Progressive 2004 Annual Report Download - page 15

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APP.-B-15
The Company’s 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. The Company’s reserves developed favorably in
2004 and 2003. In addition to favorable claims settlement during 2003, the Company benefited from a change in its estimate of the
Company’s future operating losses due to business assigned from the New York Automobile Insurance Plan.
Because the Company is primarily an insurer of motor vehicles, it has limited exposure to environmental, asbestos and general liability
claims. The Company has established reserves for these exposures, in amounts which it believes to be adequate based on information
currently known. 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 could be exposed to natural catastrophes.
Although the occurrence of a major catastrophe could have a significant effect on the Company’s monthly or quarterly results, the Company
believes such an event would not be so material as to disrupt the overall normal operations of the Company. The Company is unable to
predict if any such events will occur in the near term.
6) Reinsurance
Reinsurance contracts do not relieve the Company from its obligations to policyholders. Failure of reinsurers to honor their obligations could
result in losses to the Company. The Company evaluates the financial condition of its reinsurers and monitors concentrations of credit risk to
minimize its exposure to significant losses from reinsurer insolvencies.
The primary difference between direct and net premiums written is attributable to premiums written under state-mandated involuntary
Commercial Auto Insurance Procedures/Plans (CAIP), for which the Company retains no loss indemnity risk, and premiums ceded to state-
provided reinsurance facilities.
5) Loss and Loss Adjustment Expense Reserves
Activity in the loss and loss adjustment expense reserves, prepared in accordance with GAAP, is summarized as follows:
(millions) 2004 2003 2002
Balance at January 1 $ 4,576.3 $ 3,813.0 $ 3,238.0
Less reinsurance recoverables on unpaid losses 229.9 180.9 168.3
Net balance at January 1 4,346.4 3,632.1 3,069.7
Incurred related to:
Current year 8,664.1 7,696.5 6,295.6
Prior years (109.1) (56.1) 3.5
Total incurred 8,555.0 7,6 4 0 .4 6 , 2 9 9.1
Paid related to:
Current year 5,719.2 5,065.4 4,135.0
Prior years 2,233.7 1,860.7 1,601.7
Total paid 7,952.9 6,926.1 5,736.7
Net balance at December 31 4,948.5 4,346.4 3,632.1
Plus reinsurance recoverables on unpaid losses 337.1 229.9 180.9
Balance at December 31 $ 5,285.6 $ 4,576.3 $ 3,813.0