Progressive 2008 Annual Report Download - page 19

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20
Progressive balances operating risk with
risk of investing and financing activities
in order to have sufficient capital to sup-
port 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 com-
pounding 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 conse-
quences of foreseeable 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 perform
-
ance against them. If, in our view, future
opportunities meet our financial objec-
tives and policies, we will invest capital in
expanding business operations. Under-
leveraged capital will be returned 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.
Financial 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 concentration risk
Operating
Monitor pricing and reserving
discipline
Manage profitability targets and opera-
tional 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 program based on annual
underwriting results
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