Progressive 2004 Annual Report Download - page 26

APP.-B-26
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, a holding company that has insurance and non-insurance subsidiaries and one mutual insurance
company affiliate (collectively, the “Company”), does not have any revenue producing operations of its own. Its insurance subsidiaries and
affiliate 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. personal auto insurance market, based on
2003 and estimated 2004 net premiums written, with an estimated 7.4% market share in 2004.
Although there are approximately 300 insurance companies/groups with annual premiums greater than $5 million competing in the
estimated $158 billion U.S. personal auto market, the top 15 insurance groups account for approximately 72% of the premiums written. In
the aggregate, these top 15 groups outperformed the industry in both growth and profitability, supporting the Company’s belief that the
market will continue to consolidate. 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 U.S. The Company also competes in the
U.S. commercial auto insurance market where it is the third largest carrier, based on direct premiums written, with about 6% market share.
The Company’s Commercial Auto segment writes insurance for automobiles and trucks (e.g., pick-up or panel 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, pay interest on or retire its outstanding
indebtedness, pay dividends and repurchase its Common Shares and for other business purposes. In 2004, the Company received $1.6
billion of dividends from its subsidiaries, net of capital contributions, and used a portion of these dividends to fund the tender offer discussed
below. At year-end 2004, the Company had $1.2 billion of readily marketable securities in a non-insurance subsidiary that can be used to
satisfy the holding company’s obligations.
During 2004, the Company repurchased 16,919,674 of its Common Shares at a purchase price of $88 per share for a total cost of $1.5
billion pursuant to a “Dutch auction” tender offer. Outside of the tender offer, the Company repurchased 1,695,222 additional Common
Shares during the year at a total cost of $139.5 million, with an average cost of $82.31 per share. The Company did not issue any debt or
equity securities during 2004, but repaid $200 million of notes at maturity in January 2004 and $6 million of “other debt” in December 2004.
On a consolidated basis, the Company generated positive operating cash flows of $2.7 billion in 2004, portions of which were used
during the year to repurchase Common Shares and to construct two new call centers and an office building, as well as lease additional
space to support the Company’s growing operations. The Company opened one additional claims service center during the year, bringing
the total number of such centers to 20. These centers, which are designed to provide end-to-end resolution for auto physical damage losses,
are expected to improve efficiency and customer convenience, increase accuracy, reduce rework, improve repair cycle time and provide
greater brand distinction.
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. During the year, in light of market conditions and its own favorable underwriting
profitability, the Company favored maintaining relatively robust margins without significantly impairing growth. Nevertheless, the Company
remains committed to its stated profit and growth objectives over rolling five-year periods.
The U.S. private passenger auto insurance market produced its second consecutive year of underwriting profitability as auto accident
frequency rates continued to decline. Consequently, there was little rate pressure on consumers, leading to a natural reduction in consumer
shopping. While these market conditions and profitability levels are unusual and perhaps transitional, they offered opportunities for the
Company to improve its understanding and calibration of market responses to varying rate stimuli.
The Company had a 12% increase in net premiums written, an 85.1 combined ratio and net income of $1.65 billion in 2004. Policies
in force grew 11%. 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 stability, along with the Company’s
advancements in product design, brand and technology initiatives, also contributed to 2004 results. The Company performed 124 auto
rate and program revisions, which were designed to maintain rate adequacy and reflect the Company’s most accurate estimate of prospective
loss costs based on available information.
THE PROGRESSIVE CORPORATION AND SUBSIDIARIES
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS