Progressive 2006 Annual Report Download - page 14

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Our investment portfolio made a greater
contribution to our results this year with a
total return of 7.4%, up considerably from the
4.0% produced in 2005. Investment income
was up a healthy 21% for the year. Our com-
mon stock portfolio generated a return of
16.3%, largely tracking the general market.
We continued to maintain a high-quality, rel-
atively short-duration fixed-income portfolio .
As the market price for risk declined during
the year, we further reduced our exposure,
ending the year with a weighted average
credit quality of AA+, up from AA at the end
of 2005. Fixed-income returns were strong
on an absolute basis at 5.9% and very strong
for the level of risk assumed.
Early in the year, shareholders approved
an authorization to increase the number of
shares outstanding and the Board of Direc-
tors subsequently approved a 4:1 stock split,
which was effective in May. Based on our
long-standing and continuing position on
capital management — to repurchase shares
when our capital balances, view of the future
and the stock’s price make it attractive — we
repurchased 39.1 million shares during the
year, or a little over 6% of the outstanding
balance at the start of the year. The average
repurchase price was just under $25, on a
split-adjusted basis.
We ended the year in a very strong cap-
ital position, with no constraints on any
business opportunities, and a debt-to-total
capital ratio below 15%. Our capital strategy
preference is to maximize operating lev-
erage (i.e.,ratio of net premiums written
to statutory surplus), while maintaining
relatively low financial leverage, and we
continue to expend considerable effort to
assess capital needs under a variety of
operating and external contingencies. We
believe we have opportunities to extend
our operating leverage and will continue to
manage our capital to that objective.
As part of our capital planning process, we
announced last year that we would introduce
a variable annual dividend based on our
Gainshare factor. During 2006, we published
the year-to-date Gainshare factor in our
monthly reporting to provide shareholders
some familiarity with the measure and its
relative volatility. We closed the year with a
factor of 1.18.
The Board of Directors has established
that the 2007 variable dividend will be based
on 20% of after-tax underwriting profit
multiplied by the companywide Gainshare
factor for 2007 and paid in early February
2008. Based on similar parameters and the
1.18 factor of 2006, if the dividend policy had
been in effect for the year, the dividend would
have been about $.39 per share. We will con-
tinue to publish the year-to-date Gainshare
factor and full details of underwriting per-
formance rather than provide any guidance
on dividend expectations.
INVESTMENT AND CAPITAL MANAGEMENT