Progressive 2003 Annual Report Download - page 24

- APP.-B-24 -
The consolidated financial statements and the related notes, together with the supplemental information,should be read in
conjunction with the following discussion of the consolidated financial condition and results of operations.
OVERVIEW The Progressive Corporation is a holding company and does not have any revenue producing operations of its
own. Its insurance subsidiaries and affiliates (together with The Progressive Corporation,the “Company”) provide personal
automobile insurance and other specialty property-casualty 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
the independent agency channel and the direct channel.The Company ranks third in the U.S.private passenger auto insurance
market, based on net premiums written, with an estimated 7% market share.Although there are over 300 insurance
companies/groups with annual premiums greater than $5 million competing in this $150 billion market,the top 10 insurance
groups account for approximately 60% of the premiums written.The Company expects that the market will continue to
consolidate with the top 15 or 20 companies growing at the expense of the smaller ones, which may not have sufficient
resources to invest in the technologies and systems necessary to remain cost 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 is the third largest carrier with about 5% market share.The Company’s Commercial Auto segment writes
insurance for automobiles and trucks owned by small businesses primarily through the independent agency channel.
The holding company receives cash through borrowings, equity sales, subsidiary dividends and other transactions, and
may use the proceeds to contribute to the capital of its insurance subsidiaries in order to support premium growth, to
repurchase its Common Shares, to pay interest on or to retire its outstanding indebtedness, to pay dividends and for other
business purposes. In addition, the Company has $1.4 billion of readily marketable securities in a non-insurance subsidiary
that can be used to satisfy the holding company’s obligations.The Company did not issue any debt or equity securities during
2003, but repaid $200 million of notes in January 2004.On a consolidated basis,the Company generated positive cash flows
of $2.4 billion in 2003, portions of which were used during the year to repurchase 5.0 million Common Shares (average cost
of $64.00 per share) and to construct two call centers and an office building, as well as lease additional space to support our
growing operations.The Company leased 12 additional Claims Service Center sites during the year.These sites, which are
designed to provide end-to-end resolution for auto physical damage losses, are expected to improve efficiency, increase
accuracy,reduce rework,improve repair cycle time and provide greater brand distinction.The Company continues to evaluate
the operating performance and cost parameters of these sites to validate their effectiveness.
The Company’s goal is to grow as fast as possible,constrained only by its objective to produce an aggregate calendar year
4% underwriting profit and its ability to provide high quality customer service.The Company had a successful 2003 with a
26% increase in net premiums written, an underwriting profit of 12.7% and net income of $1.26 billion.The Company
continued to reap the benefits of the profitable growth phase of this insurance cycle and further benefited from the lowest
level of automobile accident frequency experienced by the industry in recent history. Rate adequacy, improved customer
retention and new business growth contributed to 2003’s growth.Policies in force grew 19%.The Company performed over
200 rate and program revisions, which were designed to maintain rate adequacy and reflect the most accurate estimate of
prospective loss costs based on available information.The Company’s commitment to constrain growth if it is unable to
maintain service quality was demonstrated during 2003,when the Company imposed constraints on growth in Texas.During
the constraint period, the Company increased the number of employees in the Texas claims organization by approximately
16%,relocated claims managers to Texas,reduced turnover and responded to a sizeable weather-related catastrophe,allowing
the Company to relax the constraints by mid-year.Although the Company expects the year-over-year percentage growth to
decline in 2004, it believes it is still in a position to grow at a rate which is well in excess of the industry growth rate.Future
growth will be constrained by the Company’s most current assessment of claims handling quality.The Company does not
THE PROGRESSIVE CORPORATION AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS