Progressive 2010 Annual Report Download - page 19

OBJECTIVES
Profitability Progressive’s most important goal
is for our insurance subsidiaries to produce an
aggregate calendar-year underwriting profit of
at least 4%. Our business is a composite of many
product offerings defined in part by product
type, distribution channel, geography, customer
tenure, and underwriting grouping. Each of these
products has targeted operating parameters
based on level of maturity, underlying cost struc-
tures, customer mix, and policy life expectancy.
Our aggregate goal is the balanced blend
of these individual performance targets in any
calendar year.
Growth Our goal is to grow as fast as possible,
constrained only by our profitability objective
and our ability to provide high-quality customer
service. Progressive is a growth-oriented com-
pany and management incentives are tied to
profitable growth.
We report Personal Lines and Commercial
Auto results separately. We further break down
our Personal Lines’ results by channel (Agency
and Direct) to give shareholders a clearer picture
of the business dynamics of each distribution
method and their respective rates of growth. Ag-
gregate expense ratios and aggregate growth
rates disguise the true nature and performance
of each business.
FINANCIAL POLICIES
Progressive balances operating risk with risk
of investing and financing 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, account-
ing 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 events such
as unfavorable loss reserve development, liti-
ga tion, weather-related catastrophes, and
investment-market corrections. Our financial poli-
cies 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 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.
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Operating Monitor pricing and reserving discipline
– Manage profitability targets and operational perfor-
mance at our lowest level of product definition
– Sustain premiums-to-surplus ratios at efficient
levels, and at or below applicable state regulations,
for each insurance subsidiary
– Ensure loss reserves are adequate and develop with
minimal variance
Investing Maintain a liquid, diversified, high-quality
investment portfolio
– Manage on a total return basis
– Manage interest rate, credit, prepayment, extension,
and con centra tion risk
– Allocate portfolio between two groups:
Group I – target 0% to 25% (common equities, redeem -
able and nonredeemable preferred stocks, and below
investment-grade fixed-maturity securities)
Group II–target 75% to 100% (other fixed-maturity
and short-term securities)
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 repur-
chases, extraordinary dividends, and a variable dividend
program based on annual underwriting results