discussed
above regarding the financial market disruption relating to the
sub-prime mortgage market.
We have the intent and ability to hold the fixed-maturity
securities and preferred stocks, and will do so, as long as the
securities continue to remain consistent with our investment
strategy. We may retain the common stocks to maintain
correlation to the Russell 1000 Index as long as the portfolio
and index correlation remain similar. If our strategy was to
change and these securities were determined to be
other-than-temporarily impaired, we would recognize a write-down
in accordance with our stated policy.
Trading Securities At December 31, 2007 and
2006, we did not hold any trading securities. We did not have
any net realized gains (losses) on trading securities for the
years ended December 31, 2007, 2006 and 2005.
Derivative Instruments From time to time we invest
in derivative instruments. At December 31, 2007, we held
interest rate swaps to receive fixed interest rates for
5 years and 10 years with a combined notional value of
$1.3 billion. For 2007, the interest rate swap positions
generated net realized gains, including net interest expense, of
$53.1 million. We held no interest rate swaps in 2006 or
2005. The carrying value of the derivative positions are
immaterial to our financial condition, cash flows and results of
operations and are reported as part of the available-for-sale
portfolio, with the net gain reported as a component of net
realized gains (losses) on securities.
During 2007, we closed $210 million of notional credit
default exposure on a corporate non-investment-grade index and
$40 million of notional exposure on a corporate
investment-grade index. During 2006, we held $40 million of
notional exposure on the same corporate investment-grade index.
The combined positions generated net realized gains of
$10.0 million and $.1 million for 2007 and 2006,
respectively. We held no corporate non-investment-grade or
investment-grade index derivatives in 2005. The carrying value
of the derivative positions are immaterial to our financial
condition, cash flows and results of operations and are reported
as part of the available-for-sale portfolio, with the net gain
reported as a component of net realized gains (losses) on
securities.
Additionally, during 2007, we sold credit default protection
using credit default swap derivatives on an investment-grade
asset-backed index with a credit quality of BBB-, comprised of
20 bonds in the sub-prime mortgage sector, with a
App.-A-13
notional amount of $140 million. We matched these notional
amounts with Treasury Notes with the same maturity and principal
value to cover our off-balance-sheet exposure. During 2006, we
closed our credit default protection derivatives sold on four
separate corporate issuers which were also matched with
equivalent Treasury Notes. The combined positions generated a
net gain (loss) of $(43.4) million in 2007, compared to
$9.9 million and $(7.6) million for 2006 and 2005,
respectively. The carrying value of the derivative and Treasury
positions are immaterial to our financial condition, cash flows
and results of operations and are reported as part of the
available-for-sale portfolio, with the net gain reported as a
component of net realized gains (losses) on securities.
Fixed Maturities The composition of fixed
maturities by maturity at December 31, 2007, was:
|
|
|
|
|
|
|
|
|
(millions)
|
|
Cost
|
|
|
Fair Value
|
|
|
|
|
Less than one year
|
|
$
|
527.1
|
|
|
$
|
529.0
|
|
One to five years
|
|
|
5,723.3
|
|
|
|
5,750.6
|
|
Five to ten years
|
|
|
2,678.8
|
|
|
|
2,701.0
|
|
Ten years or greater
|
|
|
152.6
|
|
|
|
150.5
|
|
|
Total
|
|
$
|
9,081.8
|
|
|
$
|
9,131.1
|
|
|
|
|
|
The table above excludes $53.8 million of gains on open
interest rate swap positions.
Asset-backed securities are classified in the maturity
distribution table based upon their projected cash flows. All
other securities which do not have a single maturity date are
reported at expected average maturity. Contractual maturities
may differ from expected maturities because the issuers of the
securities may have the right to call or prepay obligations.
The components of our income tax provision were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(millions)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
Current tax provision
|
|
$
|
503.7
|
|
|
$
|
798.6
|
|
|
$
|
696.7
|
|
Deferred tax expense (benefit)
|
|
|
6.8
|
|
|
|
(12.9
|
)
|
|
|
(31.7
|
)
|
|
Total income tax provision
|
|
$
|
510.5
|
|
|
$
|
785.7
|
|
|
$
|
665.0
|
|
|
|
|
|
The provision for income taxes in the accompanying consolidated
statements of income differed from the statutory rate as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
Income before income taxes
|
|
$
|
1,693.0
|
|
|
|
|
|
|
$
|
2,433.2
|
|
|
|
|
|
|
$
|
2,058.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tax at statutory rate
|
|
$
|
592.6
|
|
|
|
35
|
%
|
|
$
|
851.6
|
|
|
|
35
|
%
|
|
$
|
720.6
|
|
|
|
35
|
%
|
|
|
|
|
Tax effect of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exempt interest income
|
|
|
(40.3
|
)
|
|
|
(3
|
)
|
|
|
(35.9
|
)
|
|
|
(2
|
)
|
|
|
(34.8
|
)
|
|
|
(2
|
)
|
|
|
|
|
Dividends received deduction
|
|
|
(35.4
|
)
|
|
|
(2
|
)
|
|
|
(27.2
|
)
|
|
|
(1
|
)
|
|
|
(22.2
|
)
|
|
|
(1
|
)
|
|
|
|
|
Other items, net
|
|
|
(6.4
|
)
|
|
|
|
|
|
|
(2.8
|
)
|
|
|
|
|
|
|
1.4
|
|
|
|
|
|
|
|
|
|
|
Total income tax provision
|
|
$
|
510.5
|
|
|
|
30
|
%
|
|
$
|
785.7
|
|
|
|
32
|
%
|
|
$
|
665.0
|
|
|
|
32
|
%
|
|
|
|
|
|
|
|
|
App.-A-14
Deferred income taxes reflect the effect 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, 2007 and 2006, the
components of the net deferred tax assets were as follows:
|
|
|
|
|
|
|
|
|
(millions)
|
|
2007
|
|
|
2006
|
|
|
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Unearned premiums reserve
|
|
$
|
293.2
|
|
|
$
|
300.7
|
|
Non-deductible accruals
|
|
|
149.7
|
|
|
|
145.8
|
|
Loss reserves
|
|
|
121.7
|
|
|
|
120.6
|
|
Write-downs on securities
|
|
|
12.7
|
|
|
|
13.9
|
|
Other
|
|
|
7.9
|
|
|
|
5.2
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Deferred acquisition costs
|
|
|
(149.2
|
)
|
|
|
(154.4
|
)
|
Net unrealized gains on securities
|
|
|
(250.4
|
)
|
|
|
(321.4
|
)
|
Hedges on forecasted transactions
|
|
|
(15.0
|
)
|
|
|
(4.0
|
)
|
Depreciable assets
|
|
|
(63.7
|
)
|
|
|
(52.4
|
)
|
Other
|
|
|
(14.7
|
)
|
|
|
(15.0
|
)
|
|
Net deferred tax assets
|
|
|
92.2
|
|
|
|
39.0
|
|
Net income taxes (payable) recoverable
|
|
|
13.8
|
|
|
|
(22.2
|
)
|
|
Income taxes
|
|
$
|
106.0
|
|
|
$
|
16.8
|
|
|
|
|
|
In July 2006, FASB Interpretation No. 48, Accounting
for Uncertainty in Income Taxes, was issued, which
provides guidance for recognizing and measuring the financial
statement impact of tax positions taken or expected to be taken
in a tax return. This interpretation was effective beginning
January 1, 2007. As of January 1, 2007, we had no
unrecognized tax benefits. We analyzed our tax positions in
accordance with this interpretation and determined that it did
not result in any changes to our uncertain tax positions. As a
result, no adjustment to January 1, 2007 retained earnings
was required.
We recognize interest and penalties, if any, related to
unrecognized tax benefits as a component of income tax expense.
As of January 1, 2007, we had not accrued any interest or
penalties related to unrecognized tax benefits.
The statute of limitations remains open with respect to our
federal income tax returns for tax years 2004 and later. The
2004 through 2006 returns are currently under examination. We
have entered into the Compliance Assurance Program (CAP) for the
2007 tax year. Under the CAP program, the Internal Revenue
Service begins its examination process for the tax year before
the tax return is filed, by examining significant transactions
and events as they occur. The goal of the CAP program is to
expedite the exam process and to reduce the level of uncertainty
regarding a taxpayers tax filing positions.
There have been no changes to our liability for unrecognized tax
benefits, interest and penalties during the year ended
December 31, 2007.
Debt at December 31 consisted of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
Carrying
|
|
|
Fair
|
|
|
Carrying
|
|
|
Fair
|
|
(millions)
|
|
Value
|
|
|
Value
|
|
|
Value
|
|
|
Value
|
|
|
|
|
6.375% Senior Notes due 2012 (issued: $350.0, December 2001)
|
|
$
|
348.6
|
|
|
$
|
367.8
|
|
|
$
|
348.3
|
|
|
$
|
365.4
|
|
7% Notes due 2013 (issued: $150.0, October 1993)
|
|
|
149.2
|
|
|
|
162.9
|
|
|
|
149.1
|
|
|
|
163.2
|
|
65/8% Senior
Notes due 2029 (issued: $300.0, March 1999)
|
|
|
294.4
|
|
|
|
311.8
|
|
|
|
294.3
|
|
|
|
325.2
|
|
6.25% Senior Notes due 2032 (issued: $400.0, November 2002)
|
|
|
393.9
|
|
|
|
397.6
|
|
|
|
393.8
|
|
|
|
414.0
|
|
6.70% Fixed-to-Floating Rate Junior Subordinated Debentures due
2067 (issued: $1,000.0, June 2007)
|
|
|
987.8
|
|
|
|
936.5
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,173.9
|
|
|
$
|
2,176.6
|
|
|
$
|
1,185.5
|
|
|
$
|
1,267.8
|
|
|
|
|
|
App.-A-15
Debt includes amounts we have borrowed and contributed to the
capital of our insurance subsidiaries or used for other business
purposes. Fair values are obtained from publicly quoted sources.
There are no restrictive financial covenants or credit rating
triggers on our debt.
Interest on all debt is payable semiannually at the stated
rates. However, the 6.70% Fixed-to-Floating Rate Junior
Subordinated Debentures due 2067 (the Debentures)
will only bear interest at this fixed annual rate through, but
excluding, June 15, 2017. Thereafter, the Debentures will
bear interest at a rate equal to the three-month LIBOR plus
2.0175%, and the interest will be payable quarterly. In
addition, subject to certain conditions, Progressive has the
right to defer the payment of interest on the Debentures for one
or more periods not exceeding ten consecutive years each. During
any such deferral period, among other conditions, interest would
continue to accrue, including interest on the deferred interest,
and we generally would not be able to declare or pay any
dividends on, or repurchase any of, our common shares.
Except for the Debentures, all principal is due at the maturity
stated in the table above. The Debentures will become due on
June 15, 2037, the scheduled maturity date, but only to the
extent that we have received sufficient net proceeds from the
sale of certain qualifying capital securities. Progressive must
use its commercially reasonable efforts, subject to certain
market disruption events, to sell enough qualifying capital
securities to permit repayment of the Debentures in full on the
scheduled maturity date or, if sufficient proceeds are not
realized from the sale of such qualifying capital securities by
such date, on each interest payment date thereafter. Any
remaining outstanding principal will be due on June 15,
2067, the final maturity date.
The 7% Notes are noncallable. The 6.375% Senior Notes,
the
65/8% Senior
Notes and the 6.25% Senior Notes (collectively,
Senior Notes) may be redeemed in whole or in part at
any time, at the option of Progressive, subject to a
make-whole provision. Subject to the Replacement
Capital Covenant discussed below, the Debentures may be
redeemed, in whole or in part, at any time: (a) prior to
June 15, 2017, at a redemption price equal to the greater
of (i) 100% of the principal amount of the Debentures being
redeemed, or (ii) a make-whole amount, in each
case plus any accrued and unpaid interest; or (b) on or
after June 15, 2017, at a redemption price equal to 100% of
the principal amount of the Debentures being redeemed, plus any
accrued and unpaid interest. In connection with the issuance of
the Debentures, Progressive entered into a Replacement Capital
Covenant in which we agreed, for the benefit of the holders of a
senior debt security, that we will not repay, redeem, defease or
purchase all or part of the Debentures before June 15,
2047, unless, subject to certain limitations, we have received
proceeds from the sale of certain replacement capital
securities, as defined in the Replacement Capital Covenant.
Prior to issuance of the Senior Notes and Debentures, we entered
into forecasted debt issuance hedges against possible rises in
interest rates. Upon issuance of the applicable debt securities,
the hedges were closed. At that time, we recognized, as part of
accumulated other comprehensive income, unrealized gains
(losses) of $18.4 million, $(4.2) million,
$5.1 million and $34.4 million associated with the
6.375% Senior Notes, the
65/8% Senior
Notes, the 6.25% Senior Notes and the Debentures,
respectively. The gains (losses) on these hedges are deferred
and are being recognized as adjustments to interest expense over
the life of the related debt issuances for the Senior Notes, and
over the
10-year
fixed interest rate term for the Debentures.
In December 2005, we entered into an uncommitted line of credit
with National City Bank in the principal amount of
$125 million. No commitment fees are required to be paid.
There are no rating triggers under this line of credit. We had
no borrowings under this arrangement during 2007, 2006 or 2005.
Interest on amounts borrowed would generally accrue at the
one-month LIBOR plus .375%.
Aggregate principal payments on debt outstanding at
December 31, 2007, are $0 for 2008, 2009, 2010 and 2011,
$350.0 million for 2012 and $1.85 billion thereafter.
App.-A-16
|
|
5.
|
LOSS AND LOSS
ADJUSTMENT EXPENSE RESERVES
|
Activity in the loss and loss adjustment expense reserves is
summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
(millions)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
Balance at January 1
|
|
$
|
5,725.0
|
|
|
$
|
5,660.3
|
|
|
$
|
5,285.6
|
|
Less reinsurance recoverables on unpaid losses
|
|
|
361.4
|
|
|
|
347.2
|
|
|
|
337.1
|
|
|
Net balance at January 1
|
|
|
5,363.6
|
|
|
|
5,313.1
|
|
|
|
4,948.5
|
|
|
Incurred related to:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year
|
|
|
9,845.9
|
|
|
|
9,641.8
|
|
|
|
9,720.7
|
|
Prior years
|
|
|
80.3
|
|
|
|
(246.9
|
)
|
|
|
(355.9
|
)
|
|
Total incurred
|
|
|
9,926.2
|
|
|
|
9,394.9
|
|
|
|
9,364.8
|
|
|
Paid related to:
|
|
|
|
|
|
|
|
|
|
|
|
|
Current year
|
|
|
6,737.2
|
|
|
|
6,682.3
|
|
|
|
6,644.7
|
|
Prior years
|
|
|
2,897.4
|
|
|
|
2,662.1
|
|
|
|
2,355.5
|
|
|
Total paid
|
|
|
9,634.6
|
|
|
|
9,344.4
|
|
|
|
9,000.2
|
|
|
Net balance at December 31
|
|
|
5,655.2
|
|
|
|
5,363.6
|
|
|
|
5,313.1
|
|
Plus reinsurance recoverables on unpaid losses
|
|
|
287.5
|
|
|
|
361.4
|
|
|
|
347.2
|
|
|
Balance at December 31
|
|
$
|
5,942.7
|
|
|
$
|
5,725.0
|
|
|
$
|
5,660.3
|
|
|
|
|
|
Our objective is to establish case and IBNR reserves that are
adequate to cover all loss costs, while sustaining minimal
variation from the date that the reserves are initially
established until losses are fully developed. Our reserves
developed unfavorably in 2007, compared to favorable development
in 2006 and 2005. Total development consists of net changes made
by our actuarial department on prior accident year reserves,
based on regularly scheduled reviews, claims settling for more
or less than reserved, emergence of unrecorded claims at rates
different than reserved and changes in reserve estimates by
claim representatives. The estimated severity for prior accident
years, primarily 2006 and 2005, increased from our estimate as
of the end of 2006, which was the basis for the unfavorable
development in 2007.
Because we are primarily an insurer of motor vehicles, we have
limited exposure to environmental, asbestos and general
liability claims. We have established reserves for such
exposures, in amounts that we believe to be adequate based on
information currently known. These claims are not expected to
have a material effect on our liquidity, financial condition,
cash flows or results of operations.
We write personal and commercial auto insurance in the coastal
states, which could be exposed to hurricanes or other natural
catastrophes. Although the occurrence of a major catastrophe
could have a significant effect on our monthly or quarterly
results, we believe that, based on historical performance, such
an event would not be so material as to disrupt the overall
normal operations of Progressive. We are unable to predict the
frequency or severity of any such events that may occur in the
near term or thereafter.
The effect of reinsurance on premiums written and earned for the
years ended December 31 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
(millions)
|
|
Written
|
|
|
Earned
|
|
|
Written
|
|
|
Earned
|
|
|
Written
|
|
|
Earned
|
|
|
|
|
Direct premiums
|
|
$
|
13,982.4
|
|
|
$
|
14,107.0
|
|
|
$
|
14,386.2
|
|
|
$
|
14,386.3
|
|
|
$
|
14,293.4
|
|
|
$
|
14,066.2
|
|
Ceded
|
|
|
(209.9
|
)
|
|
|
(229.6
|
)
|
|
|
(254.2
|
)
|
|
|
(268.4
|
)
|
|
|
(285.8
|
)
|
|
|
(301.8
|
)
|
|
Net premiums
|
|
$
|
13,772.5
|
|
|
$
|
13,877.4
|
|
|
$
|
14,132.0
|
|
|
$
|
14,117.9
|
|
|
$
|
14,007.6
|
|
|
$
|
13,764.4
|
|
|
|
|
|
Our ceded premiums are primarily attributable to premiums
written under state-mandated involuntary Commercial Auto
Insurance Procedures/Plans (CAIP) and premiums ceded to
state-provided reinsurance facilities, for which we retain no
loss indemnity risk.
Reinsurance contracts do not relieve us from our obligations to
policyholders. Failure of reinsurers to honor their obligations
could result in losses to Progressive. We evaluate the financial
condition of our reinsurers and monitor concentrations of credit
risk to minimize our exposure to significant losses from
reinsurer insolvencies.
App.-A-17
At December 31, 2007, approximately 40% of the
prepaid reinsurance premiums were comprised of CAIP,
compared to about 50% at December 31, 2006. As of
December 31, 2007 and December 31, 2006, approximately
40% of the reinsurance recoverables were comprised
of CAIP. The remainder of the prepaid reinsurance
premiums and reinsurance recoverables was
primarily related to state-mandated and non-auto programs.
Losses and loss adjustment expenses were net of reinsurance
ceded of $109.6 million in 2007, $196.3 million in
2006 and $197.9 million in 2005.
|
|
7.
|
STATUTORY
FINANCIAL INFORMATION (unaudited)
|
At December 31, 2007, $470.2 million of consolidated
statutory policyholders surplus represented net admitted
assets of our insurance subsidiaries and affiliate that are
required to meet minimum statutory surplus requirements in such
entities states of domicile. The companies 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 companies 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 companies are licensed.
During 2007, the insurance subsidiaries paid aggregate cash
dividends of $1,484.8 million to the parent company. Based
on the dividend laws currently in effect, the insurance
subsidiaries may pay aggregate dividends of $974.6 million
in 2008 without prior approval from regulatory authorities,
provided the dividend payments are not within 12 months of
previous dividends paid by the applicable subsidiary.
Consolidated statutory policyholders surplus was
$4,587.3 million and $4,963.7 million at
December 31, 2007 and 2006, respectively. Statutory net
income was $1,105.2 million, $1,612.4 million and
$1,393.5 million for the years ended December 31,
2007, 2006 and 2005, respectively.
|
|
8.
|
EMPLOYEE BENEFIT
PLANS
|
Retirement Plans Progressive 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. Company
contributions vary from 1% to 5% of annual eligible compensation
up to the Social Security wage base, based on years of eligible
service and may be invested by a participant in any of the
investment funds available under the plan. Company contributions
were $22.5 million in 2007, $21.9 million in 2006 and
$19.5 million in 2005.
The second tier is a long-term savings plan under which
Progressive matches, up to a maximum of 3% of the
employees eligible compensation, amounts contributed to
the plan by an employee. Company matching contributions may be
invested by a participant in any of the investment funds
available under the plan. Company matching contributions were
$29.3 million in 2007, $29.6 million in 2006 and
$26.8 million in 2005.
Postemployment Benefits Progressive 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 for specified limited periods. The
liability for these benefits was $24.8 million at
December 31, 2007, compared to $23.2 million in 2006.
Postretirement Benefits We provide postretirement
health and life insurance benefits to all employees who met
requirements as to age and length of service at
December 31, 1988. There are approximately 100 people
in this group of employees. Our funding policy for the benefits
is to contribute annually the maximum amount that can be
deducted for federal income tax purposes.
Incentive Compensation Plans Employees
Our incentive compensation includes both non-equity
incentive plans (cash) and equity incentive plans (stock-based).
The cash incentive compensation includes a cash bonus program
for a limited number of senior executives and Gainsharing
programs for other employees; the bases of these programs are
similar in nature. The stock-based incentive compensation plans
provide for the granting of restricted stock awards to key
members of management. Prior to 2003, we granted non-qualified
stock options as stock-based incentive compensation (see below).
The amounts charged to income for the incentive compensation
plans for the years ended December 31 were:
|
|
|
|
|
|
|
|
|
|
|
|
|
(millions)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
Cash
|
|
$
|
126.2
|
|
|
$
|
197.7
|
|
|
$
|
235.9
|
|
Stock-based
|
|
|
26.5
|
|
|
|
27.6
|
|
|
|
33.7
|
|
App.-A-18
Our 2003 Incentive Plan, which provides for the granting of
stock-based awards, including restricted stock awards, to key
employees of Progressive, has 19.0 million shares currently
authorized, net of restricted stock awards cancelled;
11.3 million shares remain available for future restricted
stock grants. Our 1995 Incentive Plan has expired; however,
awards made under that plan prior to its expiration are still in
effect.
In 2003, we began issuing restricted stock awards in lieu of
stock options. The restricted stock awards are issued as either
time-based or performance-based awards. The time-based awards
vest in equal installments upon the lapse of specified periods
of time, typically three, four and five years. The vesting
period (i.e., requisite service period) must be a minimum of six
months and one day. The performance-based awards vest upon the
achievement of predetermined performance goals. The
performance-based awards are granted to approximately 50
executives and senior managers, in addition to their time-based
awards, to provide additional compensation for achieving
pre-established profitability and growth targets. Generally, the
restricted stock awards are expensed pro rata over their
respective vesting periods based on the market value of the
awards at the time of grant. However, restricted stock awards
granted in 2003 and 2004, that were deferred pursuant to our
deferred compensation plan, are accounted for as liability
awards, since distributions from the deferred compensation plan
for these awards will be made in cash; accordingly, we record
expense on a pro rata basis based on the current market value of
common shares at the end of the reporting period.
Prior to 2003, we granted nonqualified stock options for periods
up to ten years. These options became exercisable at various
dates not earlier than six months after the date of grant, and
remain exercisable for specified periods thereafter. All
remaining options vested on January 1, 2007. All options
granted had an exercise price equal to the market value of the
common shares on the date of grant and, under the then
applicable accounting guidance, no compensation expense was
recorded prior to 2006. Pursuant to the adoption of
SFAS 123(R), on January 1, 2006, we began expensing
the remaining unvested stock option awards (see
Note 1 Reporting and Accounting Policies,
Stock-Based Compensation, for further
discussion). All option exercises are settled in Progressive
common shares from either existing treasury shares or newly
issued shares.
A summary of all employee restricted stock activity during the
years ended December 31 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
Number
|
|
|
Average
|
|
|
Number
|
|
|
Average
|
|
|
Number
|
|
|
Average
|
|
|
|
of
|
|
|
Grant Date
|
|
|
of
|
|
|
Grant Date
|
|
|
of
|
|
|
Grant Date
|
|
Restricted Shares
|
|
Shares
|
|
|
Fair Value
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Shares
|
|
|
Fair Value
|
|
|
|
|
Beginning of year
|
|
|
6,232,522
|
|
|
$
|
22.27
|
|
|
|
5,442,988
|
|
|
$
|
20.21
|
|
|
|
3,663,364
|
|
|
$
|
18.89
|
|
Add (deduct):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
2,318,637
|
|
|
|
21.01
|
|
|
|
1,828,198
|
|
|
|
26.50
|
|
|
|
1,942,784
|
|
|
|
22.62
|
|
Vested
|
|
|
(1,005,680
|
)
|
|
|
18.80
|
|
|
|
(567,824
|
)
|
|
|
16.60
|
|
|
|
(2,728
|
)
|
|
|
18.45
|
|
Forfeited
|
|
|
(676,629
|
)
|
|
|
22.44
|
|
|
|
(470,840
|
)
|
|
|
21.74
|
|
|
|
(160,432
|
)
|
|
|
19.37
|
|
|
End of year
|
|
|
6,868,850
|
|
|
$
|
22.33
|
|
|
|
6,232,522
|
|
|
$
|
22.27
|
|
|
|
5,442,988
|
|
|
$
|
20.21
|
|
|
|
|
|
Available, end of
year1
|
|
|
11,287,225
|
|
|
|
|
|
|
|
13,448,514
|
|
|
|
|
|
|
|
15,276,712
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
Represents shares available under the 2003 Incentive Plan. The
1995 Incentive Plan expired in February 2005, and the remaining
shares thereunder are no longer available for future issuance.
|
Of the 1,005,680 restricted stock awards that vested during the
year ended December 31, 2007, 788,560 shares were not
deferred under our deferred compensation plans and 217,120 were
deferred (see discussion of deferred compensation plans below).
The aggregate pretax intrinsic value of the non-deferred awards,
based on the average of the high and low stock price on the day
prior to vesting, was $4.3 million. There was no intrinsic
value attributed to the shares which were deferred, since, as
previously discussed, these awards were granted in 2003 or 2004
and, therefore, were expensed based on the current market value
at the end of each reporting period.
App.-A-19
During the year ended December 31, 2007, we recognized
$26.5 million, or $17.2 million after taxes, of
compensation expense related to our outstanding unvested
restricted stock. During the year ended December 31, 2006,
we recognized $27.6 million, or $17.9 million after
taxes, of compensation expense related to our outstanding
unvested restricted stock and stock option awards. At
December 31, 2007, the total compensation cost related to
unvested restricted stock awards not yet recognized was
$76.5 million. This compensation expense will be recognized
into the income statement over the weighted average vesting
period of 2.51 years.
A summary of all employee stock option activity during the years
ended December 31 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
2006
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
Weighted
|
|
|
|
Number
|
|
|
Average
|
|
Number
|
|
|
Average
|
|
|
|
of
|
|
|
Grant Date
|
|
of
|
|
|
Grant Date
|
|
Nonvested Stock Options Outstanding
|
|
Shares
|
|
|
Fair Value
|
|
Shares
|
|
|
Fair Value
|
|
|
|
|
Beginning of year
|
|
|
1,087,866
|
|
|
$
|
5.82
|
|
|
4,232,220
|
|
|
$
|
4.76
|
|
Deduct:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested1
|
|
|
(1,087,866
|
)
|
|
|
5.82
|
|
|
(3,053,352
|
)
|
|
|
4.36
|
|
Forfeited
|
|
|
|
|
|
|
|
|
|
(91,002
|
)
|
|
|
5.81
|
|
|
End of year
|
|
|
|
|
|
$
|
|
|
|
1,087,866
|
|
|
$
|
5.82
|
|
|
|
|
|
|
|
1 |
All remaining stock option awards vested on January 1, 2007.
|
In September 2007, we paid a $2.00 per common share special
dividend to shareholders of record at the close of business on
August 31, 2007. Since the holders of the outstanding stock
option awards were not entitled to receive the cash dividend, we
were required to increase the number of shares and reduce the
exercise price of any of our then outstanding stock option
awards in accordance with the antidilution provisions of our
incentive plans; prior year information was not adjusted. This
adjustment is reflected in the tables below for both our
employees and directors.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
Number
|
|
|
Average
|
|
|
Number
|
|
|
Average
|
|
|
Number
|
|
|
Average
|
|
|
|
of
|
|
|
Exercise
|
|
|
of
|
|
|
Exercise
|
|
|
of
|
|
|
Exercise
|
|
Options Outstanding
|
|
Shares
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
|
|
|
Beginning of year
|
|
|
13,747,221
|
|
|
$
|
8.75
|
|
|
|
19,621,476
|
|
|
$
|
8.44
|
|
|
|
26,358,004
|
|
|
$
|
8.01
|
|
Add:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Antidilution adjustment
|
|
|
1,201,984
|
|
|
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deduct:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(3,208,873
|
)
|
|
|
9.10
|
|
|
|
(5,649,193
|
)
|
|
|
7.55
|
|
|
|
(6,581,264
|
)
|
|
|
6.67
|
|
Forfeited
|
|
|
(1,830
|
)
|
|
|
11.78
|
|
|
|
(225,062
|
)
|
|
|
12.09
|
|
|
|
(155,264
|
)
|
|
|
10.82
|
|
|
End of year
|
|
|
11,738,502
|
|
|
$
|
7.75
|
|
|
|
13,747,221
|
|
|
$
|
8.75
|
|
|
|
19,621,476
|
|
|
$
|
8.44
|
|
|
|
|
|
Exercisable, end of year
|
|
|
11,738,502
|
|
|
$
|
7.75
|
|
|
|
12,659,355
|
|
|
$
|
8.38
|
|
|
|
15,389,256
|
|
|
$
|
7.82
|
|
|
|
|
|
NM=not meaningful
The total pretax intrinsic value of options exercised during the
year ended December 31, 2007, was $37.1 million, based
on the actual stock price at time of exercise.
The following employee stock options were outstanding and
exercisable as of December 31, 2007:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
Weighted
|
|
|
|
|
|
Average
|
|
Number
|
|
|
Average
|
|
|
Aggregate
|
|
|
Remaining
|
|
of
|
|
|
Exercise
|
|
|
Intrinsic Value
|
|
|
Contractual
|
|
Shares
|
|
|
Price
|
|
|
(in millions)
|
|
|
Life
|
|
|
|
|
|
11,738,502
|
|
|
$
|
7.75
|
|
|
$
|
133.9
|
|
|
|
2.74 years
|
|
The aggregate intrinsic value in the preceding table represents
the total pretax intrinsic value, based on the difference
between our closing stock price of $19.16 on December 31,
2007, and the exercise price of the options, which is the amount
that would have been received by the option holders had all
option holders exercised their options as of that date. All of
the exercisable options at December 31, 2007, were
in-the-money.
Incentive Compensation Plans Directors
Our 2003 Directors Equity Incentive Plan, which
provides for the granting of stock-based awards, including
restricted stock awards to non-employee directors of
Progressive, has 1.4 million
App.-A-20
shares currently authorized, net of restricted stock awards
cancelled; 1.1 million shares remain available for future
restricted stock grants. Our 1998 Directors Stock
Option Plan, under which additional awards are not expected to
be made, will expire on April 24, 2008; however, awards
made under this plan prior to its expiration are still in effect.
In 2003, we began issuing restricted stock awards to
non-employee directors as the equity component of their
compensation. The restricted stock awards are issued as
time-based awards. The vesting period (i.e., requisite service
period) must be a minimum of six months and one day. The
time-based awards granted to date have included vesting periods
of eleven months from the date of each grant. The restricted
stock awards are expensed pro rata over their respective vesting
periods based on the market value of the awards at the time of
grant.
Prior to 2003, we granted nonqualified stock options as the
equity component of the directors compensation. These options
were granted for periods up to ten years, became exercisable at
various dates not earlier than six months after the date of
grant, and remain exercisable for specified periods thereafter.
All options granted had an exercise price equal to the market
value of the common shares on the date of grant and, under the
then applicable accounting guidance, no compensation expense was
recorded. All option exercises are settled in Progressive common
shares from either existing treasury shares or newly issued
shares.
In April 2006, we began granting restricted stock awards to
non-employee directors as their sole compensation as a member of
the Board of Directors. From April 2003 through April 2006, we
issued restricted stock awards in addition to other retainer and
meeting fees. A summary of all directors restricted stock
activity during the years ended December 31 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
Number
|
|
|
Average
|
|
|
Number
|
|
|
Average
|
|
|
Number
|
|
|
Average
|
|
|
|
of
|
|
|
Grant Date
|
|
|
of
|
|
|
Grant Date
|
|
|
of
|
|
|
Grant Date
|
|
Restricted Shares
|
|
Shares
|
|
|
Fair Value
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Shares
|
|
|
Fair Value
|
|
|
|
|
Beginning of year
|
|
|
66,031
|
|
|
$
|
26.64
|
|
|
|
50,244
|
|
|
$
|
21.91
|
|
|
|
48,968
|
|
|
$
|
22.47
|
|
Add (deduct):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
76,074
|
|
|
|
23.52
|
|
|
|
66,031
|
|
|
|
26.64
|
|
|
|
50,244
|
|
|
|
21.91
|
|
Vested
|
|
|
(66,031
|
)
|
|
|
26.64
|
|
|
|
(50,244
|
)
|
|
|
21.91
|
|
|
|
(48,968
|
)
|
|
|
22.47
|
|
Forfeited
|
|
|
(7,479
|
)
|
|
|
23.52
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
End of year
|
|
|
68,595
|
|
|
$
|
23.52
|
|
|
|
66,031
|
|
|
$
|
26.64
|
|
|
|
50,244
|
|
|
$
|
21.91
|
|
|
|
|
|
Available, end of
year1
|
|
|
1,094,275
|
|
|
|
|
|
|
|
1,170,349
|
|
|
|
|
|
|
|
1,236,380
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
Represents shares available under the 2003 Directors Equity
Incentive Plan.
|
A summary of all stock option activity for both current and
former directors during the years ended December 31 follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
Number
|
|
|
Average
|
|
|
Number
|
|
|
Average
|
|
|
Number
|
|
|
Average
|
|
|
|
of
|
|
|
Exercise
|
|
|
of
|
|
|
Exercise
|
|
|
of
|
|
|
Exercise
|
|
Options Outstanding
|
|
Shares
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
|
Shares
|
|
|
Price
|
|
|
|
|
Beginning of year
|
|
|
772,664
|
|
|
$
|
8.59
|
|
|
|
873,108
|
|
|
$
|
8.20
|
|
|
|
969,108
|
|
|
$
|
7.79
|
|
Add:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Antidilution adjustment
|
|
|
55,851
|
|
|
|
NM
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deduct:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(199,702
|
)
|
|
|
8.16
|
|
|
|
(100,444
|
)
|
|
|
5.18
|
|
|
|
(96,000
|
)
|
|
|
4.06
|
|
|
End of year
|
|
|
628,813
|
|
|
$
|
7.97
|
|
|
|
772,664
|
|
|
$
|
8.59
|
|
|
|
873,108
|
|
|
$
|
8.20
|
|
|
|
|
|
Exercisable, end of
year1
|
|
|
628,813
|
|
|
$
|
7.97
|
|
|
|
772,664
|
|
|
$
|
8.59
|
|
|
|
873,108
|
|
|
$
|
8.20
|
|
|
|
|
|
NM=not meaningful
|
|
1 |
There are 1,730,708 shares available under the
1998 Directors Stock Option Plan.
|
Deferred Compensation We maintain The Progressive
Corporation Executive Deferred Compensation Plan (Deferral
Plan), that permits eligible executives to defer receipt of some
or all of their annual bonuses or all of their annual restricted
stock awards. Deferred cash compensation is deemed invested in
one or more investment funds, including common
App.-A-21
shares of Progressive, offered under the Deferral Plan and
elected by the participant. All distributions from the Deferral
Plan pursuant to deferred cash compensation will be paid in cash.
For all restricted stock awards granted on or after
March 17, 2005, and deferred pursuant to the Deferral Plan,
the deferred amounts are deemed invested in common shares and
are ineligible for transfer to other investment funds in the
Deferral Plan; all distributions will be made in common shares.
For all awards granted prior to March 17, 2005, the
deferred amounts are eligible to be transferred to any of the
funds in the Deferral Plan; distributions of these deferred
awards will be made in cash.
We reserved 3.6 million common shares for issuance under
the Deferral Plan. An irrevocable grantor trust has been
established to provide a source of funds to assist us in meeting
our liabilities under the Deferral Plan. At December 31,
2007 and 2006, the trust held assets of $93.3 million and
$85.9 million, respectively, of which $15.0 million
and $13.1 million were held in Progressives common
shares.
We write personal automobile and other specialty
property-casualty insurance and provide related services
throughout the United States. Our Personal Lines segment writes
insurance for private passenger automobiles and recreational
vehicles. The Personal Lines segment is comprised of both the
Agency and Direct businesses. The Agency business includes
business written by our network of more than 30,000 independent
insurance agencies, including brokerages in New York and
California, and strategic alliance business relationships (other
insurance companies, financial institutions and national
agencies). The Direct business includes business written online
and by phone.
Our Commercial Auto segment writes primary liability and
physical damage insurance for automobiles and trucks owned by
small businesses in the specialty truck and business auto
markets. This segment is distributed through both the
independent agency and direct channels.
Our other indemnity businesses primarily include writing
professional liability insurance for community banks and
managing a small amount of run-off business.
Our service businesses include providing insurance-related
services, primarily processing CAIP business.
All revenues are generated from external customers and we do not
have a reliance on any major customer.
We evaluate segment profitability based on pretax underwriting
profit (loss) for the Personal Lines and Commercial Auto
Businesses. In addition, we use underwriting profit (loss) for
the other indemnity businesses and pretax profit (loss) for the
service businesses. Pretax underwriting profit (loss) is
calculated as follows:
|
Net premiums earned
|
Less: Losses and loss adjustment expenses
Policy acquisition costs
Other underwriting expenses
|
|
Pretax underwriting profit (loss)
|
|
|
Service business profit (loss) is the difference between service
business revenues and service business expenses.
Expense allocations are based on certain assumptions and
estimates primarily related to revenue and volume; stated
segment operating results would change if different methods were
applied. We do not allocate assets or income taxes to operating
segments. In addition, we do not separately identify
depreciation and amortization expense by segment and such
disclosure would be impractical. Companywide depreciation
expense was $106.9 million in 2007, $103.4 million in
2006 and $92.4 million in 2005. The accounting policies of
the operating segments are the same as those described in
Note 1 Reporting and Accounting Policies.
App.-A-22
Following are the operating results for the years ended December
31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
Pretax
|
|
|
|
|
|
Pretax
|
|
|
|
|
|
Pretax
|
|
|
|
|
|
|
Profit
|
|
|
|
|
|
Profit
|
|
|
|
|
|
Profit
|
|
(millions)
|
|
Revenues
|
|
|
(Loss)
|
|
|
Revenues
|
|
|
(Loss)
|
|
|
Revenues
|
|
|
(Loss)
|
|
|
|
|
Personal Lines
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency
|
|
$
|
7,636.4
|
|
|
$
|
500.2
|
|
|
$
|
7,903.6
|
|
|
$
|
936.7
|
|
|
$
|
7,993.1
|
|
|
$
|
857.6
|
|
Direct
|
|
|
4,372.6
|
|
|
|
339.9
|
|
|
|
4,337.4
|
|
|
|
568.6
|
|
|
|
4,076.2
|
|
|
|
475.7
|
|
|
Total Personal
Lines1
|
|
|
12,009.0
|
|
|
|
840.1
|
|
|
|
12,241.0
|
|
|
|
1,505.3
|
|
|
|
12,069.3
|
|
|
|
1,333.3
|
|
Commercial Auto
|
|
|
1,846.9
|
|
|
|
185.7
|
|
|
|
1,851.9
|
|
|
|
366.5
|
|
|
|
1,667.8
|
|
|
|
298.0
|
|
Other indemnity
|
|
|
21.5
|
|
|
|
(.7
|
)
|
|
|
25.0
|
|
|
|
6.5
|
|
|
|
27.3
|
|
|
|
7.9
|
|
|
Total underwriting operations
|
|
|
13,877.4
|
|
|
|
1,025.1
|
|
|
|
14,117.9
|
|
|
|
1,878.3
|
|
|
|
13,764.4
|
|
|
|
1,639.2
|
|
|
Service businesses
|
|
|
22.3
|
|
|
|
1.8
|
|
|
|
30.4
|
|
|
|
6.0
|
|
|
|
40.2
|
|
|
|
15.6
|
|
Investments2
|
|
|
787.1
|
|
|
|
774.7
|
|
|
|
638.1
|
|
|
|
626.2
|
|
|
|
498.8
|
|
|
|
486.7
|
|
Interest expense
|
|
|
|
|
|
|
(108.6
|
)
|
|
|
|
|
|
|
(77.3
|
)
|
|
|
|
|
|
|
(82.6
|
)
|
|
Consolidated total
|
|
$
|
14,686.8
|
|
|
$
|
1,693.0
|
|
|
$
|
14,786.4
|
|
|
$
|
2,433.2
|
|
|
$
|
14,303.4
|
|
|
$
|
2,058.9
|
|
|
|
|
|
|
|
1
|
Private passenger automobile insurance accounted for 91% of the
total Personal Lines segment net premiums earned in both 2007
and 2006, and 92% in 2005; our special lines products accounted
for the balance of the Personal Lines net premiums earned.
|
|
2
|
Revenues represent recurring investment income and net realized
gains (losses) on securities; pretax profit is net of investment
expenses.
|
Progressives management uses underwriting margin and
combined ratio as primary measures of underwriting
profitability. The underwriting margin is the pretax
underwriting profit (loss) expressed as a percentage of net
premiums earned (i.e., revenues). Combined ratio is the
complement of the underwriting margin. Following are the
underwriting margins/combined ratios for our underwriting
operations for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
Underwriting
|
|
|
Combined
|
|
|
Underwriting
|
|
|
Combined
|
|
|
Underwriting
|
|
|
Combined
|
|
|
|
Margin
|
|
|
Ratio
|
|
|
Margin
|
|
|
Ratio
|
|
|
Margin
|
|
|
Ratio
|
|
|
|
|
Personal Lines
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency
|
|
|
6.5
|
%
|
|
|
93.5
|
|
|
|
11.9
|
%
|
|
|
88.1
|
|
|
|
10.7
|
%
|
|
|
89.3
|
|
Direct
|
|
|
7.8
|
|
|
|
92.2
|
|
|
|
13.1
|
|
|
|
86.9
|
|
|
|
11.7
|
|
|
|
88.3
|
|
Total Personal Lines
|
|
|
7.0
|
|
|
|
93.0
|
|
|
|
12.3
|
|
|
|
87.7
|
|
|
|
11.0
|
|
|
|
89.0
|
|
Commercial Auto
|
|
|
10.1
|
|
|
|
89.9
|
|
|
|
19.8
|
|
|
|
80.2
|
|
|
|
17.9
|
|
|
|
82.1
|
|
Other
indemnity1
|
|
|
NM
|
|
|
|
NM
|
|
|
|
NM
|
|
|
|
NM
|
|
|
|
NM
|
|
|
|
NM
|
|
Total underwriting operations
|
|
|
7.4
|
|
|
|
92.6
|
|
|
|
13.3
|
|
|
|
86.7
|
|
|
|
11.9
|
|
|
|
88.1
|
|
|
|
1 |
Underwriting margins/combined ratios are not meaningful (NM) for
our other indemnity businesses due to the low level of premiums
earned by, and the variability of losses in, such businesses.
|
App.-A-23
|
|
10.
|
OTHER
COMPREHENSIVE INCOME
|
The components of other comprehensive income for the years ended
December 31 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
Tax
|
|
|
|
|
|
|
|
|
Tax
|
|
|
|
|
|
|
|
|
Tax
|
|
|
|
|
|
|
|
|
|
(Provision)
|
|
|
After
|
|
|
|
|
|
(Provision)
|
|
|
After
|
|
|
|
|
|
(Provision)
|
|
|
After
|
|
(millions)
|
|
Pretax
|
|
|
Benefit
|
|
|
Tax
|
|
|
Pretax
|
|
|
Benefit
|
|
|
Tax
|
|
|
Pretax
|
|
|
Benefit
|
|
|
Tax
|
|
|
|
|
Unrealized gains (losses) arising during period:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities
|
|
$
|
52.1
|
|
|
$
|
(18.2
|
)
|
|
$
|
33.9
|
|
|
$
|
10.7
|
|
|
$
|
(3.7
|
)
|
|
$
|
7.0
|
|
|
$
|
(138.7
|
)
|
|
$
|
48.6
|
|
|
$
|
(90.1
|
)
|
Equity securities
|
|
|
(189.2
|
)
|
|
|
66.2
|
|
|
|
(123.0
|
)
|
|
|
292.3
|
|
|
|
(102.3
|
)
|
|
|
190.0
|
|
|
|
135.8
|
|
|
|
(47.5
|
)
|
|
|
88.3
|
|
Reclassification
adjustment:1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities
|
|
|
(2.3
|
)
|
|
|
.8
|
|
|
|
(1.5
|
)
|
|
|
27.5
|
|
|
|
(9.7
|
)
|
|
|
17.8
|
|
|
|
(12.0
|
)
|
|
|
4.2
|
|
|
|
(7.8
|
)
|
Equity securities
|
|
|
(63.4
|
)
|
|
|
22.2
|
|
|
|
(41.2
|
)
|
|
|
(12.4
|
)
|
|
|
4.3
|
|
|
|
(8.1
|
)
|
|
|
(54.4
|
)
|
|
|
19.0
|
|
|
|
(35.4
|
)
|
|
Change in unrealized gains
|
|
|
(202.8
|
)
|
|
|
71.0
|
|
|
|
(131.8
|
)
|
|
|
318.1
|
|
|
|
(111.4
|
)
|
|
|
206.7
|
|
|
|
(69.3
|
)
|
|
|
24.3
|
|
|
|
(45.0
|
)
|
Net unrealized gains on forecasted
transactions2
|
|
|
31.2
|
|
|
|
(10.9
|
)
|
|
|
20.3
|
|
|
|
(1.8
|
)
|
|
|
.7
|
|
|
|
(1.1
|
)
|
|
|
(1.7
|
)
|
|
|
.6
|
|
|
|
(1.1
|
)
|
|
Other comprehensive income
|
|
$
|
(171.6
|
)
|
|
$
|
60.1
|
|
|
$
|
(111.5
|
)
|
|
$
|
316.3
|
|
|
$
|
(110.7
|
)
|
|
$
|
205.6
|
|
|
$
|
(71.0
|
)
|
|
$
|
24.9
|
|
|
$
|
(46.1
|
)
|
|
|
|
|
|
|
1
|
Represents adjustments for gains (losses) realized in net income
for securities held in the portfolio at December 31 of the
preceding year.
|
|
2
|
Entered into for the purpose of managing interest rate risk
associated with our debt issuances. See
Note 4 Debt for further discussion. We
expect to reclassify $4.6 million into income within the
next 12 months.
|
The Progressive Corporation
and/or its
insurance subsidiaries are named as a defendant in various
lawsuits arising out of claims made under insurance policies in
the ordinary course of our business. All legal actions relating
to such insurance claims are considered by us in establishing
our loss and loss adjustment expense reserves.
In addition, The Progressive Corporation
and/or its
insurance subsidiaries are named as a defendant in a number of
class action or individual lawsuits arising out of the operation
of the insurance subsidiaries. Other insurance companies face
many of these same issues. The lawsuits discussed below are in
various stages of development. We plan to contest these suits
vigorously, but may pursue settlement negotiations in some
cases, if appropriate. The outcomes of these cases are uncertain
at this time.
In accordance with GAAP, we are only permitted to establish loss
reserves for a lawsuit when it is probable that a loss has been
incurred and we can reasonably estimate its potential exposure
(referred to as a loss that is both probable and
estimable in the discussion below). Certain of the cases
for which we have established reserves under this standard are
mentioned in the discussion below. Based on currently available
information, we believe that our reserves for these lawsuits are
reasonable and that the amounts reserved did not have a material
effect on our consolidated financial condition or results of
operations. However, if any one or more of these cases results
in a judgment against, or settlement by, our insurance
subsidiaries for an amount that is significantly greater than
the amount so reserved, the resulting liability could have a
material effect on our consolidated financial condition, cash
flows and results of operations.
As to lawsuits that do not satisfy both parts of this GAAP
standard (i.e., the loss is not both probable and estimable), we
have not established reserves at this time. In the event that
any one or more of these cases results in a substantial judgment
against, or settlement by, Progressive, the resulting liability
could also have a material effect on our consolidated financial
condition, cash flows and results of operations.
Following is a discussion of potentially significant pending
cases at December 31, 2007 and certain cases resolved
during 2007, 2006 and 2005.
There are three putative class action lawsuits and one certified
class action lawsuit challenging our insurance
subsidiaries use of certain automated database vendors or
software to assist in the adjustment of bodily injury claims. A
fifth putative class action lawsuit was voluntarily dismissed by
the plaintiff in 2007. In each of these lawsuits, the plaintiffs
allege that these databases or software systematically
undervalue the claims. With respect to the three pending
putative class action lawsuits, we do not consider a loss from
these cases to be probable and estimable, and are unable to
estimate a range of loss, if any, at this time. With respect to
the one certified class action lawsuit, we engaged in extensive
settlement negotiations and reached a settlement on a nationwide
basis, and a reserve was established accordingly. The settlement
App.-A-24
received preliminary approval from the court in November 2007,
at which time the court certified the class action for
settlement purposes only. No payments have been made yet under
the settlement. The amount of the settlement is not material to
our consolidated financial condition, cash flows or results of
operations.
There are eight class action lawsuits challenging certain
aspects of our insurance subsidiaries use of credit information
and compliance with notice requirements under the federal Fair
Credit Reporting Act. During 2004, we entered into a settlement
agreement to resolve these cases, had received preliminary court
approval of the settlement and had established a reserve
accordingly. In 2005, the court denied final approval of the
proposed settlement. In 2006, an amended settlement received
trial court approval, and the loss reserve was adjusted
accordingly. The adjustment was not material to our financial
condition, cash flows and results of operations in 2006.
Individuals who objected to trial court approval of the
settlement have appealed the approval, and that appeal is
currently pending. There also are six individual actions against
our insurance subsidiaries that challenge our use of credit
information. The six individual actions are stayed pending the
outcome of the class actions. We do not consider a loss from
these cases to be probable and estimable, and are unable to
estimate a range of loss, if any, at this time.
There is one putative class action lawsuit challenging the
installment fee program used by our insurance subsidiaries. We
have successfully defended similar cases in the past, including
one case that was dismissed in 2007 and another that was
dismissed in 2005. We do not consider a loss from the currently
pending case to be probable and estimable, and are unable to
estimate a range of loss, if any, at this time.
There is one putative class action lawsuit challenging our
insurance subsidiaries practice of specifying aftermarket
(non-original equipment manufacturer) replacement parts in the
repair of insured or claimant vehicles. Plaintiffs in such cases
generally allege that aftermarket parts are inferior to
replacement parts manufactured by the vehicles original
manufacturer and that the use of such parts fails to restore the
damaged vehicle to its pre-loss condition, as
required by their insurance policies. We do not consider a loss
from this case to be probable and estimable, and are unable to
estimate a range of loss, if any, at this time.
There is one certified class action lawsuit and one putative
class action lawsuit alleging that the insurance
subsidiaries rating practices at renewal are improper. We
prevailed in a similar putative class action in December 2004.
With respect to the putative class action lawsuit, we do not
consider a loss to be probable and estimable, and are unable to
estimate a range of loss, if any, at this time. With respect to
the certified class action lawsuit, we engaged in extensive
settlement negotiations and reached a settlement on a statewide
basis. The settlement received trial court approval in December
2007 but will not be paid until 2008. The amount of the
settlement, which has been reserved, is not material to our
consolidated financial condition, cash flows and results of
operations.
There are three certified class action lawsuits and three
putative class action lawsuits pending against our insurance
subsidiaries, alleging that we failed to adjust MRI bills to a
consumer price index in violation of a statute. With respect to
the three certified class action lawsuits, we engaged in
extensive settlement negotiations and reached a settlement on a
statewide basis. The settlement received trial court approval in
May 2007 and was paid during 2007. The amount of the settlement
was not material to our consolidated financial condition, cash
flows and results of operations. With respect to the three
putative class action lawsuits, we do not consider a loss from
these cases to be probable and estimable, and we are unable to
estimate a range of loss, if any, at this time.
Progressives insurance subsidiaries are defending a
putative class action claim alleging that we violate the
make-whole and common-fund doctrines.
Specifically, it is alleged that we may obtain reimbursement of
medical payments made on behalf of an insured only when the
insured has been made whole by a third-party tortfeasor and that
we further must deduct from the reimbursement amount a
proportionate share of the insureds legal fees for
pursuing the third-party tortfeasor. We do not consider a loss
from this case to be probable and estimable, and are unable to
estimate a range of loss, if any, at this time.
There is one certified nationwide class action lawsuit
challenging our insurance subsidiaries practice of taking
betterment on boat repairs. While we consider a loss from this
case to be probable, it is not currently estimable. As a result,
we are unable to estimate a range of loss, if any, at this time.
There is one putative class action lawsuit, brought on behalf of
insureds, challenging the labor rates our insurance subsidiaries
pay to auto body repair shops. We do not consider a loss from
this case to be probable and estimable, and are unable to
estimate a range of loss, if any, at this time.
There are four putative class action lawsuits challenging
Progressives insurance subsidiaries practice in
Florida of paying personal injury protection (PIP)
and first-party medical payments at 200% of the amount allowed
by Medicare. We do not consider a loss from this case to be
probable and estimable, and are unable to estimate a range of
loss, if any, at this time.
App.-A-25
There is one putative class action lawsuit alleging that
Progressives insurance subsidiaries used non-conforming
underinsured motorist rejection forms. We have engaged in
extensive settlement negotiations and reached a settlement on a
statewide basis. The settlement has not yet been presented to
the court for approval; however, a loss reserve has been
established in connection with the settlement. The amount of the
loss reserve is not material to our consolidated financial
condition, cash flows and results of operations.
In July 2005, we settled a state class action lawsuit alleging
that Progressives insurance subsidiaries used
non-conforming uninsured/underinsured (UM/UIM) motorist
rejection forms. The settlement received trial court approval in
October 2005, and was paid during 2006. The amount of the
settlement was not material to our consolidated financial
condition, cash flows and results of operations.
There is one certified class action lawsuit seeking refunds of
all UIM premiums and certain UM premiums on grounds that the
coverages were illusory. We have engaged in extensive settlement
negotiations and reached a settlement on a statewide basis. The
settlement received preliminary approval from the court in
December 2007. No payments have been made yet under the
settlement. The amount of the settlement, which has been
reserved, is not material to our consolidated financial
condition, cash flows and results of operations.
There is one certified class action lawsuit alleging that
Progressives insurance subsidiaries failed to offer
certain enhanced PIP benefits. We do not consider a loss from
this case to be probable and estimable, and are unable to
estimate a range of loss, if any, at this time.
There is one certified class action lawsuit seeking interest on
PIP payments that allegedly were late. We understand that there
are a number of similar class actions against others in the
insurance industry. We do not consider a loss from this case to
be probable and estimable, and are unable to estimate a range of
loss, if any, at this time.
In 2006, we settled two state class action lawsuits pending
against Progressives insurance subsidiaries in Florida,
challenging the legality of our payment of preferred provider
rates on PIP claims. The settlement received trial court
approval in August 2006 and was paid in 2006. The amount of the
settlement was not material to our consolidated financial
condition, cash flows and results of operations.
In 2006, we settled a nationwide class action lawsuit
challenging our insurance subsidiaries use of certain
automated database vendors to assist in the evaluation of total
loss claims. The settlement received trial court approval and
was paid during 2006. The amount of the settlement was not
material to our consolidated financial condition, cash flows and
results of operations.
Progressives subsidiaries are also named as a defendant in
individual lawsuits related to employment issues. The outcomes
of these cases are uncertain, but we do not believe that they
will have a material impact on our financial condition, cash
flows and results of operations.
|
|
12.
|
COMMITMENTS AND
CONTINGENCIES
|
We have certain noncancelable operating lease commitments with
lease terms greater than one year for property and computer
equipment. The minimum commitments under these agreements at
December 31, 2007, were as follows:
(millions)
|
|
|
|
|
Year
|
|
Commitment
|
|
|
|
|
2008
|
|
$
|
94.3
|
|
2009
|
|
|
69.0
|
|
2010
|
|
|
46.9
|
|
2011
|
|
|
25.2
|
|
2012
|
|
|
15.6
|
|
Thereafter
|
|
|
25.3
|
|
|
Total
|
|
$
|
276.3
|
|
|
|
|
|
|
|
App.-A-26
Some of the leases have options to renew at the end of the lease
periods. The expense we incurred for the leases disclosed above,
as well as other operating leases that may be cancelable or have
terms less than one year, was:
(millions)
|
|
|
|
|
Year
|
|
Expense
|
|
|
|
|
2007
|
|
$
|
139.5
|
|
2006
|
|
|
138.8
|
|
2005
|
|
|
126.4
|
|
As of December 31, 2007, we had open investment funding
commitments of $.2 million; we had no uncollateralized
lines or letters of credit as of December 31, 2007 or 2006.
|
|
13.
|
FAIR VALUE OF
FINANCIAL INSTRUMENTS
|
Information about specific valuation techniques and related fair
value detail is provided in Note 1 Reporting
and Accounting Policies, Note 2
Investments and Note 4 Debt. The
cost and fair value of the financial instruments as of December
31 are summarized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
Fair
|
|
|
|
|
|
Fair
|
|
(millions)
|
|
Cost
|
|
|
Value
|
|
|
Cost
|
|
|
Value
|
|
|
|
|
Investments Available-for-sale:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities
|
|
$
|
9,135.6
|
|
|
$
|
9,184.9
|
|
|
$
|
9,959.6
|
|
|
$
|
9,958.9
|
|
Preferred stocks
|
|
|
2,578.1
|
|
|
|
2,270.3
|
|
|
|
1,761.4
|
|
|
|
1,781.0
|
|
Common equities
|
|
|
1,361.0
|
|
|
|
2,327.5
|
|
|
|
1,469.0
|
|
|
|
2,368.1
|
|
Short-term investments
|
|
|
382.4
|
|
|
|
382.4
|
|
|
|
581.0
|
|
|
|
581.2
|
|
Debt
|
|
|
(2,173.9
|
)
|
|
|
(2,176.6
|
)
|
|
|
(1,185.5
|
)
|
|
|
(1,267.8
|
)
|
The value of our investment portfolio, excluding short-term
investments, is obtained through market level sources for 99.8%
of the securities. Pursuant to SFAS 157, Fair Value
Measurements, approximately 98% of these securities would
be classified as either Level 1 or Level 2 hierarchy.
This statement is effective for fiscal years beginning after
November 15, 2007 (January 1, 2008 for calendar-year
companies) and will not have a significant effect on our
financial condition, cash flows or results of operations. In
addition, SFAS 157 will not require any significant changes
in our disclosure of fair value for our investment portfolio.
App.-A-27
Managements Report on Internal Control over
Financial Reporting
Progressives management is responsible for establishing
and maintaining adequate internal control over financial
reporting, as such term is defined in
Rule 13a-15(f)
under the Securities Exchange Act of 1934. Our internal control
structure was designed under the supervision of our Chief
Executive Officer and Chief Financial Officer to provide
reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for
external purposes in accordance with accounting principles
generally accepted in the United States of America.
Our internal control over financial reporting includes policies
and procedures that pertain to the maintenance of records that,
in reasonable detail, accurately and fairly reflect our
transactions and dispositions of assets; provide reasonable
assurance that transactions are recorded as necessary to permit
preparation of financial statements in accordance with generally
accepted accounting principles, and that our receipts and
expenditures are being made only in accordance with
authorizations of our management and our directors; and provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of our assets that
could have a material effect on our financial statements.
Under the supervision and with the participation of our
management, including our Chief Executive Officer and Chief
Financial Officer, we conducted an evaluation of the
effectiveness of our internal control over financial reporting
based on the framework in Internal Control
Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO). Based on our
evaluation under the framework in Internal Control -
Integrated Framework, management concluded that our internal
control over financial reporting was effective as of
December 31, 2007.
There was, however, a material weakness identified during July
2007, whereby effective controls were not maintained to ensure
that dividends were accurately accrued on the declaration date
in accordance with GAAP. New controls were promptly implemented
in response to this issue. Management concluded that the issue
was remediated prior to the filing of our Quarterly Report on
Form 10-Q
for the quarterly period ended June 30, 2007.
During the fourth quarter 2007, there were no changes in our
internal control over financial reporting identified in the
internal control review process that materially affected, or are
reasonably likely to materially affect, our internal control
over financial reporting.
The effectiveness of our internal control over financial
reporting as of December 31, 2007, has been audited by
PricewaterhouseCoopers LLP, an independent registered public
accounting firm, as stated in their report which appears herein.
CEO and CFO Certifications
Glenn M. Renwick, President and Chief Executive Officer of The
Progressive Corporation, and Brian C. Domeck, Vice President and
Chief Financial Officer of The Progressive Corporation, have
issued the certifications required by Sections 302 and 906
of The Sarbanes-Oxley Act of 2002 and applicable SEC regulations
with respect to Progressives 2007 Annual Report on
Form 10-K,
including the financial statements provided in this Report.
Among other matters required to be included in those
certifications, Mr. Renwick and Mr. Domeck have each
certified that, to the best of his knowledge, the financial
statements, and other financial information included in the
Annual Report on
Form 10-K,
fairly present in all material respects the financial condition,
results of operations and cash flows of Progressive as of, and
for, the periods presented. See Exhibits 31 and 32 to
Progressives Annual Report on
Form 10-K
for the complete Section 302 and 906 certifications,
respectively.
In addition, Mr. Renwick submitted his annual certification
to the New York Stock Exchange (NYSE) on May 18, 2007,
stating that he was not aware of any violation by Progressive of
the NYSE corporate governance listing standards, as required by
Section 303A.12(a) of the NYSE Listed Company Manual.
App.-A-28
Report of
Independent Registered Public Accounting Firm
To the Board of Directors and Shareholders
of 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 its subsidiaries at December 31, 2007 and
2006, and the results of their operations and their cash flows
for each of the three years in the period ended
December 31, 2007 in conformity with accounting principles
generally accepted in the United States of America. Also in our
opinion, the Company maintained, in all material respects,
effective internal control over financial reporting as of
December 31, 2007, based on criteria established in
Internal Control Integrated Framework issued
by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). The Companys management is responsible
for these financial statements, for maintaining effective
internal control over financial reporting and for its assessment
of the effectiveness of internal control over financial
reporting, included in the accompanying Managements Report
on Internal Control over Financial Reporting. Our responsibility
is to express opinions on these financial statements and on the
Companys internal control over financial reporting based
on our integrated audits. We conducted our audits in accordance
with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement and
whether effective internal control over financial reporting was
maintained in all material respects. Our audits of the financial
statements included 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. Our audit of internal
control over financial reporting included obtaining an
understanding of internal control over financial reporting,
assessing the risk that a material weakness exists, and testing
and evaluating the design and operating effectiveness of
internal control based on the assessed risk. Our audits also
included performing such other procedures as we considered
necessary in the circumstances. We believe that our audits
provide a reasonable basis for our opinions.
A companys internal control over financial reporting is a
process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with
generally accepted accounting principles. A companys
internal control over financial reporting includes those
policies and procedures that (i) pertain to the maintenance
of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the
company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of
financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the
company are being made only in accordance with authorizations of
management and directors of the company; and (iii) provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use, or disposition of the
companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree
of compliance with the policies or procedures may deteriorate.
Cleveland, Ohio
February 27, 2008
App.-A-29
The Progressive
Corporation and Subsidiaries
Managements
Discussion and Analysis of Financial Condition and Results of
Operations
The consolidated financial statements and the related notes,
together with the supplemental information, should be read in
conjunction with the following discussion and analysis of the
consolidated financial condition and results of operations.
The Progressive Corporation is a holding company that does not
have any revenue producing operations, physical property or
employees of its own. The Progressive Group of Insurance
Companies, together with our non-insurance subsidiaries,
comprise what we refer to as Progressive. Progressive has been
in business since 1937 and is estimated to be in a virtual tie
as the countrys third largest private passenger auto
insurer based on premiums written during 2007. Through our
insurance companies, we offer personal automobile insurance and
other specialty property-casualty insurance and related services
throughout the United States. Our Personal Lines segment writes
insurance for private passenger automobiles and recreational
vehicles through more than 30,000 independent insurance agencies
and directly to consumers online and over the phone. Our
Commercial Auto segment, which writes through both the
independent agency and direct channels, offers insurance for
cars and trucks (e.g.,
pick-up or
panel trucks) owned by small businesses and is estimated to rank
third in its industry. These underwriting operations, combined
with our service and investment operations, make up the
consolidated group.
The Progressive Corporation receives cash through subsidiary
dividends, borrowings, security sales and other transactions,
and uses these funds to contribute to its subsidiaries (e.g., to
support growth), to make payments to shareholders and debt
holders (e.g., dividends and interest, respectively), to
repurchase its common shares and for other business purposes
that might arise. In 2007, the holding company received
$1.5 billion of dividends from its subsidiaries, net of
capital contributions, and $1 billion from the issuance of
subordinated debentures (see Note 4 Debt
to the consolidated financial statements, and the Capital
Resources and Liquidity section below for additional
details). During the year, we paid a $1.4 billion special
dividend to shareholders and used $1.5 billion to
repurchase 72.9 million Progressive common shares, at an
average cost of $21.24 per share. The debt issuance, special
dividend and share repurchases were part of a plan to
restructure our capital position during the year. In addition,
we paid $110.1 million in interest on our outstanding debt
in 2007. No debt matured during the year. The holding company
also has access to funds held in a non-insurance subsidiary; at
year-end 2007, $2.1 billion of marketable securities were
available in this company. On a consolidated basis, we generated
positive operating cash flows of $1.8 billion in 2007.
In 2007, our insurance subsidiaries generated underwriting
profitability of 7.4%. On a consolidated basis, net income was
nearly $1.2 billion, or $1.65 per share. Companywide
policies in force, our preferred measure of growth, increased
4%, while net premiums written and earned decreased 3% and 2%,
respectively. Even though profitability exceeded our target of a
4% underwriting margin, both profitability and premium growth
were down from last year, primarily reflecting the pricing
strategies we started in mid-2006, when we began reducing prices
in an effort to spur growth. Our transition from the wide
margins we generated in prior years to our current results did
not produce the aggregate revenue growth in 2007 that we had
hoped for.
Market conditions in 2007, defined by relative rate stability or
reduction, continue to influence our aggregate net premium
growth measure, which was down in Agency auto and Commercial
Auto, flat in Direct auto and up in our special lines products
(e.g., motorcycles, watercraft and RVs), compared to the prior
year. Changes in net premiums written are a function of new
business applications (i.e., issued policies), premium per
policy and retention.
During 2007, we saw an increase in both our new and renewal
applications in our Personal Lines Business, primarily driven by
Direct auto, as well as in our Commercial Auto Business. We
continue to evaluate new business application growth on a
state-by-state
basis. For 2007, 31 of our states experienced growth in new
personal auto applications, with two of our largest volume
states, Florida and Texas, returning to positive growth in new
applications during the second half of the year. We partially
restricted our Agency auto new business in New York and
California until we return to an acceptable level of
profitability in the affected areas.
Because we believe that the loss trends of recent years, driven
largely by reduced frequency, were more systemic than cyclical,
since mid-2006 we have been adjusting our pricing to reflect our
consistently stated goal of growing as fast as possible at a 96
combined ratio. Our auto products, both personal and commercial,
are priced at lower average written premium per policy than at
this time a year ago. Total personal auto average written
premium per policy decreased about 5% during 2007 and Commercial
Auto decreased about 6% for the same period. Earned premium per
earned car year, another measure of rate change, lags the
written premium measure. For 2007, as compared to 2006, earned
premium per earned car year decreased about 4% in both our
personal and commercial auto products. Although adjusting rates
is a continuous process, we believe that we are closer to our
targeted margins in most states and products and have now almost
fully adjusted pricing to reflect the favorable accident
frequency of the past several years.
App.-A-30
In light of the soft market conditions, we have focused our
attention on unit growth. The rating changes implemented over
the last year and a half have been an explicit trade-off of
margin for longer-term customer growth. Companywide policies in
force have increased 4% on a year-over-year basis since
December 31, 2006. Policies in force are 1% lower than at
year-end 2006 in Agency auto, while Direct auto and Commercial
Auto are each up 7% and special lines is up 8%. To continue to
grow policies in force, it is critical that we retain our
customers for longer periods, which is why retention continues
to be one of our most significant initiatives. During 2007, we
believe we made strides in addressing issues that will support
our efforts to meet the long-term rate expectations of our
customers. As a result, internal retention measures, defined as
policy life expectancy, increased in every tier for our private
passenger auto business, and increased in most tiers in our
Commercial Auto business, compared to year-end 2006.
The 7.4% companywide underwriting profit margin for 2007
indicates the closure of the gap between our reaffirmed target
of a 4% underwriting margin and the double-digit margins we
experienced over the last several years. Reflected in our 2007
results are .6 points of unfavorable prior accident year
development, primarily driven by our field claims
representatives evaluation of larger individual bodily
injury, as well as uninsured motorist, case reserves. During
2007, we experienced flattening auto frequency trends, while
severity increased, reflecting increases in bodily injury and
personal injury protection severity.
We announced organizational changes in 2007 designed to increase
our ability to execute on key strategies, lower our non-claims
expense ratio and foster growth through more competitive
pricing, improved customer retention and an increased focus on
brand development. These changes brought our Agency and Direct
auto, as well as our special lines products, together under one
Personal Lines organization. We will continue to price products
based, in part, on how they are distributed to reflect the
applicable channel cost. We believe this structure will reduce
the cost of redundancy that had developed in areas such as
product design, management and policy servicing, as well as
improve our ability to execute on our most significant
challenges. By the end of the year, we had largely merged our
Agency and Direct product and information technology
organizations. In conjunction with the reorganization, we
reviewed our current segment reporting and determined that it
was not impacted by this organizational change.
Within our investment portfolio, we maintained our asset
allocation strategy of investing between
75-100% of
our total portfolio in fixed-income securities and 0-25% in
common equities. At the end of 2007, our portfolio was allocated
83% to fixed-income securities and 17% to common equities.
Our investment portfolio produced a fully taxable equivalent
(FTE) total return of 4.7% for 2007. Both asset classes
contributed positively to the overall result, with FTE total
returns of 6.2% and 4.4% in the common stock and fixed-income
portfolios, respectively. We continue to maintain our
fixed-income portfolio strategy of investing in high-quality,
shorter-duration securities in the current investment
environment. Our common equity investment strategy remains an
index replication approach using the Russell 1000 Index as the
benchmark. We increased the duration of our fixed-income
portfolio modestly during the year to end 2007 at
3.5 years, compared to 3.1 years at the end of 2006.
The weighted average credit rating of our fixed-income portfolio
ranged from AA+ early in 2007 to AA later in the year. Our
portfolio decreased to $14.2 billion from
$14.7 billion last year. Strong cash flows from operations
and proceeds from the issuance of $1 billion of
subordinated debentures were offset by a return of capital to
shareholders in the form of $1.5 billion in share
repurchase activity and the payment of a $1.4 billion
special dividend to shareholders.
During the year, financial markets suffered significant
turbulence, triggered by a sharp weakening of the housing
market. Credit spreads on risk assets across substantially all
asset classes increased sharply, with even some AAA rated
securities, previously considered to be highly unlikely to
suffer a capital loss, plummeting in value. Financial
institutions bore the brunt of the losses and many were forced
to raise new capital. The Federal Open Market Committee lowered
the overnight Federal Funds rate by 1.00% to 4.25% during the
second half of the year. Yields on longer maturity
U.S. Treasury bonds decreased by less than the Federal
Funds rate decreased. At year-end 2007, two-year notes and
ten-year notes were yielding 3.06% and 4.03%, respectively,
compared to 4.84% and 4.71% at the end of 2006. The economy
expanded briskly at the start of 2007, but slowed during the
fourth quarter as the impact of the housing and financial market
deterioration rippled through to the larger economy.
In light of these market conditions, during 2007, we performed a
detailed review of our asset-backed securities to identify the
extent to which our asset values may have been impacted by
direct exposure to the sub-prime mortgage loan disruption, as
well as broader credit market events. At year-end 2007, we held
approximately $148.7 million of sub-prime mortgage bonds,
classified as home equity bonds. In addition, we held
$52.3 million of non-prime collateralized mortgage
obligations (Alt-A securities). Together, these securities had
unrealized losses of $12.3 million for 2007. During 2007,
we realized $1.7 million of losses related to
other-than-temporarily impaired sub-prime securities. In
addition, we had a credit default swap derivative on an
investment-grade asset-backed index, comprised of 20 bonds in
the sub-prime mortgage sector, with a notional amount of
$140 million. In conjunction with this derivative, we
received $43.3 million of upfront
App.-A-31
cash, which effectively reduced our maximum economic exposure on
this position to $96.7 million at December 31, 2007.
For 2007, this derivative position generated a loss of
$51.3 million.
In addition, we considered the indirect effects the sub-prime
market issues had on our redeemable and nonredeemable preferred
stocks. Roughly two-thirds of our preferred stock holdings are
obligations of financial sector issuers. During the year,
preferred stocks generated gross unrealized losses of
$338.1 million, of which $271.2 million occurred in
the fourth quarter. Based on a review of these securities, we
determined that none of them were deemed to have any fundamental
issues which would lead us to believe that any were
other-than-temporarily impaired. This determination was based on
several factors, including: the relatively short duration that
these securities have been in a significant loss position; the
continuance by the issuers to pay periodic dividends; the
raising of additional capital by the issuers; and, our intent
and ability to hold these securities.
In 2007, The Progressive Corporation, the holding company,
received $1.5 billion of dividends from its subsidiaries,
net of capital contributions made to subsidiaries. For the
three-year period ended December 31, 2007, The Progressive
Corporation received $4.4 billion of dividends from its
subsidiaries, net of capital contributions. Regulatory
restrictions on subsidiary dividends are described in
Note 7 Statutory Financial Information.
In June 2007, we announced a plan to restructure our capital
position, which included issuing debt securities and returning
capital to shareholders through share repurchases and a special
dividend (see the Capital Resources and Liquidity section
below for details).
As part of the capital restructuring plan in 2007, The
Progressive Corporation issued $1 billion of 6.70%
Fixed-to-Floating
Rate Junior Subordinated Debentures due 2067. In 2006, no debt
or equity instruments were issued; however, we retired
$100 million principal amount of our 7.30% Notes on
their maturity date. See Note 4 Debt for
further discussion of our current outstanding debt.
Progressives debt-to-total capital (debt plus equity)
ratios at December 31, 2007 and 2006 were 30.6% and 14.8%,
respectively. The increase primarily reflects the new debt
issuance and the nearly $3 billion that was returned to
shareholders during the year as part of the recapitalization
plan.
During 2007, we repurchased 72,886,215 of our common shares
pursuant to the recapitalization plan. The total cost to
repurchase these shares was $1.5 billion, with an average
cost of $21.24 per share. During the three-year period ended
December 31, 2007, we repurchased 117,153,644 of our common
shares at a total cost of $3.2 billion (average cost of
$22.81 per share, on a split-adjusted basis).
Lastly, as part of the recapitalization plan during 2007, we
returned $1.4 billion to shareholders via an extraordinary
cash dividend of $2.00 per share. During the last three years,
total cash dividends paid, including the extraordinary dividend,
were $1.5 billion.
Beginning in 2007, we are no longer paying a quarterly dividend
on our outstanding common shares. In February 2006, the Board of
Directors approved a plan to replace our previous quarterly
dividend policy with an annual variable dividend, using a target
percentage of after-tax underwriting income multiplied by a
companywide performance factor, referred to as the
Gainshare factor. The target percentage is
determined by our Board of Directors on an annual basis and
announced to shareholders and the public. For 2007 and 2008, the
Board determined the target percentage to be 20% of annual
after-tax underwriting income.
The Gainshare factor can range from 0 to 2 and is determined by
comparing our operating performance for the year to certain
predetermined profitability and growth objectives approved by
the Board. This dividend program is consistent with the variable
cash incentive program currently in place for our employees
(referred to as our Gainsharing Program). Although
recalibrated every year, the structure of the Gainsharing
Program generally remains the same. For 2007, the Gainshare
factor was .74.
Based on after-tax underwriting income of $666.3 million, a
20% target percentage and the Gainshare factor of .74, in
December 2007, the Board declared a dividend of $.1450 per
share, which was paid on January 31, 2008. In comparison,
our full year 2006 and 2005 shareholder dividends were
$.0325 per share and $.03 per share, respectively.
|
|
B.
|
Capital Resources
and Liquidity
|
Progressive has substantial capital resources and we are unaware
of any trends, events or circumstances not disclosed herein that
are reasonably likely to affect our capital resources in a
material way.
App.-A-32
In an effort to restructure our capital position, in June 2007,
we announced a recapitalization plan, which included the
following components:
|
|
|
|
|
The payment of an extraordinary cash dividend of $2.00 per
common share. This extraordinary cash dividend, which aggregated
to $1.4 billion, was declared by the Board on June 13,
2007, and was paid on September 14, 2007, to shareholders
of record at the close of business on August 31, 2007.
|
|
|
|
A new Board authorization for us to repurchase up to
100 million of our common shares over the course of the
next 24 months, expiring June 30, 2009. This
authorization was in addition to the approximately
4 million shares that remained available for repurchase at
the end of the second quarter 2007 under the Boards April
2006 share repurchase authorization.
|
|
|
|
The issuance of $1 billion of 6.70% Fixed-to-Floating Rate
Junior Subordinated Debentures due 2067 (the
Debentures) on June 18, 2007. The proceeds of
the offering were $987.3 million, before $1.5 million
of expenses related to the issuance. In addition, upon issuance
of the Debentures, we closed a forecasted debt issuance hedge,
which was entered into to hedge against a possible rise in
interest rates, and recognized a $34.4 million pretax gain
as part of shareholders equity; this gain is being
recognized as an adjustment to interest expense and amortized
over 10 years, which represents the fixed interest rate
period of the Debentures. See Note 4 Debt
for further discussion of the terms of the Debentures.
|
In connection with the issuance of the Debentures, we also
entered into a Replacement Capital Covenant for the benefit of
the holders of our 6.25% Senior Notes due 2032 (the
Covered Debt). Under the Replacement Capital
Covenant, we may not repay, redeem or repurchase any of the
Debentures prior to June 15, 2047 (or, if earlier, prior to
the occurrence of certain events specified in the Replacement
Capital Covenant), except to the extent that (subject to certain
limitations) the amount to be repaid, redeemed or purchased does
not exceed a specified percentage of net cash proceeds from the
sale to third parties of certain replacement capital securities
(as defined in the Replacement Capital Covenant) plus the
proceeds from the sale or issuance of common shares or certain
qualifying warrants. The identity of the Covered Debt may be
changed from time to time by the company upon the occurrence of
certain events specified in, and in accordance with the
requirements of, the provisions of the Replacement Capital
Covenant. See our Current Report on
Form 8-K,
filed on June 22, 2007, for additional information and a
copy of the Replacement Capital Covenant.
Progressive maintains an uncommitted line of credit with
National City Bank in the principal amount of $125 million
as part of a contingency plan to help maintain liquidity in the
unlikely event that we experience conditions or circumstances
that affect our ability to transfer or receive funds. We have
not borrowed under this arrangement to date.
At December 31, 2007, our debt-to-total capital ratio was
30.6%, which is slightly over Progressives financial
policy to maintain this ratio below 30%. We expect this ratio to
fluctuate somewhat as our capital changes, but our policy
continues to remain our benchmark. Our existing debt covenants
do not include any rating or credit triggers.
Progressives insurance operations create liquidity by
collecting and investing premiums from new and renewal business
in advance of paying claims. As an auto insurer, our claims
liabilities, by their very nature, are generally short in
duration. Approximately 50% of our outstanding reserves are paid
within one year and less than 15% are still outstanding after
three years. See Claims Payment Patterns, a supplemental
disclosure provided in this Annual Report, for further
discussion on the timing of claims payments. For the three years
ended December 31, 2007, operations generated positive cash
flows of $5.8 billion, and cash flows are expected to
remain positive in both the short-term and reasonably
foreseeable future. In addition, our investment portfolio is
highly liquid and consists substantially of readily marketable,
investment-grade securities. As of December 31, 2007, 83%
of our portfolio was invested in fixed-income securities with a
weighted average credit quality of AA and duration of
3.5 years. We believe that we have sufficient readily
marketable securities to cover our claims payments without
having a negative effect on our cash flows from operations.
Progressive seeks to deploy capital in a prudent manner and uses
multiple data sources and modeling tools to estimate the
frequency, severity and correlation of identified exposures,
including, but not limited to, catastrophic losses and the
business interruptions discussed below, to estimate our
potential capital needs. Based on this analysis, as well as the
information reported above, we believe that we have sufficient
capital resources, cash flows from operations and borrowing
capacity to support our current and anticipated growth,
scheduled principal and interest payments on our debt, expected
dividends and other capital requirements.
|
|
C.
|
Commitments and
Contingencies
|
We completed construction of four new claims service centers in
2007, 29 in 2006 and six in 2005 (discussed below). During 2006,
we also constructed a data center, printing center and related
facilities in Colorado Springs, Colorado, at a total cost of
$64.2 million, and acquired additional land for future
development to support corporate operations in
App.-A-33
Colorado Springs, Colorado and Mayfield Village, Ohio, near our
current corporate facilities, at a total cost of
$16.2 million. In 2005, we completed the conversion of a
building in Austin, Texas, into a call center at a total
acquisition and development cost of $40.6 million. In 2009,
we expect to begin a multi-year project to construct up to three
buildings and three parking garages, together with associated
facilities, in Mayfield Village at a currently estimated total
construction cost of $200 million. All such construction
projects have been, and will continue to be, funded through
operating cash flows.
As of December 31, 2007, we have a total of 54 centers that
are available to provide concierge level claims service,
compared to 53 in 2006 and 26 in 2005. Three of the four centers
opened during 2007, and two of the centers built in 2006,
replaced previously leased service center locations. The service
centers are located in 41 metropolitan areas across the United
States and serve as our primary approach to damage assessment
and coordination of vehicle repairs at authorized auto repair
facilities in these markets. Over the next two years, we expect
to complete construction of five new service centers, three of
which will replace existing leased facilities. The cost of these
facilities, excluding land, is estimated to average $4 to
$7 million per center, depending on a number of variables,
including the size and location of the center.
We maintain insurance on our real property and other physical
assets, including coverage for losses due to business
interruptions caused by covered property damage. However, the
insurance will not compensate us for losses that may occur due
to disruptions in service as a result of a computer, data
processing or telecommunications systems failure that is
unrelated to covered property damage, nor will the insurance
necessarily compensate us for all losses resulting from covered
events. To help maintain functionality and reduce the risk of
significant interruptions of our operations, we maintain
back-up
systems or facilities for certain of our principal systems and
services. We still may be exposed, however, should these
measures prove to be unsuccessful or inadequate against severe,
multiple or prolonged service interruptions or against
interruptions of systems where no
back-up
currently exists. In addition, we have established emergency
management teams, which are responsible for responding to
business disruptions and other risk events. The teams
ability to respond successfully may be limited depending on the
nature of the event, the completeness and effectiveness of our
plans to maintain business continuity upon the occurrence of
such an event, and other factors beyond our control.
Off-Balance-Sheet
Arrangements
Our off-balance-sheet leverage includes derivative positions and
open investment funding commitments (as disclosed in
Note 2 Investments, Note
12 Commitments and Contingencies and the
Derivative Instruments section of this Managements
Discussion and Analysis). It also includes operating leases and
purchase obligations (disclosed in the table below).
Contractual
Obligations
A summary of our noncancelable contractual obligations as of
December 31, 2007, follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments due by period
|
|
|
|
|
|
|
Less than
|
|
|
1-3
|
|
|
3-5
|
|
|
More than
|
|
(millions)
|
|
Total
|
|
|
1 Year
|
|
|
Years
|
|
|
Years
|
|
|
5 Years
|
|
|
|
|
Debt
|
|
$
|
2,200.0
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
350.0
|
|
|
$
|
1,850.0
|
|
Interest payments on debt
|
|
|
1,852.2
|
|
|
|
144.7
|
|
|
|
289.4
|
|
|
|
278.2
|
|
|
|
1,139.9
|
|
Operating leases
|
|
|
276.3
|
|
|
|
94.3
|
|
|
|
115.9
|
|
|
|
40.8
|
|
|
|
25.3
|
|
Purchase obligations
|
|
|
94.5
|
|
|
|
65.7
|
|
|
|
28.7
|
|
|
|
.1
|
|
|
|
|
|
Loss and loss adjustment expense reserves
|
|
|
5,942.7
|
|
|
|
3,173.0
|
|
|
|
2,146.2
|
|
|
|
477.3
|
|
|
|
146.2
|
|
|
Total
|
|
$
|
10,365.7
|
|
|
$
|
3,477.7
|
|
|
$
|
2,580.2
|
|
|
$
|
1,146.4
|
|
|
$
|
3,161.4
|
|
|
|
|
|
Purchase obligations represent our noncancelable commitments for
goods and services. Unlike many other forms of contractual
obligations, loss and loss adjustment expense (LAE) reserves do
not have definitive due dates and the ultimate payment dates are
subject to a number of variables and uncertainties. As a result,
the total loss and LAE reserve payments to be made by period, as
shown above, are estimates based on our recent payment patterns.
To further understand our claims payments, see Claims Payment
Patterns, a supplemental disclosure provided in this Annual
Report. In addition, we annually publish a comprehensive
Report on Loss Reserving Practices, which was filed with
the SEC on a
Form 8-K
on June 28, 2007, that further discusses our claims payment
development patterns.
App.-A-34
In January 2008, we entered into a
16-year
contract for the ballpark naming rights and a sponsorship deal
with the Cleveland Indians Major League Baseball team. Over the
contract term, Progressive will pay an average of approximately
$3.6 million per year. This expenditure is a reallocation
of a small percentage of our annual media spend and is intended
to generate greater exposure for us by reaching an estimated
120 million baseball fans each year.
As discussed in the Capital Resources and Liquidity
section above, we believe that we have sufficient borrowing
capacity, cash flows and other capital resources to satisfy
these contractual obligations.
|
|
III.
|
RESULTS OF
OPERATIONS UNDERWRITING
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(millions)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
NET PREMIUMS WRITTEN
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personal Lines
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency
|
|
$
|
7,549.4
|
|
|
$
|
7,854.3
|
|
|
$
|
8,005.6
|
|
|
|
|
|
Direct
|
|
|
4,371.8
|
|
|
|
4,354.5
|
|
|
|
4,177.3
|
|
|
|
|
|
|
Total Personal Lines
|
|
|
11,921.2
|
|
|
|
12,208.8
|
|
|
|
12,182.9
|
|
|
|
|
|
Commercial Auto
|
|
|
1,828.9
|
|
|
|
1,898.0
|
|
|
|
1,801.2
|
|
|
|
|
|
Other indemnity
|
|
|
22.4
|
|
|
|
25.2
|
|
|
|
23.5
|
|
|
|
|
|
|
Total underwriting operations
|
|
$
|
13,772.5
|
|
|
$
|
14,132.0
|
|
|
$
|
14,007.6
|
|
|
|
|
|
|
|
|
|
Growth over prior years
|
|
|
(3
|
)%
|
|
|
1
|
%
|
|
|
5
|
%
|
|
|
|
|
|
|
|
|
NET PREMIUMS EARNED
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personal Lines
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency
|
|
$
|
7,636.4
|
|
|
$
|
7,903.6
|
|
|
$
|
7,993.1
|
|
|
|
|
|
Direct
|
|
|
4,372.6
|
|
|
|
4,337.4
|
|
|
|
4,076.2
|
|
|
|
|
|
|
Total Personal Lines
|
|
|
12,009.0
|
|
|
|
12,241.0
|
|
|
|
12,069.3
|
|
|
|
|
|
Commercial Auto
|
|
|
1,846.9
|
|
|
|
1,851.9
|
|
|
|
1,667.8
|
|
|
|
|
|
Other indemnity
|
|
|
21.5
|
|
|
|
25.0
|
|
|
|
27.3
|
|
|
|
|
|
|
Total underwriting operations
|
|
$
|
13,877.4
|
|
|
$
|
14,117.9
|
|
|
$
|
13,764.4
|
|
|
|
|
|
|
|
|
|
Growth over prior years
|
|
|
(2
|
)%
|
|
|
3
|
%
|
|
|
5
|
%
|
|
|
|
|
|
|
|
|
Net premiums written represent the premiums generated from
policies written during the period less any premiums ceded to
reinsurers. Net premiums earned, which are a function of the
premiums written in the current and prior periods, are earned as
revenue over the life of the policy using a daily earnings
convention. Policies in force, our preferred measure of growth,
represents all policies under which coverage is in effect as of
the end of the period specified. As of December 31, our
policies in force were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(thousands)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
POLICIES IN FORCE
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personal Lines
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency auto
|
|
|
4,396.8
|
|
|
|
4,433.1
|
|
|
|
4,491.4
|
|
|
|
|
|
Direct auto
|
|
|
2,598.5
|
|
|
|
2,428.5
|
|
|
|
2,327.7
|
|
|
|
|
|
|
Total auto
|
|
|
6,995.3
|
|
|
|
6,861.6
|
|
|
|
6,819.1
|
|
|
|
|
|
Special
lines1
|
|
|
3,120.3
|
|
|
|
2,879.5
|
|
|
|
2,674.9
|
|
|
|
|
|
|
Total Personal Lines
|
|
|
10,115.6
|
|
|
|
9,741.1
|
|
|
|
9,494.0
|
|
|
|
|
|
|
|
|
|
Growth over prior year
|
|
|
4
|
%
|
|
|
3
|
%
|
|
|
9
|
%
|
|
|
|
|
|
|
|
|
Commercial Auto
|
|
|
539.2
|
|
|
|
503.2
|
|
|
|
468.2
|
|
|
|
|
|
|
|
|
|
Growth over prior year
|
|
|
7
|
%
|
|
|
7
|
%
|
|
|
11
|
%
|
|
|
|
|
|
|
|
|
1Includes
insurance for motorcycles, recreational vehicles, mobile homes,
watercraft, snowmobiles and similar items, as well as a personal
umbrella product.
App.-A-35
Progressive experienced a decline in total written and earned
premiums during 2007, as compared to the positive growth rates
achieved in 2006 and 2005, reflecting market conditions in which
rates are stable or decreasing. Competitors actions, such
as rate reductions, increased advertising, higher commission
payments to agents and brokers and a relaxation of underwriting
standards, continued to have a significant impact on the
marketplace in 2007. We are continuing to focus on further
developing the Progressive brand and will continue to work with
our advertising agency to identify compelling ways to help
consumers understand what sets Progressive apart.
To analyze growth, we review new policies, rate levels, and the
retention characteristics of our books of business. During the
last three years, we experienced the following growth in new and
renewal applications:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Growth Over Prior Year
|
|
|
|
Personal Lines
|
|
|
Commercial Auto
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
New applications
|
|
|
2
|
%
|
|
|
(7
|
)%
|
|
|
|
%
|
|
|
3
|
%
|
|
|
1
|
%
|
|
|
3
|
%
|
Renewal applications
|
|
|
3
|
%
|
|
|
7
|
%
|
|
|
11
|
%
|
|
|
5
|
%
|
|
|
4
|
%
|
|
|
8
|
%
|
We began reducing rates in mid-2006 and into 2007. These rate
reductions, coupled with shifts in the mix of business,
contributed to a 5% decrease in total auto written premium per
policy in 2007, compared to declines of 2% in 2006 and 4% in
2005. Our current pricing levels are closely aligned with our
profitability targets. As such, we expect that future rate
actions will be driven by net loss and expense trend projections
which, at this time, we view as slightly positive.
Another important element affecting growth is customer
retention. One measure of retention is policy life expectancy,
which is an estimate of the average length of time that a policy
will remain in force before cancellation or non-renewal. By the
end of 2007, we achieved policy life expectancy greater than the
prior year in both our Agency and Direct auto businesses, but
still had not returned to the levels we had at year-end 2005.
Our policy life expectancies in our Commercial Auto Business
remained relatively flat overall on a year-over-year basis, but
were up slightly from year-end 2005. Realizing the importance
that retention has on our ability to continue to grow
profitably, we continue to place increased emphasis on
competitive pricing and other retention initiatives for our
current customers.
Profitability for our underwriting operations is defined by
pretax underwriting profit, which is calculated as net premiums
earned less losses and loss adjustment expenses, policy
acquisition costs and other underwriting expenses. We also use
underwriting profit margin, which is underwriting profit
expressed as a percentage of net premiums earned, to analyze our
results. For the three years ended December 31, our
underwriting profitability was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
Underwriting Profit
|
|
|
Underwriting Profit
|
|
|
Underwriting Profit
|
|
|
|
|
($ in millions)
|
|
$
|
|
|
Margin
|
|
|
$
|
|
|
Margin
|
|
|
$
|
|
|
Margin
|
|
|
|
|
|
|
|
Personal Lines
Agency
|
|
$
|
500.2
|
|
|
|
6.5
|
%
|
|
$
|
936.7
|
|
|
|
11.9
|
%
|
|
$
|
857.6
|
|
|
|
10.7
|
%
|
|
|
|
|
Direct
|
|
|
339.9
|
|
|
|
7.8
|
|
|
|
568.6
|
|
|
|
13.1
|
|
|
|
475.7
|
|
|
|
11.7
|
|
|
|
|
|
|
Total Personal Lines
|
|
|
840.1
|
|
|
|
7.0
|
|
|
|
1,505.3
|
|
|
|
12.3
|
|
|
|
1,333.3
|
|
|
|
11.0
|
|
|
|
|
|
Commercial Auto
|
|
|
185.7
|
|
|
|
10.1
|
|
|
|
366.5
|
|
|
|
19.8
|
|
|
|
298.0
|
|
|
|
17.9
|
|
|
|
|
|
Other
indemnity1
|
|
|
(.7
|
)
|
|
|
NM
|
|
|
|
6.5
|
|
|
|
NM
|
|
|
|
7.9
|
|
|
|
NM
|
|
|
|
|
|
|
Total underwriting operations
|
|
$
|
1,025.1
|
|
|
|
7.4
|
%
|
|
$
|
1,878.3
|
|
|
|
13.3
|
%
|
|
$
|
1,639.2
|
|
|
|
11.9
|
%
|
|
|
|
|
|
|
|
|
|
|
1 |
Underwriting margins for our other indemnity businesses are not
meaningful (NM) due to the low level of premiums earned by, and
the variability of losses in, such businesses.
|
The decrease in underwriting margins in 2007 primarily reflects
the rate reductions we began in mid-2006. Underwriting margins
for 2005 reflect the higher losses incurred as a result of the
major hurricanes experienced during the latter part of 2005,
which lowered the underwriting margin by 2.4 percentage
points.
App.-A-36
Further underwriting results for our Personal Lines Business,
including its channel components, the Commercial Auto Business
and other indemnity businesses, as defined in
Note 9 Segment Information, were as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Underwriting
Performance1
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
Personal Lines Agency
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss & loss adjustment expense ratio
|
|
|
72.1
|
|
|
|
67.8
|
|
|
|
69.1
|
|
Underwriting expense ratio
|
|
|
21.4
|
|
|
|
20.3
|
|
|
|
20.2
|
|
|
Combined ratio
|
|
|
93.5
|
|
|
|
88.1
|
|
|
|
89.3
|
|
|
|
|
|
Personal Lines Direct
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss & loss adjustment expense ratio
|
|
|
71.3
|
|
|
|
66.8
|
|
|
|
68.4
|
|
Underwriting expense ratio
|
|
|
20.9
|
|
|
|
20.1
|
|
|
|
19.9
|
|
|
Combined ratio
|
|
|
92.2
|
|
|
|
86.9
|
|
|
|
88.3
|
|
|
|
|
|
Total Personal Lines
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss & loss adjustment expense ratio
|
|
|
71.8
|
|
|
|
67.4
|
|
|
|
68.9
|
|
Underwriting expense ratio
|
|
|
21.2
|
|
|
|
20.3
|
|
|
|
20.1
|
|
|
Combined ratio
|
|
|
93.0
|
|
|
|
87.7
|
|
|
|
89.0
|
|
|
|
|
|
Commercial Auto
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss & loss adjustment expense ratio
|
|
|
69.7
|
|
|
|
61.0
|
|
|
|
62.4
|
|
Underwriting expense ratio
|
|
|
20.2
|
|
|
|
19.2
|
|
|
|
19.7
|
|
|
Combined ratio
|
|
|
89.9
|
|
|
|
80.2
|
|
|
|
82.1
|
|
|
|
|
|
Total Underwriting
Operations2
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss & loss adjustment expense ratio
|
|
|
71.5
|
|
|
|
66.5
|
|
|
|
68.0
|
|
Underwriting expense ratio
|
|
|
21.1
|
|
|
|
20.2
|
|
|
|
20.1
|
|
|
Combined ratio
|
|
|
92.6
|
|
|
|
86.7
|
|
|
|
88.1
|
|
|
|
|
|
Accident year Loss & loss adjustment
expense ratio
|
|
|
70.9
|
|
|
|
68.2
|
|
|
|
70.6
|
|
|
|
|
|
|
|
1
|
Ratios are expressed as a percentage of net premiums earned.
|
|
2
|
Combined ratios for the other indemnity businesses are not
presented separately due to the low level of premiums earned by,
and the variability of losses in, such businesses. For the years
ended December 31, 2007, 2006 and 2005, these businesses
generated an underwriting profit (loss) of $(.7) million,
$6.5 million and $7.9 million, respectively.
|
Losses and
Loss Adjustment Expenses (LAE)
|
|
|
|
|
|
|
|
|
|
|
|
|
(millions)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
Change in net loss and LAE reserves
|
|
$
|
291.6
|
|
|
$
|
50.5
|
|
|
$
|
364.6
|
|
Paid losses and LAE
|
|
|
9,634.6
|
|
|
|
9,344.4
|
|
|
|
9,000.2
|
|
|
Total incurred losses and LAE
|
|
$
|
9,926.2
|
|
|
$
|
9,394.9
|
|
|
$
|
9,364.8
|
|
|
|
|
|
Claims costs, our most significant expense, represent payments
made, and estimated future payments to be made, to or on behalf
of our policyholders, including expenses needed to adjust or
settle claims. These costs include an estimate for costs related
to assignments, based on current business, under state-mandated
automobile insurance programs. Claims costs are defined by loss
severity and frequency and are influenced by inflation and
driving patterns, among other factors. Accordingly, estimated
changes in these factors are taken into account when we
establish premium rates and loss reserves. Results would differ
if different assumptions were made. See the Critical
Accounting Policies for a discussion of the effect of
changing estimates.
During 2007, our loss and LAE ratio increased 5.0 points,
primarily reflecting increasing severity during the year,
unfavorable prior accident year reserve development, compared to
favorable development in 2006, as well as lower average earned
premium due to recent rate reductions. Catastrophe losses from
2007 storms contributed .3 points to our loss ratio, compared to
.5 points and 2.4 points from catastrophes in 2006 and 2005,
respectively. The large amount of catastrophe losses in 2005
primarily related to Hurricanes Katrina and Wilma.
App.-A-37
Auto accident frequency for the trailing 12 months was
slightly less than the prior year periods; however, the rate of
change is less than that experienced in the prior two years. We
cannot predict the degree or direction of frequency change that
we will experience in the future. We continue to analyze trends
to distinguish changes in our experience from external factors,
such as changes in the number of vehicles per household and
greater vehicle safety, versus those resulting from shifts in
the mix of our business.
We experienced an increase in total auto paid severity of about
3.5% during 2007. The increase was primarily from our bodily
injury and personal injury protection coverages, with a decrease
in collision. During 2005 and 2006, Progressives severity
increased modestly, after adjusting for the significant
hurricanes in 2005.
The table below presents the actuarial adjustments implemented
and the loss reserve development experienced in the years ended
December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
Actuarial Adjustments
|
|
|
|
|
|
|
|
|
|
|
|
|
Favorable/(Unfavorable)
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior accident years
|
|
$
|
37.3
|
|
|
$
|
158.3
|
|
|
$
|
127.2
|
|
Current accident year
|
|
|
(37.1)
|
|
|
|
57.8
|
|
|
|
78.4
|
|
|
Calendar year actuarial adjustment
|
|
$
|
.2
|
|
|
$
|
216.1
|
|
|
$
|
205.6
|
|
|
|
|
|
Prior Accident Years Development
|
|
|
|
|
|
|
|
|
|
|
|
|
Favorable/(Unfavorable)
|
|
|
|
|
|
|
|
|
|
|
|
|
Actuarial adjustment
|
|
$
|
37.3
|
|
|
$
|
158.3
|
|
|
$
|
127.2
|
|
All other development
|
|
|
(117.6)
|
|
|
|
88.6
|
|
|
|
228.7
|
|
|
Total development
|
|
$
|
(80.3)
|
|
|
$
|
246.9
|
|
|
$
|
355.9
|
|
|
|
|
|
(Increase) decrease to calendar year combined ratio
|
|
|
(.6) pts.
|
|
|
|
1.7 pts.
|
|
|
|
2.6 pts.
|
|
|
|
|
|
Total development consists both of actuarial adjustments and
all other development. The actuarial adjustments
represent the net changes made by our actuarial department to
both current and prior accident year reserves based on regularly
scheduled reviews. All other development represents
claims settling for more or less than reserved, emergence of
unrecorded claims at rates different than reserved and changes
in reserve estimates on specific claims. Although we believe
that the development from both the actuarial adjustments and
all other development generally results from the
same factors, as discussed below, we are unable to quantify the
portion of the reserve adjustments that might be applicable to
any one or more of those underlying factors.
As reflected in the table above, we experienced unfavorable
total development in 2007, compared to favorable development in
2006 and 2005. For 2007, the total prior years loss
reserve development was unfavorable in our Commercial Auto
Business for both the specialty truck and business auto
products, primarily reflecting a higher than expected number of
large case reserve changes associated with prior accident years,
as well as an increase in the number and severity of late
reported claims in excess of our original estimate. The
development on our total Personal Lines Business netted to no
overall impact for the year as the development for the two
channels offset each other.
For 2006 and 2005, the favorable total prior year loss reserve
development was generally consistent across our business (e.g.,
product, distribution channel and state). These changes in
estimates were made based on our actual loss experience
involving the payment of claims, along with our evaluation of
the needed reserves during these periods, as compared with the
prior reserve levels for those claims.
The prior year loss reserve development for 2007 primarily
reflected unfavorable development from accident years greater
than one year old (i.e., accident year 2005 and prior) as
discussed below. For 2006 and 2005, slightly more than half of
the development related to the immediately preceding accident
year (i.e., 2005 and 2004, respectively), with the remainder
primarily affecting the preceding two accident years at a
declining rate.
Changes in our estimate of severity from what we originally
expected when establishing the reserves is the principal cause
of prior accident year development. These changes in estimate
are the result of what we are observing in the underlying data
as it develops. During 2007, we experienced unfavorable reserve
development after several years of recognizing favorable
development. This development was driven by the unfavorable
settlement of several outstanding lawsuits, the emergence of
more than expected large losses from prior years, along with the
reviews of larger bodily injury and uninsured motorist claims.
In 2006 and 2005, we saw severity estimates develop more
favorably than what was originally expected, and although we
were unable to quantify the contribution of each factor to the
overall favorable
App.-A-38
reserve development, we believe that the favorable changes in
these estimates were related to factors as diverse as improved
vehicle safety, more conservative jury awards, better fraud
control and tenure of our claims personnel.
We are seeing our accident year severity trends following
historical patterns. We continue to focus on our loss reserve
analysis, attempting to enhance accuracy and to further our
understanding of our loss costs. A detailed discussion of our
loss reserving practices can be found in our Report on Loss
Reserving Practices, which was filed in a
Form 8-K
on June 28, 2007.
Because we are primarily an insurer of motor vehicles, our
exposure as an insurer of environmental, asbestos and general
liability claims is limited. We have established reserves for
these exposures in amounts that we believe to be adequate based
on information currently known. These exposures do not have a
material effect on our liquidity, financial condition, cash
flows or results of operations.
Underwriting
Expenses
Other underwriting expenses and policy acquisition costs as a
percentage of premiums earned were up about one point over both
2006 and 2005. The increase primarily reflects lower average
earned premium per policy due to recent rate reductions and an
increase in advertising expenditures, primarily in our Direct
channel. In accordance with GAAP, policy acquisition costs are
amortized over the policy period in which the related premiums
are earned (see Note 1 Reporting and Accounting
Policies).
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Growth Over Prior Year
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
Net premiums written
|
|
|
(2
|
)%
|
|
|
|
%
|
|
|
4
|
%
|
Net premiums earned
|
|
|
(2
|
)%
|
|
|
1
|
%
|
|
|
4
|
%
|
Policies in force
|
|
|
4
|
%
|
|
|
3
|
%
|
|
|
9
|
%
|
Progressives Personal Lines Business writes insurance for
private passenger automobiles and recreational vehicles, and
represented approximately 87% of our total net premiums written
for the last three years. We currently write our Personal Lines
products in 49 states and our personal auto product in the
District of Columbia. In 2008, we are looking to expand these
offerings into Massachusetts.
Private passenger auto represented slightly more than 90% of our
total Personal Lines net premiums written in each of the past
three years, with the special lines products (e.g., motorcycles,
watercraft, and RVs) making up the balance. Net premiums written
for private passenger auto declined 3% in 2007, was flat in 2006
and increased 3% in 2005; special lines net written premiums
grew 5%, 7% and 14%, respectively, in each of the last three
years. In 2007, 2006 and 2005, policies in force grew 2%, 1% and
8%, respectively, for private passenger auto, while policies in
force for the special lines products grew 8% in both 2007 and
2006 and 14% in 2005. The special lines products had a favorable
effect on the total Personal Lines combined ratio of about one
point in both 2007 and 2006 and had little effect in 2005.
During 2007, we reorganized and brought our Agency and Direct
businesses together under one Personal Lines organization to
increase our ability to execute on key strategies, lower our
non-claims expense ratio and foster growth through more
competitive pricing, improved customer retention and an
increased focus on brand development. Nevertheless, we will
continue to report our Agency and Direct business results
separately as a component of our Personal Lines segment to
provide further understanding of our products by channel.
The Agency
Business
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Growth Over Prior Year
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
Net premiums written
|
|
|
(4
|
)%
|
|
|
(2
|
)%
|
|
|
1
|
%
|
Net premiums earned
|
|
|
(3
|
)%
|
|
|
(1
|
)%
|
|
|
1
|
%
|
Auto: policies in force
|
|
|
(1
|
)%
|
|
|
(1
|
)%
|
|
|
6
|
%
|
new applications
|
|
|
(1
|
)%
|
|
|
(10
|
)%
|
|
|
(5)
|
%
|
renewal applications
|
|
|
|
%
|
|
|
4
|
%
|
|
|
9
|
%
|
The Agency business includes business written by the more than
30,000 independent insurance agencies that represent
Progressive, as well as brokerages in New York and California.
During 2007, we saw new Agency auto application growth in
28 states. Two of our largest volume states, Florida and
Texas, experienced positive new application growth in the
App.-A-39
second half of 2007; however, some of our other big states have
not yet seen this growth, thus hindering our overall Agency auto
growth.
Written premium per policy on total Agency auto business was
down about 4% from year-end 2006, driven by decreases of written
premium per policy in both new and renewal auto business,
reflecting our recent rate reductions. For 2006 and 2005 written
premium per policy was down about 3% and 6%, respectively, as
compared to the prior year.
The rate of conversion (i.e., converting a quote to a sale) was
down in 2007 and 2006 and relatively flat in 2005, on an
increase each year in the number of auto quotes. Within the
Agency business, we are continuing to see a shift from
traditional agent quoting, where the conversion rate is
remaining stable, to quotes generated through third-party
comparative rating systems, where the conversion rate is lower.
Our Agency business expense ratio increased about one point in
2007, compared to both 2006 and 2005, primarily the result of
lower average earned premium per policy due to our recent rate
reductions.
The Direct
Business
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Growth Over Prior Year
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
Net premiums written
|
|
|
|
%
|
|
|
4
|
%
|
|
|
10
|
%
|
Net premiums earned
|
|
|
1
|
%
|
|
|
6
|
%
|
|
|
10
|
%
|
Auto: policies in force
|
|
|
7
|
%
|
|
|
4
|
%
|
|
|
12
|
%
|
new applications
|
|
|
5
|
%
|
|
|
(4)
|
%
|
|
|
8
|
%
|
renewal applications
|
|
|
7
|
%
|
|
|
9
|
%
|
|
|
14
|
%
|
The Direct business includes business written directly by
Progressive online and over the phone. In 2007, we experienced
an increase in Direct auto new applications in 30 states.
Internet sales continue to be the most significant source of new
business that is initiated in the Direct channel.
Written premium per policy for total Direct auto business was
down 6% during 2007, compared to decreases of 1% in 2006 and 2%
in 2005. In each of the last three years, the decreases were
driven by declines in written premium per policy for both new
and renewal business.
The number of total quotes decreased in the Direct business in
both 2007 and 2006, as compared to the prior year. The rate of
conversion increased during 2007, after being relatively flat
during 2006. Conversion rates for both Internet-initiated
business and phone-initiated business increased during both
years. However, in 2006, we experienced a proportional increase
in Internet business, which has a lower conversion rate than
phone. In 2005, the overall conversion rate was down slightly on
a significant increase in quotes, reflecting the Internet
business becoming a bigger portion of the total Direct business.
The Direct expense ratio increased .8 points in 2007, compared
to 2006, primarily due to increased advertising expenditures
during the year and the lower average earned premium per policy.
Advertising expenditures also increased year-over-prior year in
2006 and 2005. We are continuing to work with the advertising
agency we hired in 2006, to find compelling ways to help
consumers understand what sets us apart and to communicate our
brand promise.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Growth Over Prior Year
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
Net premiums written
|
|
|
(4)
|
%
|
|
|
5
|
%
|
|
|
11
|
%
|
Net premiums earned
|
|
|
|
%
|
|
|
11
|
%
|
|
|
9
|
%
|
Policies in force
|
|
|
7
|
%
|
|
|
7
|
%
|
|
|
11
|
%
|
New applications
|
|
|
3
|
%
|
|
|
1
|
%
|
|
|
3
|
%
|
Renewal applications
|
|
|
5
|
%
|
|
|
4
|
%
|
|
|
8
|
%
|
Progressives Commercial Auto Business writes primary
liability and physical damage insurance for automobiles and
trucks owned by small businesses, with the majority of our
customers insuring three or fewer vehicles. Commercial Auto
Business represented about 13% of our total net premiums written
for the last three years. The Commercial Auto Business is
primarily distributed through independent agents, but we are
starting to see growth in the direct channel. The Commercial
Auto Business operates in the specialty truck and business auto
markets. The specialty truck commercial auto market, which
accounts for slightly more than half of the total Commercial
Auto premiums and approximately 40%
App.-A-40
of the vehicles we insure in this business, includes dump
trucks, logging trucks, tow trucks, local cartage and other
short-haul commercial vehicles. The remainder is in the business
auto market, which includes autos, vans and
pick-up
trucks used by artisans, such as contractors, landscapers and
plumbers, and a variety of other small businesses.
We currently write our Commercial Auto Business in
49 states; we do not write Commercial Auto in Hawaii or the
District of Columbia. We entered Massachusetts early in 2007,
West Virginia in early 2006 and New Jersey in late 2005.
As compared to the prior year, total written premium per policy
decreased about 6% in 2007, compared to increases of 5% in 2006
and 6% in 2005. The increases in 2006 and 2005 partially reflect
Commercial Autos shift from
6-month to
12-month
policies, which had a favorable impact on premium per policy.
This shift started at the end of the first quarter 2004 and was
substantially completed in the second quarter 2005.
Commercial Autos expense ratio increased one point during
2007, resulting from significant investments in agency
distribution and direct marketing capability, as well as reduced
premiums.
Although Commercial Auto differs from Personal Lines auto in its
customer base and products written, both businesses require the
same fundamental skills, including disciplined underwriting and
pricing, as well as excellent claims service. Since the
Commercial Auto policies have higher limits (up to
$1 million) than Personal Lines auto, we analyze the large
loss trends and reserving in more detail to allow us to react
quickly to changes in this exposure.
Progressives other indemnity businesses, which represent
less than 1% of our net premiums earned, primarily include
professional liability insurance for community banks and a small
amount of run-off business. The underwriting profit (loss) in
these businesses may fluctuate widely due to the low premium
volume, variability in losses, and the run-off nature of some of
these products.
We reinsure the majority of the risk on our professional
liability insurance, principally directors and
officers liability insurance, with a small mutual
reinsurer controlled by its bank customers and various other
reinsurance entities. In light of the sub-prime mortgage
crisis, we reviewed our community bank program and
believe that we do not have any significant direct exposure to
claims arising from this issue. From a strategic perspective,
community banks tend not to generate sub-prime mortgages or
invest in sub-prime securities. To date, we have not received
any directors or officers liability claims related to sub-prime
mortgages.
Our service businesses provide insurance-related services and
represented less than 1% of revenues for each of the last three
years. Our principal service business is providing policy
issuance and claims adjusting services for the Commercial Auto
Insurance Procedures/Plans (CAIP), which are state-supervised
plans serving the involuntary markets in 27 states. We
currently process approximately half of the premiums in the CAIP
market, which is down slightly from the prior two years. There
are two other CAIP service providers nationwide and one of these
carriers has indicated that it will cease writing new business
in 2008; we expect our market share of this business will
increase as a result.
As a service provider, we collect fee revenue that is earned on
a pro rata basis over the term of the related policies. We cede
100% of the premiums and losses to the plans. Reimbursements to
us from the CAIP plans are required by state laws and
regulations. Material violations of contractual service
standards can result in ceding restrictions for the affected
business. We have maintained, and plan to continue to maintain,
compliance with these standards. Any changes in our
participation as a CAIP service provider would not materially
affect our financial condition, results of operations or cash
flows.
Service business revenues decreased 27% in 2007. The decrease
reflects the continuing cyclical downturn in the involuntary
commercial auto market. At the same time, however, expenses are
not decreasing at the same rate, primarily due to the fixed
costs associated with our total loss replacement program, which
is another one of our service businesses. This program is
primarily a customer-service initiative, through which we help
policyholders and claimants find and purchase a replacement
vehicle when their automobile is declared to be a total loss. We
evaluated the benefits of maintaining this service in-house and
concluded that contracting with third-party providers to deliver
this service will continue to meet our customers needs and
reduce our costs; transition of the program is expected to be
completed in the second quarter 2008.
App.-A-41
The Progressive Corporation
and/or its
subsidiaries are named as a defendant in a number of putative
class action or other lawsuits, such as those alleging damages
as a result of our use of after-market parts; total loss
evaluation methodology; use of credit in underwriting and
related requirements under the federal Fair Credit Reporting
Act; installment fee programs; practices in evaluating or paying
medical or injury claims or benefits, including, but not limited
to, personal injury protection, medical payments, uninsured
motorist/underinsured motorist (UM/UIM), and bodily injury
benefits; rating practices at policy renewal; the utilization,
content, or appearance of UM/UIM rejection forms; the practice
of taking betterment on boat repairs; labor rates paid to auto
body repair shops; and cases challenging other aspects of our
claims or marketing practices or other business operations.
Other insurance companies face many of these same issues. During
2007, we settled a nationwide class action challenging our use
of software to assist in the adjustment of bodily injury claims,
a state class action challenging payments of certain medical
benefits, and a state class action challenging the amount
charged for UIM premiums. During 2006, we settled nationwide
claims challenging our use of credit information and notice
requirements under the federal Fair Credit Reporting Act;
statewide class action lawsuits that challenged our payment of
preferred provider rates on personal injury protection claims;
and certain statewide class action lawsuits challenging our
payments of MRI bills under personal injury protection coverage.
In 2005, we settled nationwide claims challenging our use of
certain automated database vendors to assist in the evaluation
of total loss claims and a state class action challenging our
UM/UIM rejection form. These settlements did not have a material
impact on our financial condition, cash flows or results of
operations. See Note 11 Litigation for a
more detailed discussion.
As reported in the balance sheet, income taxes are comprised of
net income taxes payable and net deferred tax assets and
liabilities. A deferred tax asset/liability is a tax
benefit/expense that will be realized in a future tax return. At
December 31, 2007 and 2006, our income taxes were in a net
asset position. The increase in our net asset position during
2007 primarily reflected a decrease in our net unrealized gains
on securities. See Note 3 Income Taxes
for further information.
App.-A-42
|
|
IV.
|
RESULTS OF
OPERATIONS INVESTMENTS
|
Progressives investment strategy targets a range of
between 75% and 100% in fixed-income securities with the balance
in common equities. This strategy is based on our need to
maintain capital adequate to support our insurance operations,
recognizing that our reserves are short in duration. Investments
in our portfolio have varying degrees of risk. We evaluate the
risk/reward trade-offs of investment opportunities, measuring
their effects on stability, diversity, overall quality and
liquidity, and the potential return of the investment portfolio.
We also monitor the value at risk of the portfolio to evaluate
the maximum potential loss (see the Quantitative Market Risk
Disclosures, a supplemental schedule provided in this Annual
Report, for further information). The composition of the
investment portfolio at December 31 was:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
|
|
|
Gross
|
|
|
|
|
|
% of
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
|
Unrealized
|
|
|
Fair
|
|
|
Total
|
|
|
Duration
|
|
|
|
|
($ in millions)
|
|
Cost
|
|
|
Gains
|
|
|
Losses
|
|
|
Value
|
|
|
Portfolio
|
|
|
(years)
|
|
|
Rating5
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed
maturities1
|
|
$
|
9,135.6
|
|
|
$
|
137.1
|
|
|
$
|
(87.8
|
)
|
|
$
|
9,184.9
|
|
|
|
64.8
|
%
|
|
|
4.0
|
|
|
|
AA
|
|
Preferred
stocks2
|
|
|
2,578.1
|
|
|
|
6.0
|
|
|
|
(306.4
|
)
|
|
|
2,270.3
|
|
|
|
16.0
|
|
|
|
1.9
|
|
|
|
A-
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other short-term investments
|
|
|
382.4
|
|
|
|
|
|
|
|
|
|
|
|
382.4
|
|
|
|
2.7
|
|
|
|
<1
|
|
|
|
AA+
|
|
|
|
|
|
|
|
|
|
|
Total fixed income
|
|
|
12,096.1
|
|
|
|
143.1
|
|
|
|
(394.2
|
)
|
|
|
11,837.6
|
|
|
|
83.5
|
|
|
|
3.5
|
|
|
|
AA
|
|
Common equities
|
|
|
1,361.0
|
|
|
|
986.8
|
|
|
|
(20.3
|
)
|
|
|
2,327.5
|
|
|
|
16.5
|
|
|
|
na
|
|
|
|
na
|
|
|
|
|
|
|
|
|
|
|
Total
portfolio2,3,4
|
|
$
|
13,457.1
|
|
|
$
|
1,129.9
|
|
|
$
|
(414.5
|
)
|
|
$
|
14,165.1
|
|
|
|
100.0
|
%
|
|
|
3.5
|
|
|
|
AA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities
|
|
$
|
9,959.6
|
|
|
$
|
74.8
|
|
|
$
|
(75.5
|
)
|
|
$
|
9,958.9
|
|
|
|
67.8
|
%
|
|
|
3.6
|
|
|
|
AAA-
|
|
Preferred stocks
|
|
|
1,761.4
|
|
|
|
31.5
|
|
|
|
(11.9
|
)
|
|
|
1,781.0
|
|
|
|
12.1
|
|
|
|
1.5
|
|
|
|
A-
|
|
Short-term investments:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auction rate municipal obligations
|
|
|
99.4
|
|
|
|
|
|
|
|
|
|
|
|
99.4
|
|
|
|
.7
|
|
|
|
<1
|
|
|
|
AAA-
|
|
Auction rate preferred stocks
|
|
|
69.2
|
|
|
|
.2
|
|
|
|
|
|
|
|
69.4
|
|
|
|
.5
|
|
|
|
<1
|
|
|
|
A-
|
|
Other short-term investments
|
|
|
412.4
|
|
|
|
|
|
|
|
|
|
|
|
412.4
|
|
|
|
2.8
|
|
|
|
<1
|
|
|
|
A+
|
|
|
|
|
|
|
|
|
|
|
Total short-term investments
|
|
|
581.0
|
|
|
|
.2
|
|
|
|
|
|
|
|
581.2
|
|
|
|
4.0
|
|
|
|
<1
|
|
|
|
A+
|
|
|
|
|
|
|
|
|
|
|
Total fixed income
|
|
|
12,302.0
|
|
|
|
106.5
|
|
|
|
(87.4
|
)
|
|
|
12,321.1
|
|
|
|
83.9
|
|
|
|
3.1
|
|
|
|
AA+
|
|
Common equities
|
|
|
1,469.0
|
|
|
|
904.0
|
|
|
|
(4.9
|
)
|
|
|
2,368.1
|
|
|
|
16.1
|
|
|
|
na
|
|
|
|
na
|
|
|
|
|
|
|
|
|
|
|
Total
portfolio3,4
|
|
$
|
13,771.0
|
|
|
$
|
1,010.5
|
|
|
$
|
(92.3
|
)
|
|
$
|
14,689.2
|
|
|
|
100.0
|
%
|
|
|
3.1
|
|
|
|
AA+
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
na = not applicable
|
|
1
|
Includes $53.8 million of gains on our open interest rate
swap positions. Also includes $34.1 million of collateral,
in the form of Treasury Notes that were delivered to the
counterparty on our open credit default swaps. See the
Derivative Instruments section below for further
discussion.
|
|
2
|
At December 31, 2007, the fair value included a
$7.4 million change in certain hybrid securities that was
recognized as a realized loss.
|
|
3
|
Includes net unsettled security acquisitions of
$77.0 million and $41.9 million at December 31,
2007 and 2006, respectively.
|
|
4
|
December 31, 2007 and 2006 totals include $2.1 billion
and $2.5 billion, respectively, of securities in the
portfolio of a consolidated, non-insurance subsidiary of the
holding company.
|
|
5
|
Credit quality ratings are assigned by nationally recognized
securities rating organizations. To calculate the weighted
average credit quality ratings, we weight individual securities
based on fair value and assign a numeric score to each credit
rating based on a scale from 0-5.
|
Unrealized
Gains and Losses
During 2007, we experienced a $202.8 million pretax
decrease in net unrealized gains, which was largely the result
of modest positive returns in our fixed maturities and
equity-indexed common stock portfolios, offset by a significant
decline in our redeemable and nonredeemable preferred stocks.
The decline in our preferred stocks was primarily the result of
recent financial market disruptions relating to the sub-prime
mortgage market. See the Gross Unrealized Losses
section of Note 2 Investments for
further discussion.
App.-A-43
Fixed-Income
Securities
The fixed-income portfolio is managed internally and includes
fixed-maturity securities, short-term investments and preferred
stocks. The fixed-maturity securities and short-term securities,
as reported on the balance sheets at December 31, were
comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
|
2007
|
|
|
2006
|
|
|
|
|
|
Investment-grade fixed
maturities:1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short/intermediate term
|
|
$
|
9,084.2
|
|
|
|
95.0
|
%
|
|
$
|
10,381.9
|
|
|
|
98.5
|
%
|
|
|
Long term
|
|
|
147.0
|
|
|
|
1.5
|
|
|
|
70.9
|
|
|
|
.7
|
|
|
|
Non-investment-grade fixed
maturities2
|
|
|
336.1
|
|
|
|
3.5
|
|
|
|
87.3
|
|
|
|
.8
|
|
|
|
|
Total
|
|
$
|
9,567.3
|
|
|
|
100.0
|
%
|
|
$
|
10,540.1
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
1
|
Long term includes securities with expected liquidation dates of
10 years or greater. Asset-backed securities are reported
at their weighted average maturity based upon their projected
cash flows. All other securities that do not have a single
expected maturity date are reported at average maturity. See
Note 2 Investments for further
discussion.
|
|
2
|
Non-investment-grade fixed-maturity securities are non-rated or
have a quality rating of an equivalent BB+ or lower, classified
by the lowest rating from a nationally recognized rating agency.
|
A primary exposure for the fixed-income portfolio is interest
rate risk, which is managed by maintaining the portfolios
duration between 1.8 to 5 years. Interest rate risk
includes the change in value resulting from movements in the
underlying market rates of debt securities held. The
fixed-income portfolio had a duration of 3.5 years at
December 31, 2007, compared to 3.1 years at
December 31, 2006. The distribution of duration and
convexity (i.e., a measure of the speed at which the duration of
a security is expected to change based on a rise or fall in
interest rates) are monitored on a regular basis.
Another exposure related to the fixed-income portfolio is credit
risk, which is managed by maintaining a minimum average
portfolio credit quality rating of A+, as defined by nationally
recognized rating agencies, and limiting non-investment-grade
securities to a maximum of 5% of the fixed-income portfolio.
Pursuant to guidelines established by our Board of Directors,
concentration in a single issuers bonds and preferred
stocks is limited to no more than 6% of our shareholders
equity, except for U.S. Treasury and agency bonds; any
states general obligation bonds are limited to 12% of
shareholders equity.
The credit quality distribution of the fixed-income portfolio at
December 31 was as follows:
|
|
|
|
|
|
|
|
|
|
|
Rating
|
|
2007
|
|
|
2006
|
|
|
|
|
|
AAA
|
|
|
49.4
|
%
|
|
|
61.1
|
%
|
|
|
AA
|
|
|
20.6
|
|
|
|
15.0
|
|
|
|
A
|
|
|
16.2
|
|
|
|
14.4
|
|
|
|
BBB
|
|
|
10.6
|
|
|
|
8.3
|
|
|
|
Non Rated/Other
|
|
|
3.2
|
|
|
|
1.2
|
|
|
|
|
Total
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
During 2007, the AAA rating category decreased while the
remaining ratings categories increased, representing our
decision to take advantage of better valuations in some
lower-rated securities, compared to certain existing higher
credit-rated assets.
App.-A-44
ASSET-BACKED
SECURITIES
Included in the fixed-income portfolio are asset-backed
securities, which were comprised of the following at
December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Asset-Backed
|
|
|
Duration
|
|
|
|
|
($ in millions)
|
|
Fair Value
|
|
|
Securities
|
|
|
(years)
|
|
|
Rating
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized mortgage
obligations1
|
|
$
|
611.4
|
|
|
|
24.3
|
%
|
|
|
1.2
|
|
|
|
AAA-
|
|
|
|
|
|
|
|
|
|
|
Commercial mortgage-backed obligations
|
|
|
914.7
|
|
|
|
36.5
|
|
|
|
2.7
|
|
|
|
AA
|
|
Commercial mortgage-backed obligations: interest only
|
|
|
759.1
|
|
|
|
30.2
|
|
|
|
1.9
|
|
|
|
AAA-
|
|
|
|
|
|
|
|
|
|
|
Subtotal commercial mortgage-backed obligations
|
|
|
1,673.8
|
|
|
|
66.7
|
|
|
|
2.3
|
|
|
|
AA+
|
|
|
|
|
|
|
|
|
|
|
Other asset-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home
equity2
|
|
|
148.7
|
|
|
|
5.9
|
|
|
|
.1
|
|
|
|
AA
|
|
Other
|
|
|
77.7
|
|
|
|
3.1
|
|
|
|
1.1
|
|
|
|
A
|
|
|
|
|
|
|
|
|
|
|
Subtotal other asset-backed securities
|
|
|
226.4
|
|
|
|
9.0
|
|
|
|
.4
|
|
|
|
AA-
|
|
|
|
|
|
|
|
|
|
|
Total asset-backed securities
|
|
$
|
2,511.6
|
|
|
|
100.0
|
%
|
|
|
1.9
|
|
|
|
AA+
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized mortgage
obligations1
|
|
$
|
575.9
|
|
|
|
24.1
|
%
|
|
|
1.8
|
|
|
|
AAA
|
|
|
|
|
|
|
|
|
|
|
Commercial mortgage-backed obligations
|
|
|
770.4
|
|
|
|
32.2
|
|
|
|
3.1
|
|
|
|
AAA-
|
|
Commercial mortgage-backed obligations: interest only
|
|
|
893.7
|
|
|
|
37.4
|
|
|
|
2.2
|
|
|
|
AAA-
|
|
|
|
|
|
|
|
|
|
|
Subtotal commercial mortgage-backed obligations
|
|
|
1,664.1
|
|
|
|
69.6
|
|
|
|
2.6
|
|
|
|
AAA-
|
|
|
|
|
|
|
|
|
|
|
Other asset-backed securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home
equity2
|
|
|
23.0
|
|
|
|
1.0
|
|
|
|
.5
|
|
|
|
AAA
|
|
Other
|
|
|
127.1
|
|
|
|
5.3
|
|
|
|
1.2
|
|
|
|
AA-
|
|
|
|
|
|
|
|
|
|
|
Subtotal other asset-backed securities
|
|
|
150.1
|
|
|
|
6.3
|
|
|
|
1.1
|
|
|
|
AA-
|
|
|
|
|
|
|
|
|
|
|
Total asset-backed securities
|
|
$
|
2,390.1
|
|
|
|
100.0
|
%
|
|
|
2.3
|
|
|
|
AAA-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
Includes $52.3 million of Alt-A, non-prime bonds (low
document/no document or non-conforming prime loans) with a net
unrealized loss of $.1 million and a credit quality of AAA
for 2007; 2006 included $63.1 million of Alt-A bonds that
had a net unrealized loss of $.3 million and a credit
quality of AAA.
|
|
2
|
Represents sub-prime bonds with a net unrealized loss of
$12.2 million and $.1 million for 2007 and 2006,
respectively; these bonds are unrelated to the asset-backed
derivative position discussed below.
|
Substantially all of the asset-backed securities are liquid with
available market quotes and contain no residual interests (the
most subordinated class in a pool of securitized assets). As of
December 31, 2007, 8% of our asset-backed securities are
exposed to sub-prime mortgage loans. We reviewed these
securities for other-than-temporary impairment and yield or
asset valuation adjustments, and we realized $1.7 million
in write-downs on sub-prime securities during 2007. The
securities with sub-prime exposure are paying their principal
and periodic interest timely, and we continue to have the intent
and ability to hold these securities.
App.-A-45
The following table shows the credit quality rating of our home
equity securities by deal origination year, along with a
comparison of the fair value at December 31, 2007, to our
original investment value (adjusted for returns of principal and
amortization).
Home Equity
Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
|
Deal Origination Year
|
|
|
|
|
|
|
|
|
% of Home
|
|
Rating (date acquired)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
Total
|
|
|
|
|
|
Equity Loans
|
|
|
|
|
AAA (October
2003-December
2007)1
|
|
$
|
|
|
|
$
|
59.9
|
|
|
$
|
4.9
|
|
|
$
|
|
|
|
$
|
.1
|
|
|
$
|
64.9
|
|
|
|
|
|
|
|
43.7
|
%
|
Increase (decrease) in value
|
|
|
|
|
|
|
(1.2
|
)%
|
|
|
(.4
|
)%
|
|
|
|
|
|
|
|
|
|
|
(1.1
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AA (August 2007-October 2007)
|
|
$
|
3.1
|
|
|
|
|
|
|
$
|
23.2
|
|
|
$
|
14.5
|
|
|
|
|
|
|
$
|
40.8
|
|
|
|
|
|
|
|
27.4
|
%
|
Increase (decrease) in value
|
|
|
(37.0
|
)%
|
|
|
|
|
|
|
(13.6
|
)%
|
|
|
.3
|
%
|
|
|
|
|
|
|
(11.7
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
A (August 2007)
|
|
|
|
|
|
|
|
|
|
$
|
34.0
|
|
|
$
|
6.3
|
|
|
|
|
|
|
$
|
40.3
|
|
|
|
|
|
|
|
27.1
|
%
|
Increase (decrease) in value
|
|
|
|
|
|
|
|
|
|
|
(13.9
|
)%
|
|
|
2.2
|
%
|
|
|
|
|
|
|
(11.7
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
BBB (March 2007)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
2.7
|
|
|
|
|
|
|
$
|
2.7
|
|
|
|
|
|
|
|
1.8
|
%
|
Increase (decrease) in value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(21.4
|
)%
|
|
|
|
|
|
|
(21.4
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3.1
|
|
|
$
|
59.9
|
|
|
$
|
62.1
|
|
|
$
|
23.5
|
|
|
$
|
.1
|
|
|
$
|
148.7
|
|
|
|
|
|
|
|
100.0
|
%
|
|
|
|
|
Increase (decrease) in value
|
|
|
(37.0
|
)%
|
|
|
(1.2
|
)%
|
|
|
(12.8
|
)%
|
|
|
(2.3
|
)%
|
|
|
|
%
|
|
|
(7.6
|
)%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1The
entire $59.9 million balance of our 2006 AAA securities was
added to the portfolio in December 2007.
At December 31, 2007, 36.5% of our asset-backed securities
were commercial mortgage-backed obligations (CMBS). The
following table details the credit quality rating and fair value
of our CMBS portfolio by year of deal origination and reflects
the high quality of these securities.
Commercial
Mortgage-Backed Obligations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rating
|
|
|
|
|
|
|
|
($ in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Investment
|
|
|
|
|
|
% of Total
|
|
Deal Origination Year
|
|
AAA
|
|
|
AA
|
|
|
A
|
|
|
BBB
|
|
|
Grade
|
|
|
Fair Value
|
|
|
Exposure
|
|
|
|
|
Pre-2000
|
|
$
|
6.1
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
40.4
|
|
|
$
|
23.5
|
|
|
$
|
70.0
|
|
|
|
7.6
|
%
|
2000
|
|
|
53.2
|
|
|
|
24.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
77.7
|
|
|
|
8.5
|
|
2001
|
|
|
140.2
|
|
|
|
27.5
|
|
|
|
7.4
|
|
|
|
|
|
|
|
|
|
|
|
175.1
|
|
|
|
19.1
|
|
2002
|
|
|
43.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43.1
|
|
|
|
4.7
|
|
2003
|
|
|
155.3
|
|
|
|
13.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
168.8
|
|
|
|
18.5
|
|
2004
|
|
|
78.9
|
|
|
|
8.8
|
|
|
|
4.8
|
|
|
|
|
|
|
|
7.1
|
|
|
|
99.6
|
|
|
|
10.9
|
|
2005
|
|
|
71.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
71.0
|
|
|
|
7.8
|
|
2006
|
|
|
145.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
25.2
|
|
|
|
170.7
|
|
|
|
18.7
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6.9
|
|
|
|
31.8
|
|
|
|
38.7
|
|
|
|
4.2
|
|
|
Total Fair Value
|
|
$
|
693.3
|
|
|
$
|
74.3
|
|
|
$
|
12.2
|
|
|
$
|
47.3
|
|
|
$
|
87.6
|
|
|
$
|
914.7
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
% of Total Fair Value
|
|
|
75.8
|
%
|
|
|
8.1
|
%
|
|
|
1.3
|
%
|
|
|
5.2
|
%
|
|
|
9.6
|
%
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Approximately 15% of our CMBS portfolio is rated BBB or lower
with an average duration of 2.4 years, compared to
2.7 years for the entire CMBS portfolio. In addition, we
believe the non-investment-grade securities which we hold that
originated in 2006 and 2007 will have lower frequency of default
than those generally originated in that class of issuance due to
the underlying strength of the single transaction borrowers.
App.-A-46
We also held CMBS interest only (IO) securities at
December 31, 2007. The IO portfolio had a credit quality of
AAA- and a duration of 1.9 years. The following table
quantifies the fair value and total exposure of these securities
by the year of deal origination.
Commercial
Mortgage-Backed Obligations: Interest Only
|
|
|
|
|
|
|
|
|
($ in millions)
|
|
|
|
|
% of Total
|
|
Deal Origination Year
|
|
Fair Value
|
|
|
Exposure
|
|
|
|
|
Pre-2000
|
|
$
|
7.3
|
|
|
|
1.0
|
%
|
2000
|
|
|
38.4
|
|
|
|
5.0
|
|
2001
|
|
|
29.0
|
|
|
|
3.8
|
|
2002
|
|
|
33.1
|
|
|
|
4.4
|
|
2003
|
|
|
115.5
|
|
|
|
15.2
|
|
2004
|
|
|
119.9
|
|
|
|
15.8
|
|
2005
|
|
|
192.0
|
|
|
|
25.3
|
|
2006
|
|
|
223.9
|
|
|
|
29.5
|
|
|
Total Fair Value
|
|
$
|
759.1
|
|
|
|
100.0
|
%
|
|
|
|
|
The IO portfolio is 92% comprised of planned amortization
class IOs, which provides bondholders greater protection
against loan prepayment or default risk inherent with these
types of securities. Since 2004, 100% of the IO securities we
have purchased were made up of this more protected class.
App.-A-47
MUNICIPAL
SECURITIES
At December 31, 2007, we held $3,745.1 million of
state and local government obligations with an overall credit
quality of AA+. About one-third, or $1,163.3 million, of
these securities were general obligation or revenue bonds that
had a credit quality of AAA due to the fact that they were
insurance enhanced. The following table shows the composition
and credit quality of these municipal obligations by monoline
insurer at December 31, 2007. The credit rating represents
the quality of the underlying security, excluding credit
insurance, based on ratings by nationally recognized rating
agencies.
Insurance
Enhanced Municipal Securities
|
|
|
|
|
|
|
|
|
|
|
|
|
(millions)
|
|
|
|
|
|
|
|
|
|
Monoline Insurer/
|
|
General
|
|
|
|
|
|
|
|
Rating
|
|
Obligations
|
|
|
Revenue Bonds
|
|
|
Total
|
|
|
|
|
FGIC
|
|
|
|
|
|
|
|
|
|
|
|
|
AA
|
|
$
|
149.0
|
|
|
$
|
113.1
|
|
|
$
|
262.1
|
|
A
|
|
|
77.5
|
|
|
|
36.6
|
|
|
|
114.1
|
|
|
|
|
$
|
226.5
|
|
|
$
|
149.7
|
|
|
$
|
376.2
|
|
|
AMBAC
|
|
|
|
|
|
|
|
|
|
|
|
|
AA
|
|
$
|
129.1
|
|
|
$
|
71.6
|
|
|
$
|
200.7
|
|
A
|
|
|
38.7
|
|
|
|
2.1
|
|
|
|
40.8
|
|
BBB
|
|
|
|
|
|
|
4.5
|
|
|
|
4.5
|
|
Non-rated
|
|
|
|
|
|
|
2.4
|
|
|
|
2.4
|
|
|
|
|
$
|
167.8
|
|
|
$
|
80.6
|
|
|
$
|
248.4
|
|
|
MBIA
|
|
|
|
|
|
|
|
|
|
|
|
|
AA
|
|
$
|
95.3
|
|
|
$
|
78.1
|
|
|
$
|
173.4
|
|
A
|
|
|
44.0
|
|
|
|
58.8
|
|
|
|
102.8
|
|
BBB
|
|
|
|
|
|
|
5.3
|
|
|
|
5.3
|
|
|
|
|
$
|
139.3
|
|
|
$
|
142.2
|
|
|
$
|
281.5
|
|
|
FSA
|
|
|
|
|
|
|
|
|
|
|
|
|
AA
|
|
$
|
97.7
|
|
|
$
|
131.5
|
|
|
$
|
229.2
|
|
A
|
|
|
|
|
|
|
23.5
|
|
|
|
23.5
|
|
BBB
|
|
|
|
|
|
|
4.5
|
|
|
|
4.5
|
|
|
|
|
$
|
97.7
|
|
|
$
|
159.5
|
|
|
$
|
257.2
|
|
|
TOTAL
|
|
|
|
|
|
|
|
|
|
|
|
|
AA
|
|
$
|
471.1
|
|
|
$
|
394.3
|
|
|
$
|
865.4
|
|
A
|
|
|
160.2
|
|
|
|
121.0
|
|
|
|
281.2
|
|
BBB
|
|
|
|
|
|
|
14.3
|
|
|
|
14.3
|
|
Non-rated
|
|
|
|
|
|
|
2.4
|
|
|
|
2.4
|
|
|
|
|
$
|
631.3
|
|
|
$
|
532.0
|
|
|
$
|
1,163.3
|
|
|
|
|
|
As of December 31, 2007, the insurance enhanced general
obligation or revenue bonds had a combined net unrealized gain
of $12.5 million. We believe that the valuation of these
securities is related to the credit rating of the underlying
municipal bonds with only a small adjustment related to the
credit insurance. Our policy does not require us to liquidate
securities should the insurance provided by the monoline
insurers cease to exist.
App.-A-48
CORPORATE
SECURITIES
Included in our fixed-income securities at December 31, 2007,
are $1.1 billion of fixed-rate corporate securities which
have a duration of 4.4 years and an overall credit quality
rating of A-. The table below shows the exposure breakdown by
rating and sector.
Corporate
Securities Rating By Sector
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Sector
|
|
AAA
|
|
|
AA
|
|
|
A
|
|
|
BBB
|
|
|
% of Portfolio
|
|
|
|
|
Financial
|
|
|
2.7
|
%
|
|
|
16.4
|
%
|
|
|
21.6
|
%
|
|
|
3.3
|
%
|
|
|
44.0
|
%
|
Agency
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Industrial
|
|
|
|
|
|
|
|
|
|
|
4.7
|
|
|
|
49.5
|
|
|
|
54.2
|
|
Utility
|
|
|
|
|
|
|
|
|
|
|
1.8
|
|
|
|
|
|
|
|
1.8
|
|
|
Total
|
|
|
2.7
|
%
|
|
|
16.4
|
%
|
|
|
28.1
|
%
|
|
|
52.8
|
%
|
|
|
100.0
|
%
|
|
|
|
|
PREFERRED
STOCKS REDEEMABLE AND NONREDEEMABLE
Included in fixed-income securities are redeemable and
nonredeemable preferred stocks, which represented approximately
20% of our total investment portfolio at December 31, 2007,
and had an overall credit quality rating of A-. The table below
shows the exposure breakdown by rating and sector.
Preferred Stocks
Rating By Sector
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Investment
|
|
|
|
|
Sector
|
|
AA
|
|
|
A
|
|
|
BBB
|
|
|
Grade
|
|
|
% of Portfolio
|
|
|
|
|
Financial
|
|
|
7.1
|
%
|
|
|
40.9
|
%
|
|
|
13.8
|
%
|
|
|
3.8
|
%
|
|
|
65.6
|
%
|
Agency
|
|
|
15.7
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
15.7
|
|
Industrial
|
|
|
|
|
|
|
4.0
|
|
|
|
4.4
|
|
|
|
5.3
|
|
|
|
13.7
|
|
Utility
|
|
|
|
|
|
|
1.5
|
|
|
|
3.5
|
|
|
|
|
|
|
|
5.0
|
|
|
Total
|
|
|
22.8
|
%
|
|
|
46.4
|
%
|
|
|
21.7
|
%
|
|
|
9.1
|
%
|
|
|
100.0
|
%
|
|
|
|
|
Approximately half of these securities pay dividends which have
tax preferential characteristics, while the balance are fully
taxable. In addition, all of our non-investment-grade preferred
stocks were with issuers who maintain investment-grade senior
debt ratings.
For these preferred securities, approximately two-thirds are
fixed-rate securities and one-third are floating-rate
securities. All of our preferred securities have call or
mandatory redemption features. Most of the securities are
structured to provide some protection against extension risk in
the event the issuer elects not to call such securities at their
initial call date by either paying a higher dividend amount or
by paying floating-rate coupons. Of our fixed-rate securities,
approximately 85% will convert to floating-rate dividend
payments if not called at their initial call date.
As shown in the table, the majority of this portfolio is in the
financial services sector, reflecting both the composition of
the preferred market, which is dominated by financial issuers,
as well as our belief that there is better relative economic
value in the preferred stock market than in the comparable debt
market without significantly increasing our investment risk.
Within the financial sector, approximately 60% of our holdings
are in large capitalization banks and 20% are in
U.S. broker/dealers.
Common
Equities
Common equities, as reported in the balance sheets at
December 31, were comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
Common stocks
|
|
$
|
2,313.8
|
|
|
|
99.4
|
%
|
|
$
|
2,352.0
|
|
|
|
99.3
|
%
|
|
|
|
|
Other risk investments
|
|
|
13.7
|
|
|
|
.6
|
|
|
|
16.1
|
|
|
|
.7
|
|
|
|
|
|
|
Total common equities
|
|
$
|
2,327.5
|
|
|
|
100.0
|
%
|
|
$
|
2,368.1
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
Common equities, which generally have greater risk and
volatility of fair value than fixed-income securities, may range
from 0% to 25% of the investment portfolio. Common stocks are
managed externally to track the Russell 1000 Index with an
anticipated annual tracking error of +/- 50 basis points.
During 2007, the GAAP basis total return was within our tracking
error.
App.-A-49
Our common equity allocation is intended to enhance the return
of, and provide diversification for, the total portfolio. To
maintain high correlation with the Russell 1000, we held 655 out
of 1,000, or approximately 66%, of the common stocks comprising
the index at December 31, 2007. Our individual holdings are
selected based on their contribution to the correlation with the
index.
Other risk investments include private equity investments and
limited partnership interests in private equity and mezzanine
investment funds which have no off-balance-sheet exposure or
contingent obligations, except for the $.2 million of open
funding commitments.
Trading
Securities
Trading securities may be entered into from time to time for the
purpose of near-term profit generation. We have not entered into
any trading securities in the last three years.
Derivative
Instruments
From time to time we invest in derivative instruments. At
December 31, 2007, we held interest rate swaps to receive
fixed interest rates for 5 years and 10 years with a
combined notional value of $1.3 billion. In January 2008,
we closed a
5-year swap
with a notional value of $.3 billion and recognized a gain
of $15.1 million. For 2007, the interest rate swap
positions generated net realized gains of $53.8 million.
Total net realized gains, including interest expense, were
$53.1 million for 2007. We had no interest rate swaps
during 2006 or 2005.
During 2007, we opened and closed $210 million of notional
credit default exposure on a corporate non-investment-grade
index and closed $40 million of notional exposure on a
corporate investment-grade index, which we held in 2006. The
combined positions generated net realized gains of
$10.0 million and $.1 million for 2007 and 2006,
respectively. We held no corporate non-investment-grade or
investment-grade index derivatives in 2005.
Additionally, during 2007, we sold credit default protection
using credit default swap derivatives on an investment-grade
asset-backed index with a credit quality of BBB-, comprised of
20 bonds in the sub-prime mortgage sector, with a notional
amount of $140 million. We matched these notional amounts
with Treasury Notes with the same maturity and principal value
to cover our off-balance-sheet exposure. We received upfront
cash payments of $43.3 million on these open swap
positions, effectively reducing our maximum exposure of loss to
$96.7 million. During 2007, this derivative position
generated a net loss of $51.3 million. As required by the
counterparty contract, we delivered $34.1 million of
collateral in the form of U.S. Treasury Notes to reduce
counterparty credit risk. During 2006, we closed credit default
protection derivatives sold on four separate corporate issuers,
which were also matched with equivalent Treasury Notes.
Following is a summary of our net realized gains (losses) on the
credit default protection we sold using credit default swaps and
matched with Treasury Notes for the years ended December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
(millions)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
Credit default swap
|
|
$
|
(51.3
|
)
|
|
$
|
9.9
|
|
|
$
|
(6.8
|
)
|
Treasury Notes
|
|
|
7.9
|
|
|
|
|
|
|
|
(.8
|
)
|
|
Combined gain (loss)
|
|
$
|
(43.4
|
)
|
|
$
|
9.9
|
|
|
$
|
(7.6
|
)
|
|
|
|
|
For all of the derivative positions discussed above, realized
holding period gains and losses are netted with any upfront cash
that may be exchanged under the contract to determine if the net
position should be classified either as an asset or a liability.
To be reported as a component of the available-for-sale
portfolio, the realized gain on the derivative position at
period end would have to exceed any upfront cash received (net
derivative asset). On the other hand, a net derivative liability
would reflect realized losses plus the amount of upfront cash
received (or netted if upfront cash was paid) and would be
reported as a component of other liabilities. These net
derivative assets/liabilities are not separately disclosed on
the balance sheet due to the immaterial effect on our financial
condition, cash flows and results of operations.
In addition, during the second quarter 2007, we entered into a
forecasted debt issuance hedge against a possible rise in
interest rates in anticipation of issuing $1 billion of our
6.70% Fixed-to-Floating Rate Junior Subordinated Debentures due
2067 (the Debentures). The hedge was designated as,
and qualified for, cash flow hedge accounting treatment. Upon
issuance of the Debentures, the hedge was closed, and we
recognized a pretax gain of $34.4 million, which is
recorded as part of accumulated other comprehensive income. The
$34.4 million gain is deferred and is being recognized as
an adjustment to interest expense over the
10-year
fixed interest rate term of the Debentures. During 2007, we
recognized $1.3 million as an adjustment to interest
expense.
App.-A-50
Recurring investment income (interest and dividends, before
investment and interest expenses) increased 5% in 2007, 21% in
2006 and 11% in 2005. The increase in 2007 was primarily the
result of a decision to take advantage of attractive
opportunities in certain higher-yielding, though lower-rated,
assets. These lower-rated assets provided additional income over
our previous investments. The increase in investment income
during 2006 was primarily the result of an increase in
investment yields, with a small growth in average assets
providing the balance of the increase. In 2005, the increase in
investment income was a more balanced combination of yield and
portfolio growth in average assets.
Investment expenses were $12.4 million in 2007, compared to
$11.9 million in 2006 and $12.1 million in 2005.
Interest expense in 2007 was $108.6 million, compared to
$77.3 million in 2006 and $82.6 million in 2005. The
increase in 2007 reflects the June 2007 issuance of our
$1 billion Debentures, while the decrease in 2006 reflects
the retirement in June 2006 of our $100 million
7.30% Notes at maturity.
We report total return to reflect more accurately the management
philosophy governing the portfolio and our evaluation of
investment results. The fully taxable equivalent (FTE) total
return includes recurring investment income, net realized gains
(losses) on securities and changes in unrealized gains (losses)
on investment securities. By reporting on an FTE basis, we are
adjusting our tax preferential securities to an equivalent
measure when comparing results to taxable securities. We
reported the following investment results for the years ended
December 31:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
Pretax recurring investment book yield
|
|
|
4.8%
|
|
|
|
4.6%
|
|
|
|
4.1%
|
|
Weighted average FTE book yield
|
|
|
5.6%
|
|
|
|
5.3%
|
|
|
|
4.7%
|
|
FTE total return:
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-income securities
|
|
|
4.4%
|
|
|
|
5.9%
|
|
|
|
3.4%
|
|
Common stocks
|
|
|
6.2%
|
|
|
|
16.3%
|
|
|
|
7.1%
|
|
Total portfolio
|
|
|
4.7%
|
|
|
|
7.4%
|
|
|
|
4.0%
|
|
Realized
Gains/Losses
Gross realized gains and losses were the result of customary
investment sales transactions in our fixed-income portfolio,
affected by movements in credit spreads and interest rates,
rebalancing of our equity-indexed portfolio and holding period
valuation changes on derivatives. In addition, in 2007, gains
and losses also reflected the sale of securities to fund our
$1.4 billion extraordinary dividend payment in September
2007. From time to time, gross realized losses also include
write-downs for securities determined to be
other-than-temporarily impaired in our fixed-income
and/or
equity portfolios. Disclosure related to these write-downs is
provided below. As of December 31, 2007, realized losses
also included $7.4 million of net losses related to certain
hybrid securities within our preferred stock portfolio that are
reported at fair value.
OTHER-THAN-TEMPORARY
IMPAIRMENT
Included in the net realized gains (losses) on securities for
the years ended December 31, 2007, 2006 and 2005, are
write-downs on securities determined to have had an
other-than-temporary decline in fair value. We routinely monitor
our portfolio for pricing changes that might indicate potential
impairments, and perform detailed reviews of securities with
unrealized losses based on predetermined criteria. In such
cases, changes in fair value are evaluated to determine the
extent to which such changes are attributable to
(i) fundamental factors specific to the issuer, such as
financial conditions, business prospects or other factors or
(ii) market-related factors, such as interest rates or
equity market declines (i.e., negative returns at either a
sector index level or the broader market level).
Fixed-income and equity securities with declines attributable to
issuer-specific fundamentals are reviewed to identify all
available evidence, circumstances and influences to estimate the
potential for, and timing of, recovery of the investments
impairment. An other-than-temporary impairment loss is deemed to
have occurred when the potential for, and timing of, recovery
does not satisfy the criteria set forth in the current
accounting guidance (see Critical Accounting Policies,
Other-than-Temporary Impairment for further discussion).
For fixed-income investments with unrealized losses due to
market or industry-related declines where we have the intent and
ability to hold the investment for the period of time necessary
to recover a significant portion of the investments
impairment and collect the interest obligation, declines are not
deemed to qualify as other than temporary. Our policy for common
stocks with market-related declines is to recognize impairment
losses on individual securities with losses that are not
reasonably expected to be recovered under historical market
conditions when the security has been in such a loss position
for three consecutive quarters.
App.-A-51
When a security in our investment portfolio has an unrealized
loss in fair value that is deemed to be other than temporary, we
reduce the book value of such security to its current fair
value, recognizing the decline as a realized loss in the income
statement. All other unrealized gains or losses are reflected in
shareholders equity. The write-down activity for the years
ended December 31 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Write-downs
|
|
Write-downs
|
|
|
Total
|
|
|
on Securities
|
|
on Securities
|
|
|
Write-
|
|
|
Subsequently
|
|
Held at Period
|
(millions)
|
|
downs
|
|
|
Sold
|
|
End
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
Fixed
income1
|
|
$
|
19.3
|
|
|
$
|
|
|
$
|
19.3
|
Common equities
|
|
|
2.4
|
|
|
|
2.1
|
|
|
.3
|
|
Total portfolio
|
|
$
|
21.7
|
|
|
$
|
2.1
|
|
$
|
19.6
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
Fixed income
|
|
$
|
1.8
|
|
|
$
|
.3
|
|
$
|
1.5
|
Common equities
|
|
|
2.4
|
|
|
|
2.0
|
|
|
.4
|
|
Total portfolio
|
|
$
|
4.2
|
|
|
$
|
2.3
|
|
$
|
1.9
|
|
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
Fixed income
|
|
$
|
14.6
|
|
|
$
|
5.3
|
|
$
|
9.3
|
Common equities
|
|
|
7.1
|
|
|
|
|
|
|
7.1
|
|
Total portfolio
|
|
$
|
21.7
|
|
|
$
|
5.3
|
|
$
|
16.4
|
|
|
|
|
1Includes
$1.7 million related to a sub-prime mortgage debt security
determined to be other-than-temporarily impaired.
The following is a summary of the 2007 equity security
write-downs by sector (both market-related and issuer specific):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity Portfolio
|
|
|
Russell 1000
|
|
|
Russell 1000
|
|
|
Remaining Gross
|
|
|
Amount of
|
|
Allocation at
|
|
|
Allocation at
|
|
|
Sector
|
|
|
Unrealized Loss at
|
($ in millions)
|
|
Write-down
|
|
December 31,
|
|
|
December 31,
|
|
|
Return
|
|
|
December 31,
|
Sector
|
|
in 2007
|
|
2007
|
|
|
2007
|
|
|
in 2007
|
|
|
2007
|
|
|
Auto and Transportation
|
|
$
|
|
|
|
2.5
|
%
|
|
|
2.3
|
%
|
|
|
|
%
|
|
$
|
1.2
|
Consumer Discretionary
|
|
|
.3
|
|
|
11.7
|
|
|
|
12.9
|
|
|
|
(3.2
|
)
|
|
|
2.8
|
Consumer Staples
|
|
|
|
|
|
8.3
|
|
|
|
7.3
|
|
|
|
8.6
|
|
|
|
.1
|
Financial Services
|
|
|
.6
|
|
|
17.9
|
|
|
|
18.6
|
|
|
|
(16.9
|
)
|
|
|
10.3
|
Health Care
|
|
|
.4
|
|
|
11.4
|
|
|
|
11.9
|
|
|
|
7.5
|
|
|
|
3.2
|
Integrated Oil
|
|
|
|
|
|
8.4
|
|
|
|
6.6
|
|
|
|
29.8
|
|
|
|
|
Materials and Processing
|
|
|
.1
|
|
|
4.7
|
|
|
|
5.2
|
|
|
|
27.7
|
|
|
|
.3
|
Other Energy
|
|
|
|
|
|
4.3
|
|
|
|
5.5
|
|
|
|
42.0
|
|
|
|
.2
|
Producer Durables
|
|
|
.9
|
|
|
5.6
|
|
|
|
5.0
|
|
|
|
13.3
|
|
|
|
.2
|
Technology
|
|
|
|
|
|
13.7
|
|
|
|
13.7
|
|
|
|
16.7
|
|
|
|
1.1
|
Utilities
|
|
|
.1
|
|
|
6.9
|
|
|
|
7.1
|
|
|
|
9.6
|
|
|
|
.7
|
Other Equities
|
|
|
|
|
|
4.6
|
|
|
|
3.9
|
|
|
|
1.0
|
|
|
|
.1
|
|
Total Common Stocks
|
|
$
|
2.4
|
|
|
100.0
|
%
|
|
|
100.0
|
%
|
|
|
5.8
|
%
|
|
$
|
20.2
|
|
|
|
|
|
|
|
|
|
|
Other Risk Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
.1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Common Equities
|
|
$
|
2.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
20.3
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See Critical Accounting Policies, Other-than-Temporary
Impairment for further discussion.
C. Repurchase Transactions
During each of the last three years, we entered into
repurchase commitment transactions, whereby we loaned
U.S. Treasury or U.S. Government agency securities to
accredited brokerage firms in exchange for cash equal to the
fair value of the securities. These internally managed
transactions were typically overnight arrangements. The cash
proceeds were invested in Eurodollar and commercial paper
obligations issued by large, high-quality institutions with
yields that exceeded our interest obligation on the borrowed
cash. We are able to borrow the cash at low rates since the
securities
App.-A-52
loaned are in either short supply or high demand. Our interest
rate exposure does not increase or decrease since the borrowing
and investing periods match. During the year ended
December 31, 2007, our largest single outstanding balance
of repurchase commitments was $2.4 billion, which was open
for four consecutive days; the average daily balance of
repurchase commitments was $.7 billion for 2007. During
2006, the largest single outstanding balance of repurchase
commitments was $2.6 billion, which was open for five
consecutive days; the average daily balance of repurchase
commitments was $1.2 billion for 2006. We had no open
repurchase commitments at December 31, 2007 and 2006. We
earned income of $3.7 million during both 2007 and 2006,
and $4.5 million during 2005, on repurchase commitments.
V. CRITICAL ACCOUNTING POLICIES
Progressive is required to make certain estimates and
assumptions when preparing its financial statements and
accompanying notes in conformity with GAAP. Actual results could
differ from those estimates in a variety of areas. The two areas
that we view as most critical with respect to the application of
estimates and assumptions are the establishment of our loss
reserves and the method of determining impairments in our
investment portfolio.
A. Loss and LAE Reserves
Loss and loss adjustment expense (LAE) reserves represent
our best estimate of our ultimate liability for losses and LAE
relating to events that occurred prior to the end of any given
accounting period but have not yet been paid. At
December 31, 2007, we had $5.7 billion of net loss and
LAE reserves, which included $4.5 billion of case reserves
and $1.2 billion of incurred but not recorded (IBNR)
reserves.
Progressives actuarial staff reviews over 350 subsets of
the business, which are at a combined state, product and line
coverage level (the products), to calculate the
needed loss and LAE reserves. We begin our review of a set of
data by producing six different estimates of needed reserves,
three using paid data and three using incurred data, to
determine if a reserve change is required. In the event of a
wide variation among results generated by the different
projections, our actuarial group will further analyze the data
using additional techniques. Each review develops a point
estimate for a relatively small subset of the business, which
allows us to establish meaningful reserve levels for that
subset. In addition, the actuarial staff completes separate
projections of needed case and IBNR reserves.
We review a large majority of our reserves by product/state
combination on a quarterly time frame, with almost all the
remaining reserves reviewed on a semiannual basis. A change in
our scheduled reviews of a particular subset of the business
depends on the size of the subset or emerging issues relating to
the product or state. By reviewing the reserves at such a
detailed level, we have the ability to identify and measure
variances in trend by state, product and line coverage that
would not otherwise be seen on a consolidated basis. Our
intricate process of reviewing over 350 subsets makes compiling
a companywide roll up to generate a range of needed loss
reserves not meaningful. We do not review loss reserves on a
macro level and, therefore, do not derive a companywide range of
reserves to compare to a standard deviation.
In analyzing the ultimate accident year loss experience, our
actuarial staff reviews in detail, at the subset level,
frequency (number of losses per earned car year), severity
(dollars of loss per each claim) and average premium (dollars of
premium per earned car year). The loss ratio, a primary measure
of loss experience, is equal to the product of frequency times
severity divided by the average premium. The average premium for
personal and commercial auto businesses is known and, therefore,
is not estimated. The projection of frequency for these lines of
business is usually stable in the short term, because a large
majority of the parties involved in an accident report their
claims within a short time period after the occurrence. The
actual frequency experienced will vary depending on the change
in mix of class of drivers insured by Progressive, but the
accuracy of the projected level is considered to be reliable.
The severity experienced by Progressive, which is much more
difficult to estimate, especially for injury claims, is affected
by changes in underlying costs, such as medical costs, jury
verdicts and regulatory changes. In addition, severity will vary
relative to the change in our mix of business by limit.
Assumptions regarding needed reserve levels made by the
actuarial staff take into consideration influences on available
historical data that reduce the predictiveness of our projected
future loss cost. Internal considerations that are
process-related, which generally result from changes in our
claims organizations activities, include claim closure
rates, the number of claims that are closed without payment and
the level of the claims representatives estimates of the
needed case reserves for each claim. We study these changes and
their effect on the historical data at the state level versus on
a larger, less indicative, countrywide basis.
App.-A-53
External items considered include the litigation atmosphere,
state-by-state
changes in medical costs and the availability of services to
resolve claims. These also are better understood at the state
level versus at a more macro countrywide level.
The manner in which we consider and analyze the multitude of
influences on the historical data, as well as how loss reserves
affect our financial results, is discussed in more detail in our
Report on Loss Reserving Practices, which was filed on
June 28, 2007 via
Form 8-K.
At December 31, 2007, Progressives carried net
reserve balance of $5.7 billion implicitly assumes that the
loss and LAE severity will increase for accident year 2007 over
accident year 2006 by 2.6% and 2.2% for personal auto liability
and commercial auto liability, respectively. Personal auto
liability and commercial auto liability reserves represent
approximately 98% of our total carried reserves. As discussed
above, the severity estimates are influenced by many variables
that are difficult to quantify and which influence the final
amount of claims settlement. That, coupled with changes in
internal claims practices, the legal environment and state
regulatory requirements, requires significant judgment in the
estimate of the needed reserves to be carried.
The following table highlights what the impact would be to our
carried loss and LAE reserves, on a net basis, as of
December 31, 2007, if during 2008 we were to experience the
indicated change in our estimate of severity for the 2007
accident year (i.e., claims that occurred in 2007):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Changes in Severity for Accident Year 2007
|
|
(millions)
|
|
|
-2%
|
|
|
|
-1%
|
|
|
|
As Reported
|
|
|
|
+1%
|
|
|
|
+2%
|
|
Personal Auto Liability
|
|
|
$
|
4,125.4
|
|
|
|
$
|
4,177.2
|
|
|
|
$
|
4,229.0
|
|
|
|
$
|
4,280.8
|
|
|
|
$
|
4,332.6
|
|
Commercial Auto Liability
|
|
|
|
1,291.5
|
|
|
|
|
1,300.4
|
|
|
|
|
1,309.3
|
|
|
|
|
1,318.2
|
|
|
|
|
1,327.1
|
|
Other1
|
|
|
|
116.9
|
|
|
|
|
116.9
|
|
|
|
|
116.9
|
|
|
|
|
116.9
|
|
|
|
|
116.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$
|
5,533.8
|
|
|
|
$
|
5,594.5
|
|
|
|
$
|
5,655.2
|
|
|
|
$
|
5,715.9
|
|
|
|
$
|
5,776.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
Includes reserves for personal and commercial auto physical
damage claims and our non-auto lines of business; no change in
estimates is presented due to the immaterial level of these
reserves.
|
Note: Every percentage point change in our estimate of severity
for the 2007 accident year would impact our personal auto
liability reserves by $51.8 million and our commercial auto
liability reserves by $8.9 million.
Our 2007 year-end loss and LAE reserve balance also
includes claims from prior years. Claims that occurred in 2007,
2006 and 2005, in the aggregate, accounted for approximately 91%
of our reserve balance. If during 2008 we were to experience the
indicated change in our estimate of severity for the total of
the prior three accident years (i.e., 2007, 2006 and 2005), the
impact to our year-end 2007 reserve balances would be as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Estimated Changes in Severity for Accident Years 2007, 2006 and 2005
|
|
(millions)
|
|
|
-2%
|
|
|
|
-1%
|
|
|
|
As Reported
|
|
|
|
+1%
|
|
|
|
+2%
|
|
Personal Auto Liability
|
|
|
$
|
3,924.0
|
|
|
|
$
|
4,076.5
|
|
|
|
$
|
4,229.0
|
|
|
|
$
|
4,381.5
|
|
|
|
$
|
4,534.0
|
|
Commercial Auto Liability
|
|
|
|
1,257.1
|
|
|
|
|
1,283.2
|
|
|
|
|
1,309.3
|
|
|
|
|
1,335.4
|
|
|
|
|
1,361.5
|
|
Other1
|
|
|
|
116.9
|
|
|
|
|
116.9
|
|
|
|
|
116.9
|
|
|
|
|
116.9
|
|
|
|
|
116.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
$
|
5,298.0
|
|
|
|
$
|
5,476.6
|
|
|
|
$
|
5,655.2
|
|
|
|
$
|
5,833.8
|
|
|
|
$
|
6,012.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
Includes reserves for personal and commercial auto physical
damage claims and our non-auto lines of business; no change in
estimates is presented due to the immaterial level of these
reserves.
|
Note: Every percentage point change in our estimate of severity
for the total of accident years 2007, 2006 and 2005 would impact
our personal auto liability reserves by $152.5 million and
our commercial auto liability reserves by $26.1 million.
App.-A-54
Our best estimate of the appropriate amount for our reserves as
of year-end 2007 is included in our financial statements for the
year. Our goal is to ensure that total reserves are adequate to
cover all loss costs, while sustaining minimal variation from
the time reserves are initially established until losses are
fully developed. At the point in time when reserves are set, we
have no way of knowing whether our reserve estimates will prove
to be high or low (and, thus, whether future reserve development
will be favorable or unfavorable), or whether one of the
alternative scenarios discussed above is reasonably
likely to occur. During 2007, our estimate of the needed
reserves at the end of 2006 increased 1.5%. The following table
shows how we have performed against this goal over the last ten
years.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For The Years Ended
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
1997
|
|
|
1998
|
|
|
1999
|
|
|
2000
|
|
|
2001
|
|
|
2002
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
|
|
Loss and LAE
Reserves1
|
|
$
|
1,867.5
|
|
|
$
|
1,945.8
|
|
|
$
|
2,200.2
|
|
|
$
|
2,785.3
|
|
|
$
|
3,069.7
|
|
|
$
|
3,632.1
|
|
|
$
|
4,346.4
|
|
|
$
|
4,948.5
|
|
|
$
|
5,313.1
|
|
|
$
|
5,363.6
|
|
|
$
|
5,655.2
|
|
Re-estimated reserves as of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
One year later
|
|
|
1,683.3
|
|
|
|
1,916.0
|
|
|
|
2,276.0
|
|
|
|
2,686.3
|
|
|
|
3,073.2
|
|
|
|
3,576.0
|
|
|
|
4,237.3
|
|
|
|
4,592.6
|
|
|
|
5,066.2
|
|
|
|
5,443.9
|
|
|
|
|
|
Two years later
|
|
|
1,668.5
|
|
|
|
1,910.6
|
|
|
|
2,285.4
|
|
|
|
2,708.3
|
|
|
|
3,024.2
|
|
|
|
3,520.7
|
|
|
|
4,103.3
|
|
|
|
4,485.2
|
|
|
|
5,130.5
|
|
|
|
|
|
|
|
|
|
Three years later
|
|
|
1,673.1
|
|
|
|
1,917.3
|
|
|
|
2,277.7
|
|
|
|
2,671.2
|
|
|
|
2,988.7
|
|
|
|
3,459.2
|
|
|
|
4,048.0
|
|
|
|
4,501.6
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Four years later
|
|
|
1,669.2
|
|
|
|
1,908.2
|
|
|
|
2,272.3
|
|
|
|
2,666.9
|
|
|
|
2,982.7
|
|
|
|
3,457.8
|
|
|
|
4,070.0
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Five years later
|
|
|
1,664.7
|
|
|
|
1,919.0
|
|
|
|
2,277.5
|
|
|
|
2,678.5
|
|
|
|
2,993.7
|
|
|
|
3,475.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six years later
|
|
|
1,674.5
|
|
|
|
1,917.6
|
|
|
|
2,284.9
|
|
|
|
2,683.7
|
|
|
|
3,002.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Seven years later
|
|
|
1,668.4
|
|
|
|
1,921.9
|
|
|
|
2,287.4
|
|
|
|
2,688.4
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eight years later
|
|
|
1,673.9
|
|
|
|
1,923.4
|
|
|
|
2,291.9
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nine years later
|
|
|
1,675.5
|
|
|
|
1,928.5
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ten years later
|
|
|
1,680.8
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative Development:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Favorable/(unfavorable)
|
|
$
|
186.7
|
|
|
$
|
17.3
|
|
|
$
|
(91.7
|
)
|
|
$
|
96.9
|
|
|
$
|
67.2
|
|
|
$
|
156.7
|
|
|
$
|
276.4
|
|
|
$
|
446.9
|
|
|
$
|
182.6
|
|
|
$
|
(80.3
|
)
|
|
|
|
|
Percentage2
|
|
|
10.0
|
|
|
|
.9
|
|
|
|
(4.2
|
)
|
|
|
3.5
|
|
|
|
2.2
|
|
|
|
4.3
|
|
|
|
6.4
|
|
|
|
9.0
|
|
|
|
3.4
|
|
|
|
(1.5
|
)
|
|
|
|
|
|
|
1
|
Represents loss and LAE reserves net of reinsurance recoverables
on net unpaid losses at the balance sheet date.
|
|
2
|
Cumulative development
¸
loss and LAE reserves.
|
Note: The chart above represents the development of the
property-casualty loss and LAE reserves for 1997 through 2006.
The last line in the triangle for each year represents the
following:
Re-estimated reserves = Total amount paid to-date + Total
remaining case reserves on unsettled claims.
Changes in the estimated severity and the actual number of late
reported claims are the cause of the change in our re-estimated
reserves from year to year. The cumulative development
represents the aggregate change in our estimates over all years.
We experienced significant favorable reserve development through
the mid-1990s until 1997, primarily due to decreasing
bodily injury severity, while the carried reserves anticipated
an increasing severity. From 1998 through 2001, we experienced
an increase in bodily injury severity and, as a result, saw our
reserve development much closer to our original estimates. The
bodily injury severity change was much lower than we expected
between 2002 and 2006. As a result, the reserve run-off for
these years was very favorable. In 2007, the realization of
higher prior years severity than anticipated resulted in
our reserves developing unfavorably by 1.5%. Not only did this
development impact 2006, but also impacted the run-off of most
of the past year-end reserves. In 2007, the estimated severity
for accident years 2005 and 2006, was higher than our estimated
severity at the end of 2006 by 1.0% and .7%, respectively, for
our personal auto products and by 4.0% and 7.7% for our
commercial auto products.
Because Progressive is primarily an insurer of motor vehicles,
we have minimal exposure as an insurer of environmental,
asbestos and general liability claims.
|
|
B.
|
Other-than-Temporary
Impairment
|
Companies are required to perform periodic reviews of individual
securities in their investment portfolios to determine whether a
decline in the value of a security is other than temporary. A
review for other-than-temporary impairment (OTI) requires
companies to make certain judgments regarding the materiality of
the decline; its effect on the financial statements; the
probability, extent and timing of a valuation recovery; and the
companys ability and intent to hold the security. The
scope of this review is broad and requires a forward-looking
assessment of the fundamental characteristics of a security, as
well as market-related prospects of the issuer and its industry.
Pursuant to these requirements, we assess valuation declines to
determine the extent to which such changes are attributable to
(i) fundamental factors specific to the issuer, such as
financial conditions, business prospects or other factors, or
(ii) market-related factors, such as interest rates or
equity market declines (i.e., negative returns at either a
sector index level or the broader market level). This evaluation
reflects our assessment of current conditions, as well as
App.-A-55
predictions of uncertain future events, that may have a material
effect on the financial statements related to security valuation.
For fixed-income investments with unrealized losses due to
market- or industry-related declines where we have the intent
and ability to hold the investment for the period of time
necessary to recover a significant portion of the
investments impairment and collect the interest
obligation, declines are not deemed to qualify as other than
temporary. Our policy for common stocks with market-related
declines is to recognize impairment losses on individual
securities with losses that are not reasonably expected to be
recovered under historical market conditions when the security
has been in such a loss position for three consecutive quarters.
When persuasive evidence exists that causes us to evaluate a
decline in fair value to be other than temporary, we reduce the
book value of such security to its current fair value,
recognizing the decline as a realized loss in the income
statement. All other unrealized gains (losses) are reflected in
shareholders equity.
The following table stratifies the gross unrealized losses in
our portfolio at December 31, 2007, by duration in a loss
position and magnitude of the loss as a percentage of the cost
of the security. The individual amounts represent the additional
OTI loss we would have recognized in the income statement if our
policy for market-related declines was different from what is
stated above.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Gross
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
|
|
Decline of Investment Value
|
|
(millions)
|
|
Fair Value
|
|
|
Losses
|
|
>15%
|
|
|
>25%
|
|
|
>35%
|
|
|
> 45%
|
|
|
|
|
Unrealized loss for 1 quarter
|
|
$
|
1,198.1
|
|
|
$110.3
|
|
$
|
67.8
|
|
|
$
|
8.0
|
|
|
$
|
6.8
|
|
|
$
|
.7
|
|
Unrealized loss for 2 quarters
|
|
|
826.6
|
|
|
159.7
|
|
|
133.3
|
|
|
|
33.7
|
|
|
|
16.8
|
|
|
|
|
|
Unrealized loss for 3 quarters
|
|
|
581.5
|
|
|
45.0
|
|
|
17.9
|
|
|
|
7.0
|
|
|
|
.3
|
|
|
|
|
|
Unrealized loss for 1 year or longer
|
|
|
2,038.9
|
|
|
99.5
|
|
|
33.6
|
|
|
|
24.6
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
4,645.1
|
|
|
$414.5
|
|
$
|
252.6
|
|
|
$
|
73.3
|
|
|
$
|
23.9
|
|
|
$
|
.7
|
|
|
|
|
|
We determined that none of the securities represented by the
table above met the criteria for other-than-temporary impairment
write-downs. However, if we had decided to write down all
securities in an unrealized loss position for one year or longer
where the securities decline in value exceeded 25%, we would
have recognized an additional $24.6 million of OTI losses
in the income statement.
Of the $99.5 million of unrealized losses existing for a
period of one year or longer, $33.6 million of the losses
had a decline in value greater than 15% of our initial
investment; these losses included $24.6 million with a
greater than 25% decline in value. These losses are contained to
five issuers within the financial services sector that have
significant exposure to sub-prime loans and securities backed by
sub-prime loans. Prior to the fourth quarter, these securities
were trading at relatively modest losses. As early as the third
quarter, the losses related to our sub-prime exposure ranged
between 5% and 10% of our original investment. The remaining
$65.9 million of losses for a period of one year or longer
had declines in value of less than 15%, of which
$32.3 million were related to three securities in the
financial sector.
We completed a thorough review of the securities in this loss
category and determined that there was not enough evidence to
conclude that these securities were other-than-temporarily
impaired. We will continue to closely monitor these securities
to determine if a future impairment write-down is necessary.
We have the intent and ability to hold these investments for the
period of time necessary to recover a significant portion of the
investments impairment and collect the interest
obligations, and will do so, as long as the securities continue
to be consistent with our investment strategy. We will retain
the common stocks to maintain correlation to the Russell 1000
Index as long as the portfolio and index correlation remain
similar. If our strategy were to change and these securities
were impaired, we would recognize a write-down in accordance
with our stated policy.
Since total unrealized losses are already a component of our
shareholders equity, any recognition of additional OTI
losses would have no effect on our comprehensive income or book
value.
App.-A-56
Safe Harbor Statement Under the Private Securities
Litigation Reform Act of 1995: Statements in this
report that are not historical fact are forward-looking
statements that are subject to certain risks and uncertainties
that could cause actual events and results to differ materially
from those discussed herein. These risks and uncertainties
include, without limitation, uncertainties related to estimates,
assumptions and projections generally; inflation and changes in
economic conditions (including changes in interest rates and
financial markets); the accuracy and adequacy of our pricing and
loss reserving methodologies; the competitiveness of our pricing
and the effectiveness of our initiatives to retain more
customers; initiatives by competitors and the effectiveness of
our response; our ability to obtain regulatory approval for
requested rate changes and the timing thereof; the effectiveness
of our brand strategy and advertising campaigns relative to
those of competitors; legislative and regulatory developments;
disputes relating to intellectual property rights; the outcome
of litigation pending or that may be filed against us; weather
conditions (including the severity and frequency of storms,
hurricanes, snowfalls, hail and winter conditions); changes in
driving patterns and loss trends; acts of war and terrorist
activities; our ability to maintain the uninterrupted operation
of our facilities, systems (including information technology
systems) and business functions; court decisions and trends in
litigation and health care and auto repair costs; and other
matters described from time to time in our releases and
publications, and in our periodic reports and other documents
filed with the United States Securities and Exchange Commission.
In addition, investors should be aware that generally accepted
accounting principles prescribe when a company may reserve for
particular risks, including litigation exposures. Accordingly,
results for a given reporting period could be significantly
affected if and when a reserve is established for one or more
contingencies. Reported results, therefore, may appear to be
volatile in certain accounting periods.
App.-A-57
The Progressive Corporation and
Subsidiaries
Ten Year Summary -
Financial Highlights
(unaudited)
(millions - except ratios,
per share amounts and number of people employed)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
|
Insurance Companies Selected Financial Information and
Operating Statistics Statutory Basis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums written
|
|
$
|
13,772.5
|
|
|
$
|
14,132.0
|
|
|
$
|
14,007.6
|
|
|
$
|
13,378.1
|
|
|
$
|
11,913.4
|
|
Growth
|
|
|
(3
|
)%
|
|
|
1
|
%
|
|
|
5
|
%
|
|
|
12
|
%
|
|
|
26
|
%
|
Policyholders surplus
|
|
$
|
4,587.3
|
|
|
$
|
4,963.7
|
|
|
$
|
4,674.1
|
|
|
$
|
4,671.0
|
|
|
$
|
4,538.3
|
|
Net premiums written to policyholders surplus ratio
|
|
|
3.0
|
|
|
|
2.8
|
|
|
|
3.0
|
|
|
|
2.9
|
|
|
|
2.6
|
|
Loss and loss adjustment expense ratio
|
|
|
71.6
|
|
|
|
66.6
|
|
|
|
68.1
|
|
|
|
65.0
|
|
|
|
67.4
|
|
Underwriting expense ratio
|
|
|
21.1
|
|
|
|
19.9
|
|
|
|
19.3
|
|
|
|
19.6
|
|
|
|
18.8
|
|
|
Statutory combined ratio
|
|
|
92.7
|
|
|
|
86.5
|
|
|
|
87.4
|
|
|
|
84.6
|
|
|
|
86.2
|
|
Selected Consolidated Financial Information
GAAP Basis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
18,843.1
|
|
|
$
|
19,482.1
|
|
|
$
|
18,898.6
|
|
|
$
|
17,184.3
|
|
|
$
|
16,281.5
|
|
Total shareholders equity
|
|
|
4,935.5
|
|
|
|
6,846.6
|
|
|
|
6,107.5
|
|
|
|
5,155.4
|
|
|
|
5,030.6
|
|
Common Shares outstanding
|
|
|
680.2
|
|
|
|
748.0
|
|
|
|
789.3
|
|
|
|
801.6
|
|
|
|
865.8
|
|
Common Share price:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
$
|
25.16
|
|
|
$
|
30.09
|
|
|
$
|
31.23
|
|
|
$
|
24.32
|
|
|
$
|
21.17
|
|
Low
|
|
|
17.26
|
|
|
|
22.18
|
|
|
|
20.35
|
|
|
|
18.28
|
|
|
|
11.56
|
|
Close (at December 31)
|
|
|
19.16
|
|
|
|
24.22
|
|
|
|
29.20
|
|
|
|
21.21
|
|
|
|
20.90
|
|
Market capitalization
|
|
$
|
13,032.6
|
|
|
$
|
18,116.6
|
|
|
$
|
23,040.7
|
|
|
$
|
17,001.9
|
|
|
$
|
18,088.9
|
|
Book value per Common Share
|
|
|
7.26
|
|
|
|
9.15
|
|
|
|
7.74
|
|
|
|
6.43
|
|
|
|
5.81
|
|
Return on average common shareholders equity
|
|
|
19.5
|
%
|
|
|
25.3
|
%
|
|
|
25.0
|
%
|
|
|
30.0
|
%
|
|
|
29.1
|
%
|
Debt outstanding
|
|
$
|
2,173.9
|
|
|
$
|
1,185.5
|
|
|
$
|
1,284.9
|
|
|
$
|
1,284.3
|
|
|
$
|
1,489.8
|
|
Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt to total capital
|
|
|
30.6
|
%
|
|
|
14.8
|
%
|
|
|
17.4
|
%
|
|
|
19.9
|
%
|
|
|
22.8
|
%
|
Price to earnings
|
|
|
11.6
|
|
|
|
11.5
|
|
|
|
16.7
|
|
|
|
11.1
|
|
|
|
14.7
|
|
Price to book
|
|
|
2.6
|
|
|
|
2.6
|
|
|
|
3.8
|
|
|
|
3.3
|
|
|
|
3.6
|
|
Earnings to fixed charges
|
|
|
13.5x
|
|
|
|
24.7x
|
|
|
|
21.3x
|
|
|
|
27.1x
|
|
|
|
18.8x
|
|
Net premiums earned
|
|
$
|
13,877.4
|
|
|
$
|
14,117.9
|
|
|
$
|
13,764.4
|
|
|
$
|
13,169.9
|
|
|
$
|
11,341.0
|
|
Total revenues
|
|
|
14,686.8
|
|
|
|
14,786.4
|
|
|
|
14,303.4
|
|
|
|
13,782.1
|
|
|
|
11,892.0
|
|
Underwriting
margins:1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personal Lines
|
|
|
7.0
|
%
|
|
|
12.3
|
%
|
|
|
11.0
|
%
|
|
|
14.1
|
%
|
|
|
12.1
|
%
|
Commercial Auto
|
|
|
10.1
|
%
|
|
|
19.8
|
%
|
|
|
17.9
|
%
|
|
|
21.1
|
%
|
|
|
17.5
|
%
|
Other
indemnity2
|
|
|
NM
|
|
|
|
NM
|
|
|
|
NM
|
|
|
|
NM
|
|
|
|
NM
|
|
Total underwriting operations
|
|
|
7.4
|
%
|
|
|
13.3
|
%
|
|
|
11.9
|
%
|
|
|
14.9
|
%
|
|
|
12.7
|
%
|
Net income
|
|
$
|
1,182.5
|
|
|
$
|
1,647.5
|
|
|
$
|
1,393.9
|
|
|
$
|
1,648.7
|
|
|
$
|
1,255.4
|
|
Per share (diluted basis)
|
|
|
1.65
|
|
|
|
2.10
|
|
|
|
1.74
|
|
|
|
1.91
|
|
|
|
1.42
|
|
Dividends declared per share
|
|
|
2.1450
|
|
|
|
.0325
|
|
|
|
.0300
|
|
|
|
.0275
|
|
|
|
.0250
|
|
Number of people employed
|
|
|
26,851
|
|
|
|
27,778
|
|
|
|
28,336
|
|
|
|
27,085
|
|
|
|
25,834
|
|
All share and per share amounts were adjusted for the
May 18, 2006,
4-for-1
stock split and the April 22, 2002,
3-for-1
stock split.
|
|
1
|
Underwriting margins are calculated as pretax underwriting
profit (loss), as defined in
Note 9 Segment Information, as a
percentage of net premiums earned.
|
|
2
|
In 2003, we ceased writing business for our lenders
collateral protection program. As a result, underwriting margin
is not meaningful (NM) for our other indemnity businesses due to
the low level of premiums earned by, and the variability of
losses in, such businesses after that date.
|
App.-A-58
(millions - except ratios,
per share amounts and number of people employed)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2002
|
|
|
2001
|
|
|
2000
|
|
|
1999
|
|
|
1998
|
|
|
|
|
Insurance Companies Selected Financial Information and
Operating Statistics Statutory Basis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net premiums written
|
|
$
|
9,452.0
|
|
|
$
|
7,260.1
|
|
|
$
|
6,196.1
|
|
|
$
|
6,124.7
|
|
|
$
|
5,299.7
|
|
Growth
|
|
|
30
|
%
|
|
|
17
|
%
|
|
|
1
|
%
|
|
|
16
|
%
|
|
|
14
|
%
|
Policyholders surplus
|
|
$
|
3,370.2
|
|
|
$
|
2,647.7
|
|
|
$
|
2,177.0
|
|
|
$
|
2,258.9
|
|
|
$
|
2,029.9
|
|
Net premiums written to policyholders surplus ratio
|
|
|
2.8
|
|
|
|
2.7
|
|
|
|
2.8
|
|
|
|
2.7
|
|
|
|
2.6
|
|
Loss and loss adjustment expense ratio
|
|
|
70.9
|
|
|
|
73.6
|
|
|
|
83.2
|
|
|
|
75.0
|
|
|
|
68.5
|
|
Underwriting expense ratio
|
|
|
20.4
|
|
|
|
21.1
|
|
|
|
21.0
|
|
|
|
22.1
|
|
|
|
22.4
|
|
|
Statutory combined ratio
|
|
|
91.3
|
|
|
|
94.7
|
|
|
|
104.2
|
|
|
|
97.1
|
|
|
|
90.9
|
|
Selected Consolidated Financial Information
GAAP Basis
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets
|
|
$
|
13,564.4
|
|
|
$
|
11,122.4
|
|
|
$
|
10,051.6
|
|
|
$
|
9,704.7
|
|
|
$
|
8,463.1
|
|
Total shareholders equity
|
|
|
3,768.0
|
|
|
|
3,250.7
|
|
|
|
2,869.8
|
|
|
|
2,752.8
|
|
|
|
2,557.1
|
|
Common Shares outstanding
|
|
|
871.8
|
|
|
|
881.2
|
|
|
|
882.2
|
|
|
|
877.1
|
|
|
|
870.5
|
|
Common Share price:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
$
|
15.12
|
|
|
$
|
12.65
|
|
|
$
|
9.25
|
|
|
$
|
14.52
|
|
|
$
|
14.33
|
|
Low
|
|
|
11.19
|
|
|
|
6.84
|
|
|
|
3.75
|
|
|
|
5.71
|
|
|
|
7.83
|
|
Close (at December 31)
|
|
|
12.41
|
|
|
|
12.44
|
|
|
|
8.64
|
|
|
|
6.09
|
|
|
|
14.11
|
|
Market capitalization
|
|
$
|
10,819.3
|
|
|
$
|
10,958.6
|
|
|
$
|
7,616.8
|
|
|
$
|
5,345.4
|
|
|
$
|
12,279.7
|
|
Book value per Common Share
|
|
|
4.32
|
|
|
|
3.69
|
|
|
|
3.25
|
|
|
|
3.14
|
|
|
|
2.94
|
|
Return on average common shareholders equity
|
|
|
19.3
|
%
|
|
|
13.5
|
%
|
|
|
1.7
|
%
|
|
|
10.9
|
%
|
|
|
19.3
|
%
|
Debt outstanding
|
|
$
|
1,489.0
|
|
|
$
|
1,095.7
|
|
|
$
|
748.8
|
|
|
$
|
1,048.6
|
|
|
$
|
776.6
|
|
Ratios:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt to total capital
|
|
|
28.3
|
%
|
|
|
25.2
|
%
|
|
|
20.7
|
%
|
|
|
27.6
|
%
|
|
|
23.3
|
%
|
Price to earnings
|
|
|
16.6
|
|
|
|
27.2
|
|
|
|
164.5
|
|
|
|
18.5
|
|
|
|
27.7
|
|
Price to book
|
|
|
2.9
|
|
|
|
3.4
|
|
|
|
2.7
|
|
|
|
1.9
|
|
|
|
4.8
|
|
Earnings to fixed charges
|
|
|
13.2x
|
|
|
|
10.7x
|
|
|
|
1.3x
|
|
|
|
5.7x
|
|
|
|
10.2x
|
|
Net premiums earned
|
|
$
|
8,883.5
|
|
|
$
|
7,161.8
|
|
|
$
|
6,348.4
|
|
|
$
|
5,683.6
|
|
|
$
|
4,948.0
|
|
Total revenues
|
|
|
9,294.4
|
|
|
|
7,488.2
|
|
|
|
6,771.0
|
|
|
|
6,124.2
|
|
|
|
5,292.4
|
|
Underwriting
margins:1
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personal Lines
|
|
|
7.5
|
%
|
|
|
4.5
|
%
|
|
|
(5.2
|
)%
|
|
|
1.2
|
%
|
|
|
7.9
|
%
|
Commercial Auto
|
|
|
9.1
|
%
|
|
|
8.3
|
%
|
|
|
3.3
|
%
|
|
|
8.4
|
%
|
|
|
17.6
|
%
|
Other
indemnity2
|
|
|
7.2
|
%
|
|
|
7.0
|
%
|
|
|
13.6
|
%
|
|
|
10.8
|
%
|
|
|
8.6
|
%
|
Total underwriting operations
|
|
|
7.6
|
%
|
|
|
4.8
|
%
|
|
|
(4.4
|
)%
|
|
|
1.7
|
%
|
|
|
8.4
|
%
|
Net income
|
|
$
|
667.3
|
|
|
$
|
411.4
|
|
|
$
|
46.1
|
|
|
$
|
295.2
|
|
|
$
|
456.7
|
|
Per share (diluted basis)
|
|
|
.75
|
|
|
|
.46
|
|
|
|
.05
|
|
|
|
.33
|
|
|
|
.51
|
|
Dividends declared per share
|
|
|
.0240
|
|
|
|
.0233
|
|
|
|
.0225
|
|
|
|
.0218
|
|
|
|
.0208
|
|
Number of people employed
|
|
|
22,974
|
|
|
|
20,442
|
|
|
|
19,490
|
|
|
|
18,753
|
|
|
|
15,735
|
|
App.-A-59
The Progressive Corporation and
Subsidiaries
Quantitative Market Risk
Disclosures
(unaudited)
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, 2007, and the
potential for near-term losses from reasonably possible
near-term changes in market rates or prices. We had no trading
financial instruments at December 31, 2007.
OTHER-THAN-TRADING
FINANCIAL INSTRUMENTS
Financial instruments subject to interest rate risk were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
|
-200 bps
|
|
|
-100 bps
|
|
|
|
|
|
+100 bps
|
|
|
+200 bps
|
|
(millions)
|
|
Change
|
|
|
Change
|
|
|
Actual
|
|
|
Change
|
|
|
Change
|
|
|
|
|
U.S. government obligations
|
|
$
|
1,519.5
|
|
|
$
|
1,358.0
|
|
|
$
|
1,207.1
|
|
|
$
|
1,066.9
|
|
|
$
|
937.4
|
|
State and local government obligations
|
|
|
3,974.0
|
|
|
|
3,856.0
|
|
|
|
3,745.1
|
|
|
|
3,641.8
|
|
|
|
3,545.5
|
|
Asset-backed securities
|
|
|
2,612.4
|
|
|
|
2,562.4
|
|
|
|
2,511.6
|
|
|
|
2,461.6
|
|
|
|
2,413.8
|
|
Corporate securities
|
|
|
1,179.9
|
|
|
|
1,127.5
|
|
|
|
1,078.4
|
|
|
|
1,032.5
|
|
|
|
989.4
|
|
Preferred stocks
|
|
|
2,375.6
|
|
|
|
2,323.8
|
|
|
|
2,270.3
|
|
|
|
2,228.3
|
|
|
|
2,184.0
|
|
Other debt
securities1
|
|
|
706.1
|
|
|
|
673.2
|
|
|
|
642.7
|
|
|
|
614.5
|
|
|
|
588.6
|
|
Short-term investments
|
|
|
382.4
|
|
|
|
382.4
|
|
|
|
382.4
|
|
|
|
382.4
|
|
|
|
382.4
|
|
|
Balance as of December 31, 2007
|
|
$
|
12,749.9
|
|
|
$
|
12,283.3
|
|
|
$
|
11,837.6
|
|
|
$
|
11,428.0
|
|
|
$
|
11,041.1
|
|
|
|
|
|
Balance as of December 31, 2006
|
|
$
|
13,110.5
|
|
|
$
|
12,707.5
|
|
|
$
|
12,321.1
|
|
|
$
|
11,954.2
|
|
|
$
|
11,608.4
|
|
|
|
|
|
|
|
1 |
Includes $612.5 million in redeemable preferred stocks.
|
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, which includes any issuer-specific
features, such as a call option. Asset-backed securities,
including state and local government housing securities, are
priced assuming deal-specific prepayment scenarios, considering
the deal structure, prepayment penalties, yield maintenance
agreements and the underlying collateral.
Financial instruments subject to equity market risk were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Hypothetical
|
|
|
|
Fair
|
|
|
Market Changes
|
|
(millions)
|
|
Value
|
|
|
+10%
|
|
|
-10%
|
|
|
|
|
Common equities as of December 31, 2007
|
|
$
|
2,327.5
|
|
|
$
|
2,560.3
|
|
|
$
|
2,094.8
|
|
Common equities as of December 31, 2006
|
|
$
|
2,368.1
|
|
|
$
|
2,604.9
|
|
|
$
|
2,131.3
|
|
The model represents the estimated value of our common equity
portfolio given a +/- 10% change in the market, based on the
common stock portfolios weighted average beta of 1.0. The
beta is derived from recent historical experience, using the
S&P 500 as the market surrogate. The historical
relationship of the common stock portfolios beta to the
S&P 500 is not necessarily indicative of future
correlation, as individual company or industry factors may
affect price movement. Betas are not available for all
securities. In such cases, the change in fair value reflects a
direct +/- 10% change; the number of securities without betas is
approximately 1%, and the remaining 99% of the equity portfolio
is indexed to the Russell 1000.
App.-A-60
As an additional supplement to the sensitivity analysis, we
present results from a
value-at-risk
(VaR) analysis used to estimate and quantify our market risks.
VaR is the expected loss, for a given confidence level, of our
portfolio due to adverse market movements in an ordinary market
environment. The VaR estimates below are used as a risk
measurement and reflect an estimate of potential reductions in
fair value of our portfolio for the following 66 trading days
(three-month intervals) at the
99th percentile
loss. We use the
66-day VaR
for contingency capital planning. During the year, we changed
from reporting the
95th percentile
loss to the
99th percentile
loss to align with the current trends in risk management; prior
periods were restated. Under the
99th percentile
analysis, we would expect the stated VaR for a
66-day
horizon to be exceeded once in 100 quarters.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
September 30,
|
|
|
June 30,
|
|
|
March 31,
|
|
|
December 31,
|
|
($ in millions)
|
|
2007
|
|
|
2007
|
|
|
2007
|
|
|
2007
|
|
|
2006
|
|
|
|
|
66-day
VaR
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-income portfolio
|
|
$
|
(358.5
|
)
|
|
$
|
(324.5
|
)
|
|
$
|
(279.7
|
)
|
|
$
|
(210.5
|
)
|
|
$
|
(234.1
|
)
|
% of portfolio
|
|
|
(3.0
|
)%
|
|
|
(2.6
|
)%
|
|
|
(2.0
|
)%
|
|
|
(1.7
|
)%
|
|
|
(1.9
|
)%
|
% of shareholders equity
|
|
|
(7.3
|
)%
|
|
|
(6.1
|
)%
|
|
|
(5.1
|
)%
|
|
|
(3.0
|
)%
|
|
|
(3.4
|
)%
|
Common equity portfolio
|
|
$
|
(449.5
|
)
|
|
$
|
(440.9
|
)
|
|
$
|
(319.1
|
)
|
|
$
|
(316.5
|
)
|
|
$
|
(196.5
|
)
|
% of portfolio
|
|
|
(19.3
|
)%
|
|
|
(18.0
|
)%
|
|
|
(12.6
|
)%
|
|
|
(13.2
|
)%
|
|
|
(8.3
|
)%
|
% of shareholders equity
|
|
|
(9.1
|
)%
|
|
|
(8.3
|
)%
|
|
|
(5.8
|
)%
|
|
|
(4.6
|
)%
|
|
|
(2.9
|
)%
|
Total portfolio
|
|
$
|
(387.8
|
)
|
|
$
|
(470.0
|
)
|
|
$
|
(465.5
|
)
|
|
$
|
(337.1
|
)
|
|
$
|
(300.9
|
)
|
% of portfolio
|
|
|
(2.7
|
)%
|
|
|
(3.2
|
)%
|
|
|
(2.9
|
)%
|
|
|
(2.2
|
)%
|
|
|
(2.0
|
)%
|
% of shareholders equity
|
|
|
(7.9
|
)%
|
|
|
(8.8
|
)%
|
|
|
(8.5
|
)%
|
|
|
(4.9
|
)%
|
|
|
(4.4
|
)%
|
Our VaR results are based on a stochastic simulation where all
securities are marked to market under 10,000 scenarios.
Fixed-income securities are priced off simulated term structures
and risk is calculated based on the volatilities and
correlations of the points on those curves. Equities are priced
off each securitys individual pricing history. The model
uses an exponentially weighted moving average methodology to
forecast variance and covariance over a two-year time horizon
for each security. In estimating the parameters of the forecast
model, the sample mean is set to zero and the weight applied in
the exponential moving average forecasts are set at .97, making
the model more sensitive to recent volatility and correlations.
The VaR of the total investment portfolio is less than the sum
of the two components (fixed income and common equity) due to
the benefit of diversification.
The increase in the
66-day VaR
from December 31, 2006 to December 31, 2007, primarily
results from volatility in the market in 2007.
App.-A-61
The Progressive Corporation and
Subsidiaries
Claims Payment
Patterns
(unaudited)
The Progressive Group of Insurance Companies is primarily an
insurer of automobiles and recreational vehicles owned by
individuals, and trucks owned by small businesses. As such, our
claims liabilities, by their very nature, are short in duration.
Since our incurred losses consist of both payments and changes
in the reserve estimates, it is important to understand our paid
development patterns. The charts below show our personal auto
claims payment patterns, reflecting both dollars and claims
counts paid, for auto physical damage and bodily injury claims,
as well as on a total auto basis. Since physical damage claims
pay out so quickly, the chart is calibrated on a monthly basis,
as compared to a quarterly basis for the bodily injury and total
auto payments.
App.-A-62
Note: The above graphs are presented for our personal auto
products on an accident period basis and are based on three
years of actual experience for physical damage and nine years
for bodily injury and total auto.
App.-A-63
The Progressive Corporation and
Subsidiaries
Quarterly Financial and Common
Share Data
(unaudited)
(millions - except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net Income
|
|
|
Stock
Price1
|
|
|
Dividends
|
|
|
|
Total
|
|
|
|
|
|
Per
|
|
|
|
|
|
|
|
|
|
|
|
Rate of
|
|
|
Declared
|
|
Quarter
|
|
Revenues
|
|
|
Total
|
|
|
Share2
|
|
|
High
|
|
|
Low
|
|
|
Close
|
|
|
Return3
|
|
|
Per
Share4
|
|
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
$
|
3,686.8
|
|
|
$
|
363.5
|
|
|
$
|
.49
|
|
|
$
|
24.75
|
|
|
$
|
20.91
|
|
|
$
|
21.82
|
|
|
|
|
|
|
$
|
|
|
2
|
|
|
3,675.9
|
|
|
|
283.7
|
|
|
|
.39
|
|
|
|
25.16
|
|
|
|
21.55
|
|
|
|
23.93
|
|
|
|
|
|
|
|
2.0000
|
|
3
|
|
|
3,709.6
|
|
|
|
299.2
|
|
|
|
.42
|
|
|
|
24.10
|
|
|
|
18.88
|
|
|
|
19.41
|
|
|
|
|
|
|
|
|
|
4
|
|
|
3,614.5
|
|
|
|
236.1
|
|
|
|
.34
|
|
|
|
20.50
|
|
|
|
17.26
|
|
|
|
19.16
|
|
|
|
|
|
|
|
.1450
|
|
|
|
|
$
|
14,686.8
|
|
|
$
|
1,182.5
|
|
|
$
|
1.65
|
|
|
$
|
25.16
|
|
|
$
|
17.26
|
|
|
$
|
19.16
|
|
|
|
(12.6
|
)%
|
|
$
|
2.1450
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
$
|
3,660.9
|
|
|
$
|
436.6
|
|
|
$
|
.55
|
|
|
$
|
30.09
|
|
|
$
|
25.25
|
|
|
$
|
26.07
|
|
|
|
|
|
|
$
|
.00750
|
|
2
|
|
|
3,707.9
|
|
|
|
400.4
|
|
|
|
.51
|
|
|
|
27.86
|
|
|
|
25.25
|
|
|
|
25.71
|
|
|
|
|
|
|
|
.00750
|
|
3
|
|
|
3,723.8
|
|
|
|
409.6
|
|
|
|
.53
|
|
|
|
25.84
|
|
|
|
22.18
|
|
|
|
24.54
|
|
|
|
|
|
|
|
.00875
|
|
4
|
|
|
3,693.8
|
|
|
|
400.9
|
|
|
|
.53
|
|
|
|
25.54
|
|
|
|
22.19
|
|
|
|
24.22
|
|
|
|
|
|
|
|
.00875
|
|
|
|
|
$
|
14,786.4
|
|
|
$
|
1,647.5
|
|
|
$
|
2.10
|
|
|
$
|
30.09
|
|
|
$
|
22.18
|
|
|
$
|
24.22
|
|
|
|
(17.0
|
)%
|
|
$
|
.03250
|
|
|
|
|
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
|
|
$
|
3,491.8
|
|
|
$
|
412.7
|
|
|
$
|
.51
|
|
|
$
|
23.12
|
|
|
$
|
20.35
|
|
|
$
|
22.94
|
|
|
|
|
|
|
$
|
.00750
|
|
2
|
|
|
3,590.1
|
|
|
|
394.3
|
|
|
|
.49
|
|
|
|
25.22
|
|
|
|
21.88
|
|
|
|
24.70
|
|
|
|
|
|
|
|
.00750
|
|
3
|
|
|
3,622.5
|
|
|
|
305.3
|
|
|
|
.38
|
|
|
|
26.83
|
|
|
|
23.43
|
|
|
|
26.19
|
|
|
|
|
|
|
|
.00750
|
|
4
|
|
|
3,599.0
|
|
|
|
281.6
|
|
|
|
.35
|
|
|
|
31.23
|
|
|
|
25.76
|
|
|
|
29.20
|
|
|
|
|
|
|
|
.00750
|
|
|
|
|
$
|
14,303.4
|
|
|
$
|
1,393.9
|
|
|
$
|
1.74
|
|
|
$
|
31.23
|
|
|
$
|
20.35
|
|
|
$
|
29.20
|
|
|
|
37.9
|
%
|
|
$
|
.03000
|
|
|
|
|
|
|
|
All per share amounts and stock prices were adjusted for the
May 18, 2006,
4-for-1
stock split.
|
|
1
|
Prices as reported on the consolidated transaction reporting
system. Progressives Common Shares are listed on the New
York Stock Exchange under the symbol PGR.
|
|
2
|
Presented on a diluted basis. The sum may not equal the total
because the average equivalent shares differ in the periods.
|
|
3
|
Represents annual rate of return, assuming dividend
reinvestment, including the $2.00 per share extraordinary cash
dividend paid in September 2007.
|
|
4
|
Progressive transitioned to an annual variable dividend policy
beginning in 2007; the annual dividend of $.1450 per common
share was declared by the Board of Directors in December 2007
and paid on January 31, 2008. In addition, in June 2007,
Progressives Board declared an extraordinary cash dividend
payable September 14, 2007 to shareholders of record at the
close of business on August 31, 2007.
|
App.-A-64
The Progressive Corporation and
Subsidiaries
Performance Graph
(unaudited)
The following performance graph compares the performance of
Progressives Common Shares (PGR) to the
Standard & Poors Index (S&P
Index) and the Value Line Property/Casualty Industry Group
(P/C Group) for the last five years.
Cumulative
Five-Year Total Return*
PGR, S&P Index, P/C Group (Performance Results through
12/31/07)
Cumulative Total
Return as of December 31 of each year
(assumes $100 was invested at the close of trading on
December 31, 2002)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
|
|
PGR
|
|
$
|
168.75
|
|
|
$
|
171.52
|
|
|
$
|
236.38
|
|
|
$
|
196.35
|
|
|
$
|
171.54
|
|
S&P Index
|
|
|
128.69
|
|
|
|
142.69
|
|
|
|
149.70
|
|
|
|
173.34
|
|
|
|
182.86
|
|
P/C Group
|
|
|
126.49
|
|
|
|
141.36
|
|
|
|
156.80
|
|
|
|
179.48
|
|
|
|
218.55
|
|
|
|
* |
Assumes reinvestment of dividends.
|
Source: Value Line, Inc.
App.-A-65
The Progressive Corporation and
Subsidiaries
Net Premiums Written by
State
(unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
|
Florida
|
|
$
|
1,656.9
|
|
|
|
12.0
|
%
|
|
$
|
1,811.5
|
|
|
|
12.8
|
%
|
|
$
|
1,774.2
|
|
|
|
12.7
|
%
|
|
$
|
1,522.6
|
|
|
|
11.4
|
%
|
|
$
|
1,338.2
|
|
|
|
11.2
|
%
|
|
|
|
|
California
|
|
|
1,106.4
|
|
|
|
8.0
|
|
|
|
1,085.1
|
|
|
|
7.7
|
|
|
|
982.8
|
|
|
|
7.0
|
|
|
|
892.7
|
|
|
|
6.7
|
|
|
|
736.2
|
|
|
|
6.2
|
|
|
|
|
|
Texas
|
|
|
1,072.0
|
|
|
|
7.8
|
|
|
|
1,096.0
|
|
|
|
7.8
|
|
|
|
1,126.8
|
|
|
|
8.0
|
|
|
|
1,181.1
|
|
|
|
8.8
|
|
|
|
1,126.4
|
|
|
|
9.4
|
|
|
|
|
|
New York
|
|
|
847.9
|
|
|
|
6.2
|
|
|
|
930.6
|
|
|
|
6.6
|
|
|
|
968.8
|
|
|
|
6.9
|
|
|
|
935.7
|
|
|
|
7.0
|
|
|
|
808.3
|
|
|
|
6.8
|
|
|
|
|
|
Georgia
|
|
|
748.9
|
|
|
|
5.4
|
|
|
|
751.0
|
|
|
|
5.3
|
|
|
|
749.5
|
|
|
|
5.4
|
|
|
|
733.2
|
|
|
|
5.5
|
|
|
|
614.4
|
|
|
|
5.2
|
|
|
|
|
|
Ohio
|
|
|
655.9
|
|
|
|
4.8
|
|
|
|
693.7
|
|
|
|
4.9
|
|
|
|
736.0
|
|
|
|
5.3
|
|
|
|
754.2
|
|
|
|
5.6
|
|
|
|
712.1
|
|
|
|
6.0
|
|
|
|
|
|
Pennsylvania
|
|
|
610.5
|
|
|
|
4.4
|
|
|
|
642.1
|
|
|
|
4.5
|
|
|
|
659.1
|
|
|
|
4.7
|
|
|
|
634.4
|
|
|
|
4.7
|
|
|
|
589.3
|
|
|
|
4.9
|
|
|
|
|
|
All other
|
|
|
7,074.0
|
|
|
|
51.4
|
|
|
|
7,122.0
|
|
|
|
50.4
|
|
|
|
7,010.4
|
|
|
|
50.0
|
|
|
|
6,724.2
|
|
|
|
50.3
|
|
|
|
5,988.5
|
|
|
|
50.3
|
|
|
|
|
|
|
Total
|
|
$
|
13,772.5
|
|
|
|
100.0
|
%
|
|
$
|
14,132.0
|
|
|
|
100.0
|
%
|
|
$
|
14,007.6
|
|
|
|
100.0
|
%
|
|
$
|
13,378.1
|
|
|
|
100.0
|
%
|
|
$
|
11,913.4
|
|
|
|
100.0
|
%
|
|
|
|
|
|
|
|
|
App.-A-66
Directors
|
|
|
|
|
Charles A. Davis3,5,6 Chief Executive Officer, Stone Point Capital LLC (private equity investing)
Stephen R. Hardis1,2,5,6 Lead Director, Axcelis Technologies, Inc. (manufacturing)
Bernadine P. Healy, M.D.1,6 Health
Editor and Medical Columnist, U.S. News & World Report (publishing)
Jeffrey D. Kelly2,4,6 Vice Chairman and Chief Financial Officer, National City Corporation (commercial banking)
Abby F. Kohnstamm6 President and Chief Executive Officer,
Abby F. Kohnstamm & Associates, Inc. (marketing consulting)
|
|
Peter B. Lewis2,4,6,7 Chairman of the Board
Norman S. Matthews3,5,6 Consultant, formerly President, Federated Department Stores, Inc. (retailing)
Patrick H. Nettles, Ph.D.1,6 Executive
Chairman, Ciena Corporation (telecommunications)
Glenn M. Renwick2 President and Chief Executive Officer
Donald B. Shackelford4,6 Chairman, Fifth Third Bank, Central Ohio (commercial banking)
Bradley T. Sheares, Ph.D.3,6 formerly Chief Executive Officer, Reliant Pharmaceuticals, Inc. (pharmaceuticals)
|
|
1Audit
Committee member
2Executive
Committee member
3Compensation
Committee member
4Investment
and Capital
Committee member
5Nominating
and Governance
Committee member
6Independent
director
7Non-executive
chairman
|
|
|
|
Corporate Officers
|
|
Other Executive
Officers
|
|
Glenn M. Renwick President and Chief Executive Officer
Brian C. Domeck Vice President and Chief Financial Officer
Charles E. Jarrett Vice President, Secretary and Chief Legal Officer
Thomas A. King Vice President and Treasurer
Jeffrey W. Basch Vice President and Chief Accounting Officer
Peter B. Lewis Chairman of the Board (non-executive)
|
|
John A. Barbagallo Commercial Lines Group President
William M. Cody Chief Investment Officer
Susan Patricia Griffith Chief Human Resource Officer
John P. Sauerland Personal Lines Group President
Raymond M. Voelker Chief Information Officer
|
App.-A-67
Contact Non-Management Directors Interested
parties have the ability to contact the non-management directors
as a group by sending a written communication clearly addressed
to the non-management directors and sent to any of the following:
Peter B. Lewis, Chairman of the Board, The Progressive
Corporation, 6300 Wilson Mills Road, Mayfield Village, Ohio
44143 or
e-mail:
peter_lewis@progressive.com.
Charles E. Jarrett, Corporate Secretary, The Progressive
Corporation, 6300 Wilson Mills Road, Mayfield Village, Ohio
44143 or
e-mail:
chuck_jarrett@progressive.com.
The recipient will forward communications so received to the
non-management directors.
Accounting Complaint Procedure Any employee or
other interested party with a complaint or concern regarding
accounting, internal accounting controls or auditing matters
relating to Progressive may report such complaint or concern
directly to the Chairman of the Audit Committee, as follows:
Stephen R. Hardis, Chairman of the Audit Committee,
stephen_hardis@progressive.com.
Any such complaint or concern also may be reported anonymously
over the following toll-free Alert Line:
1-800-683-3604.
Progressive will not retaliate against any individual by reason
of his or her having made such a complaint or reported such a
concern in good faith. View the complete procedures at
progressive.com/governance.
Whistleblower Protections Progressive will not
retaliate against any officer or employee of Progressive because
of any lawful act done by the employee to provide information or
otherwise assist in investigations regarding conduct that the
employee reasonably believes to be a violation of Federal
Securities Laws or of any rule or regulation of the Securities
and Exchange Commission or Federal Securities Laws relating to
fraud against shareholders. View the complete Whistleblower
Protections at progressive.com/governance.
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 18, 2008,
at 10 a.m. eastern time. There were 3,851 shareholders
of record on December 31, 2007.
Principal Office
The Progressive Corporation
6300 Wilson Mills Road
Mayfield Village, Ohio 44143
440-461-5000
progressive.com
24-Hour
Claims Reporting and Customer Service
|
|
|
|
|
|
|
Private passenger autos, motorcycles and
|
|
|
|
|
recreational vehicles
|
|
Commercial autos/trucks
|
|
|
To report a claim
|
|
1-800-274-4499
|
|
1-800-274-4499
|
|
For customer service
|
|
|
|
|
If you bought your policy through an independent agent or broker
|
|
1-800-925-2886 (1-800-300-3693 in California)
progressiveagent.com
|
|
1-800-444-4487
progressivecommercial.com
|
|
If you bought your policy directly through Progressive online or
by phone
|
|
1-800-PROGRESSIVE (1-800-776-4737) progressive.com
|
|
1-800-895-2886
progressivecommercial.com
|
Common Shares The Progressive Corporations
common shares (symbol PGR) are traded on the New York Stock
Exchange. Progressive currently has an annual variable dividend
policy. We expect the Board to declare the next annual variable
dividend in December 2008, with a record date in January 2009
and payment shortly thereafter.
A complete description of our annual variable dividend policy
can be found at: progressive.com/dividend.
Corporate Governance Progressives Corporate
Governance Guidelines and Board Committee Charters are available
at: progressive.com/governance, or may be requested in print by
writing to: The Progressive Corporation, Investor Relations,
6300 Wilson Mills Road, Box W33, Mayfield Village, Ohio 44143.
Charitable Contributions Progressive contributes
annually to The Progressive Insurance Foundation, which
provides: (i) financial support to the Insurance Institute
for Highway Safety to further its work in reducing the human
trauma and economic costs of auto accidents, and
(ii) matching funds to eligible 501(c)(3) charitable
organizations to which Progressive employees contribute.
App.-A-68
Counsel
Baker & Hostetler LLP, Cleveland, Ohio
Transfer Agent and Registrar Registered
Shareholders: If your Progressive shares are registered in
your name, contact National City Bank regarding questions or
changes to your account: National City Bank, Shareholder
Services Operations Dept. 5352, P.O. Box 92301,
Cleveland, Ohio
44193-0900.
Phone:
1-800-622-6757
or e-mail:
shareholder.inquiries@nationalcity.com.
Beneficial Shareholders: If your Progressive
shares are held in a brokerage or other financial institution
account, contact your broker or financial institution directly
regarding questions or changes to your account.
Shareholder/Investor Relations Progressive does
not maintain a mailing list for distribution of
shareholders reports. To view Progressives publicly
filed documents, shareholders can access our Web site:
progressive.com/sec. To view our earnings and other releases,
access progressive.com/investors.
To request copies of Progressives publicly filed documents
free of charge, write to: The Progressive Corporation, Investor
Relations, 6300 Wilson Mills Road, Box W33, Mayfield Village,
Ohio 44143,
e-mail:
investor_relations@progressive.com or call:
440-395-2258.
For financial-related information, call:
440-395-2222
or e-mail:
investor_relations@progressive.com.
For all other Company information, call:
440-461-5000
or e-mail:
webmaster@progressive.com.
Registered Trademarks
Progressive®
is a registered trademark. Net
Promoter®
is a registered trademark of Satmetrix Systems, Inc.
Online Annual Report and Proxy Statement Our 2007
Annual Report to Shareholders, in an interactive format, can be
found at: progressive.com/annualreport.
We have also posted copies of our 2008 Proxy Statement and 2007
Annual Report to Shareholders, in a PDF format, at:
progressiveproxy.com.
©2008
The Progressive Corporation
App.-A-69
THE PROGRESSIVE CORPORATION
Proxy
Solicited on Behalf of the Board of Directors for the 2008 Annual Meeting of Shareholders
The undersigned hereby appoints Brian C. Domeck, Charles E. Jarrett and David M. Coffey, and
each of them, with full power of substitution, as proxies for the undersigned to attend the Annual
Meeting of Shareholders of The Progressive Corporation, to be held at 6671 Beta Drive, Mayfield
Village, Ohio, at 10:00 a.m., local time, on April 18, 2008, and thereat, and at any
adjournment thereof, to vote and act with respect to all of The Progressive Corporation Common Shares,
$1.00 par value per share, which the undersigned would be entitled to vote, with all power the undersigned would possess if
present in person, as follows:
1. |
|
[ ] WITH authority to vote
(except as marked to the contrary below),
or
[ ] WITHOUT authority to
vote,
for the
election as directors of all four nominees listed below, each to serve
for a term of three years. |
Charles A. Davis, Bernadine P. Healy, M.D., Jeffrey D. Kelly, Abby F. Kohnstamm
(INSTRUCTION: To withhold authority to vote for any individual nominee, print that nominees name on the space provided below.)
2. |
|
Proposal to approve amendments to the Companys Amended Articles of Incorporation and Code of
Regulations to adopt a majority voting standard in uncontested elections of directors. |
[ ] FOR [ ] AGAINST [ ] ABSTAIN
3. |
|
Proposal to approve an amendment to the Companys Code of Regulations to modify the
definition of a directors term of office. |
[ ] FOR [ ] AGAINST [ ] ABSTAIN
4. |
|
Proposal to approve an amendment to the Companys Code of Regulations to increase the maximum
number of director positions from 12 to 13 and to fix the number of directors at
13. |
[ ] FOR [ ] AGAINST [ ] ABSTAIN
5. |
|
Proposal to ratify the appointment of PricewaterhouseCoopers
LLP as the Companys independent
registered public accounting firm for 2008. |
[ ] FOR [ ] AGAINST [ ] ABSTAIN
6. |
|
In their discretion, to vote upon such other business as may properly come before the
meeting. |
This proxy, when properly executed, will be voted as specified by the shareholder. If no
specifications are made, this proxy will be voted to elect the nominees identified in Item 1 above
and to approve the Proposals described in Items 2, 3, 4 and 5 above.
Receipt of
Notice of Annual Meeting of Shareholders and the related Proxy
Statement dated March 7, 2008, is hereby acknowledged.
|
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|
|
|
|
Date:
|
|
|
|
|
, 2008 |
|
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|
|
Signature of Shareholder(s) |
|
|
|
|
|
|
Please sign as your name or names appear hereon. If
shares are held jointly, all holders must sign. When
signing as attorney, executor, administrator, trustee
or guardian, please give your full title. If a
corporation, please sign in full corporate name by the
president or other authorized officer. If a
partnership, please sign in partnership name by an
authorized person.