Progressive 2006 Annual Report Download - page 18

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FINANCIAL POLICIES
Progressive balances operating risk with risk of investing and financ-
ing activities in order to have sufficient capital to support all the
insurance we can profitably underwrite and service. Risks arise in all
operational and functional areas, and therefore must be assessed
holistically, accounting for the offsetting and compounding effects
of the separate sources of risk within Progressive.
We use risk management tools to quantify the amount of capital
needed, in addition to surplus, to absorb consequences of foresee-
able events such as unfavorable loss reserve development, litigation,
weather-related catastrophes and investment-market corrections.
Our financial policies define our allocation of risk and we measure
our performance against them. If, in our view, future opportunities
meet our financial objectives and policies, we will invest capital in
expanding business operations. Underleveraged capital will be re-
turned to investors. We expect to earn a return on equity greater than
its cost. Presented is an overview of Progressive’s Operating, Investing
and Financing policies.
Investing Maintain
a liquid, diversified,
high-quality investment
portfolio
Manage on a total
return basis
Target an allocation of
75% to 100% for fixed-
income securities
with the balance in
common equities
Manage interest rate,
credit, prepayment,
extension and concen-
tration risk
Operating Monitor
pricing and reserving
discipline
Manage profitability
targets and operational
performance at our
lowest level of product
definition
Sustain premiums-
to-surplus ratios at
efficient levels, and
below applicable state
regulations, for each
insurance subsidiary
Ensure loss reserves
are adequate and
develop with minimal
variance
Financing Maintain
sufficient capital
to support insurance
operations
Maintain debt below
30% of total capital at
book value
Neutralize dilution
from equity-based
compensation in
the year of issuance
through share
repurchases
Return underleveraged
capital through share
repurchases and a
variable dividend pro-
gram based on annual
underwriting results
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