Progressive 2003 Annual Report Download

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- APP.-B-1 -
THE PROGRESSIVE CORPORATION AND SUBSIDIARIES
REPORT OF PRICEWATERHOUSECOOPERS LLP, INDEPENDENT AUDITORS
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, 2003 and 2002,and the results of their operations and their cash flows for
each of the three years in the period ended December 31,2003,in conformity with accounting principles generally accepted
in the United States of America.These financial statements are the responsibility of the Company’s management; our
responsibility is to express an opinion on these financial statements based on our audits.We conducted our audits of these
statements in accordance with auditing standards generally accepted in the United States of America,which require that we
plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material
misstatement.An audit includes examining,on a test basis,evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates made by management, and evaluating the
overall financial statement presentation.We believe that our audits provide a reasonable basis for our opinion.
To the Board of Directors and Shareholders, The Progressive Corporation:
Cleveland, Ohio
January 21, 2004

Table of contents

  • Page 1
    ... AUDITORS To the Board of Directors and Shareholders, The Progressive Corporation: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, changes in shareholders' equity and cash flows present fairly, in all material respects, the financial...

  • Page 2
    THE PROGRESSIVE CORPORATION AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (millions - except per share amounts) For the years ended December 31, REVENUES 2003 2002 2001 Net premiums earned Investment income Net realized gains (losses) on securities Service revenues Other income1 Total ...

  • Page 3
    THE PROGRESSIVE CORPORATION AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (millions) December 31, ASSETS 2003 2002 Investments: Available-for-sale: Fixed maturities, at market (amortized cost: $8,899.0 and $7,409.4) Equity securities, at market: Preferred stocks (cost: $751.3 and $631.9) Common ...

  • Page 4
    ... Restricted stock market value adjustment Amortization of restricted stock Balance, End of year Total Shareholders' Equity 1 $ $ $ $ $ 5,030.6 $ 3,768.0 $ 3,250.7 The Company did not split treasury shares. In 2002, the Company repurchased 136,182 Common Shares prior to the stock split and...

  • Page 5
    ...activities: Depreciation and amortization 89.3 Amortization of restricted stock 11.0 Net realized (gains) losses on securities (12.7) Changes in: Unearned premiums 590.4 Loss and loss adjustment expense reserves 763.3 Accounts payable, accrued expenses and other liabilities 124.5 Prepaid reinsurance...

  • Page 6
    ... insurance and related services throughout the United States. The Company's Personal Lines segment writes insurance for private passenger automobiles and recreation vehicles through both an independent agency channel and a direct channel. The Company's Commercial Auto segment writes insurance...

  • Page 7
    ... increases in the market value of securities written down are reflected as changes in unrealized gains as part of accumulated other comprehensive income within shareholders' equity. Realized gains and losses on securities are computed based on the first-in first-out method and include write-downs on...

  • Page 8
    ...provides insurance and related services to individuals and small commercial accounts throughout the United States, and offers a variety of payment plans. Generally, premiums are collected prior to providing risk coverage, minimizing the Company's exposure to credit risk.The Company performs a policy...

  • Page 9
    ... pricing model to calculate the fair value of the options awarded as of the date of grant. (millions, except per share amounts) 2003 2002 2001 Net income, as reported Deduct: Total stock-based employee compensation expense determined under the fair value based method for all awards, net of related...

  • Page 10
    ... were on deposit with various regulatory agencies to meet statutory requirements.The Company did not have any securities of one issuer with an aggregate cost or market value exceeding ten percent of total shareholders' equity at December 31, 2003 or 2002. The components of net investment income for...

  • Page 11
    ...preferred stocks common equities Total Market Value $ 2,004.9 132.3 179.2 $ 2,316.4 $ $ Total (25.5) (7.4) (8.8) (41.7) Less than 12 Months $ $ (22.9) (2.2) (2.2) (27.3) 12 months or greater $ $ (2.6) (5.2) (6.6) (14.4) The market value for securities in an unrealized loss position for 12 months or...

  • Page 12
    ... of the securities may have the right to call or prepay obligations. The Company records derivative instruments at fair value on the balance sheet, with changes in value reflected in income during the current period.This accounting treatment did not change when SFAS 133,"Accounting for Derivative...

  • Page 13
    ... Committee of Taxation of Congress had completed its review of a Federal income tax settlement agreed to by the Internal Revenue Service, primarily attributable to the amount of loss reserves deductible for tax purposes. As a result, the Company will receive an income tax refund of approximately...

  • Page 14
    ...annually. Under this agreement, the Company has the right to borrow up to $10.0 million. By selecting from available credit options, the Company may elect to pay interest at rates related to the London interbank offered rate, the bank's base rate or at a money market rate.A commitment fee is payable...

  • Page 15
    ...to be adequate based on information currently known. The Company does not believe that these claims will have a material effect on the Company's liquidity, financial condition, cash flows or results of operations. The Company writes personal and commercial auto insurance in the coastal states, which...

  • Page 16
    .... 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...

  • Page 17
    ... The Company maintains The Progressive Corporation Executive Deferred Compensation Plan (Deferral Plan), which permits eligible executives to defer receipt of some or all of their annual bonuses or restricted stock awards. These deferred amounts are deemed invested in one or more investment funds...

  • Page 18
    ... total shares available under both the 1995 and 2003 Incentive Plans, after the granting of stock options and restricted stock awards. The following employee stock options were outstanding or exercisable as of December 31, 2003: Options Outstanding Range of Exercise Prices Weighted Average Number...

  • Page 19
    ...-Scholes pricing model to calculate the fair value of the options awarded as of the date of grant, including 62,424 options awarded to the non-employee directors during 2002 and 2001, using the following assumptions: 2002 2001 Option Term Annualized Volatility Rate Risk-Free Rate of Return Dividend...

  • Page 20
    ...52.2) $ 587.6 1 Personal automobile insurance accounted for 93% of the total Personal Lines segment net premiums written in 2003, 2002 and 2001. 2 For 2003, both revenues and pretax profit include $31.2 million of estimated interest income related to an income tax refund the Company will receive...

  • Page 21
    ...past and does not consider a loss to be probable and estimable, and is unable to estimate a range of loss, if any, at this time. There are currently four putative class action lawsuits challenging the Company's practice of specifying aftermarket (nonoriginal equipment manufacturer) replacement parts...

  • Page 22
    ...from the remaining cases to be probable and estimable, and is unable to estimate a range of loss, if any, at this time. In July 2002, the Company settled a nationwide class action lawsuit challenging one of the Company's claim adjustment practices, known as the charging of "betterment." Specifically...

  • Page 23
    ....The Company had no uncollateralized lines or letters of credit as of December 31, 2003 or 2002. - 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...

  • Page 24
    ... competitive.The Company is the number one writer of private passenger auto insurance through independent agencies and the number three writer in the direct channel, based on net premiums written in the United States. The Company also competes in the U. S. commercial auto insurance market where it...

  • Page 25
    ...its claims handling quality, as indicated by the Company's internal audit of claims files, and increased staff during 2003 to enhance capacity. In 2003, the Company achieved underwriting profitability in all of the Personal Lines markets where it writes business, with only five states not meeting or...

  • Page 26
    ...of readily marketable, investment-grade securities. The Company's companywide premiums-to-surplus ratio was 2.6 to 1 at December 31, 2003.The Company intends over time to slowly increase operating leverage through a higher rate of net premiums to surplus in its agency,direct and commercial insurance...

  • Page 27
    ... life expectancy,which is an estimate of the average length of time that a policy will remain in force before cancellation or non-renewal.The Company experienced a modest increase in retention in its Personal Lines segment, in both the Agency channel and the Direct channel, during the first half...

  • Page 28
    ... YEAR Loss & loss adjustment expense ratio POLICIES IN FORCE (AT DECEMBER 31) (thousands) Agency - Auto Direct - Auto Other Personal Lines1 Total Personal Lines Commercial Auto Business 1 3,966 1,852 1,990 7,808 365 3,386 1,541 1,642 6,569 289 2,779 1,209 1,383 5,371 209 Includes insurance for...

  • Page 29
    ... the industry due to changes in its mix of business.For example, during 2003, the Company had a shift in the policies in force in its Direct business from nonstandard auto and mid-market to standard and preferred. As a result, the Company analyzes trends to distinguish changes in its experience from...

  • Page 30
    ... strategic alliance business relationships (other insurance companies,financial institutions,employers and national brokerage agencies). Direct business includes business written through 1-800-PROGRESSIVE, online at progressive.com and on behalf of affinity groups. Personal Lines The Agency Channel...

  • Page 31
    ... class action lawsuits, such as those alleging damages as a result of the Company's use of after-market parts, total loss evaluation methodology, use of credit in underwriting, installment fee programs, using preferred provider rates for payment of personal injury protection claims or for paying...

  • Page 32
    ... average maturity. See Note 2 - Investments. Non-investment-grade fixed-maturity securities offer the Company higher returns and added diversification but may involve greater risks, often related to creditworthiness, solvency and relative liquidity of the secondary trading market. - APP .-B-32 - 2

  • Page 33
    ... defined by nationally recognized rating agencies, and limiting non-investment-grade securities to a maximum of 5% of the fixed-income portfolio. Concentration in a single issuer's bonds and preferred stocks is limited to no more than 6% of the Company's shareholders' equity, except for U.S.Treasury...

  • Page 34
    ... maximum expected loss. For further information, see the Quantitative Market Risk Disclosures, a supplemental schedule provided in this Annual Report. Trading Securities Trading securities are entered into for the purpose of near-term profit generation.At December 31, 2003 and 2002, the Company did...

  • Page 35
    ...upon changes in interest rates and other factors. Exposure to credit risk is limited to the carrying value; collateral may be required to limit credit risk. Recurring investment income (interest and dividends) increased 2% in 2003,10% in 2002 and 7% in 2001. The Company is reporting total returns to...

  • Page 36
    ... of, recovery does not satisfy the conditions set forth in the current accounting guidance (see Critical Accounting Policies, Other-thanTemporary Impairment for further discussion). For fixed-income investments with unrealized losses due to market or industry-related declines where the Company has...

  • Page 37
    ... of the 2003 equity security market write-downs by sector (both market-related and issuer specific): (millions) Russell Amount of Write-down Equity Portfolio Allocation Russell 1000 Allocation 1000 Sector Return Remaining Gross Unrealized Loss Sector Auto and Transportation Consumer Discretionary...

  • Page 38
    ... claims practices,changes in the legal environment and state regulatory requirements,requires significant judgment in the reserve setting process. The Company reviews its reserves at a combined state, product and line coverage level (the "products") on an annual, semiannual or quarterly time frame...

  • Page 39
    ... discussion on the Company's loss reserving practices and how loss reserves affect the Company's financial results, see the Company's Report on Loss Reserving Practices, which was filed in June 2003 via Form 8-K and is available on the Company's Web site at progressive.com/investors. - APP .-B-39 -

  • Page 40
    ... rates or equity market declines.This evaluation reflects the Company's assessments of current conditions, as well as predictions of uncertain future events, that may have a material impact on the financial statements related to security valuation. For fixed-income investments with unrealized losses...

  • Page 41
    ... a write down in accordance with its stated policy. Since total unrealized losses are already a component of the Company's shareholders' equity, any recognition of additional OTI losses would have no effect on the Company's comprehensive income or book value. Safe Harbor Statement Under the Private...

  • Page 42
    ...-except ratios, per share amounts and number of people employed) INSURANCE COMPANIES SELECTED FINANCIAL INFORMATION AND OPERATING STATISTICS - STATUTORY BASIS 2003 2002 2001 2000 1999 Policyholders' surplus Net premiums written to policyholders' surplus ratio Loss and loss adjustment expense...

  • Page 43
    ...-except ratios, per share amounts and number of people employed) INSURANCE COMPANIES SELECTED FINANCIAL INFORMATION AND OPERATING STATISTICS - STATUTORY BASIS 1998 1997 1996 1995 1994 Policyholders' surplus Net premiums written to policyholders' surplus ratio Loss and loss adjustment expense...

  • Page 44
    ... Direct premiums written: Personal Lines Commercial Auto Business Other businesses Total direct premiums written Reinsurance assumed Reinsurance ceded Net premiums written Net change in unearned premiums reserve1 Net premiums earned Expenses: Losses and loss adjustment expenses2 Policy acquisition...

  • Page 45
    ... Direct premiums written: Personal Lines Commercial Auto Business Other businesses Total direct premiums written Reinsurance assumed Reinsurance ceded Net premiums written Net change in unearned premiums reserve1 Net premiums earned Expenses: Losses and loss adjustment expenses2 Policy acquisition...

  • Page 46
    ... rate risk were: Market Value (millions) -200 bps Change -100 bps Change Actual +100 bps Change +200 bps Change U.S. government obligations State and local government obligations Asset-backed securities Corporate and other debt securities Preferred stocks Short-term investments Balance...

  • Page 47
    ...common stock portfolio's 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 market value reflects a direct +/- 10% change; the number of...

  • Page 48
    ... and total projected exercises represents an estimate of the Company's historical experience of option cancellations.Actual exercises can and will vary based on a number of factors, including variation in the market price of Progressive stock. Forecasted exercises are based on management assumptions...

  • Page 49
    ... pursuant to The Progressive Corporation Executive Deferred Compensation Plan. The employee time-based awards typically vest in equal installments over three, four and five year periods.The performancebased awards vest upon the attainment of preestablished profitability and growth objectives...

  • Page 50
    ...system.The Company's Common Shares are listed on the New York Stock Exchange. Represents premiums earned plus service revenues. 2 3 Presented on a diluted basis.The sum may not equal the total because the average equivalent shares differ in the periods. Represents annual rate of return, including...

  • Page 51
    THE PROGRESSIVE CORPORATION AND SUBSIDIARIES DIRECT PREMIUMS WRITTEN BY STATE (unaudited - not covered by report of independent auditors) (millions) 2003 2002 2001 2000 1999 Florida Texas New York California Ohio Georgia Pennsylvania All other Total $1,343.8 11.0% 1,129.5 9.3 825.2 6.8 762...

  • Page 52
    ... non-management directors as a [email protected]. group by sending a written communication clearly addressed to the non-management directors or any one of the following: Charles E. Jarrett, Corporate Secretary, The Progressive Corporation, 6300 Wilson Mills Road, Mayfield Village, Ohio...

  • Page 53
    ... were 4,103 shareholders of record on December 31, 2003. ANNUAL MEETING The principal office of The Progressive Corporation is at 6300 Wilson Mills Road, Mayfield Village, Ohio 44143. PRINCIPAL OFFICE PHONE: 440-461-5000 progressive.com WEB SITE: TOLL-FREE TELEPHONE NUMBER For assistance after...