Progressive 2012 Annual Report Download - page 45

Management views our capital position as consisting of the following three layers, each with a specific size and purpose:
• The first layer of capital, which we refer to as “regulatory capital,” is the amount of capital we need to satisfy state
insurance regulatory requirements and support our objective of writing all the business we can write and service,
consistent with our underwriting discipline of achieving a 96 combined ratio. This capital is held by our various
insurance entities.
• The second layer of capital we call “extreme contingency.” While our regulatory capital is, by definition, a cushion
for absorbing financial consequences of adverse events, such as loss reserve development, litigation, weather
catastrophes, or investment market corrections, we view that as a base and hold additional capital for even more
extreme conditions. The modeling used to quantify capital needs for these conditions is quite extensive, including
tens of thousands of simulations, representing our best estimates of such contingencies based on historical
experience. This capital is held either at a non-insurance subsidiary of the holding company or in our insurance
entities, where it is potentially eligible for a dividend up to the holding company.
• The third layer of capital is capital in excess of the sum of the first two layers and provides maximum flexibility to
repurchase stock or other securities, consider acquisitions, and pay dividends to shareholders, among other
purposes. This capital is largely held at a non-insurance subsidiary of the holding company.
At all times during the last two years, our total capital exceeded the sum of our regulatory capital layer plus our self-
constructed extreme contingency load. At December 31, 2012, we held total capital (debt plus equity) of $8.1 billion,
compared to $8.2 billion at December 31, 2011, reflecting the actions taken during the year to return underleveraged capital
to our shareholders as discussed above.
Short-Term Borrowings
During the last three years, we did not engage in short-term borrowings to fund our operations. As discussed above, our
insurance operations create liquidity by collecting and investing insurance premiums in advance of paying claims.
Information concerning our insurance operations can be found below under Results of Operations – Underwriting, and
details about our investment portfolio can be found below under Results of Operations – Investments.
During 25 days in 2012, we engaged in repurchase agreements under which we loaned U.S. Treasury securities to
accredited brokerage firms in exchange for cash equal to the fair value of the securities, as described in more detail below
under Results of Operations – Investments: Repurchase and Reverse Repurchase Transactions. These investment
transactions were entered into to enhance the yield from our fixed-income portfolio and not as a source of liquidity or
funding for our operations. We had no open repurchase commitments at December 31, 2012 or 2011.
C. Commitments and Contingencies
Contractual Obligations
A summary of our noncancelable contractual obligations as of December 31, 2012, follows:
Payments due by period
(millions) Total
Less than
1 year
1-3
years
3-5
years
More than
5 years
Debt $ 2,081.2 $ 150.0 $ 0 $ 0 $1,931.2
Interest payments on debt11,227.6 123.1 225.2 200.7 678.6
Operating leases 151.5 47.1 68.4 26.5 9.5
Purchase obligations 246.7 185.4 60.6 .7 0
Loss and loss adjustment expense reserves 7,838.4 3,891.1 2,867.6 562.6 517.1
Total $11,545.4 $4,396.7 $3,221.8 $790.5 $3,136.4
1Includes interest on the 6.70% Debentures at the fixed annual rate through, but excluding, June 15, 2017. See Note 4 – Debt for further discussion
on the interest rate and maturity dates for these Debentures.
App.-A-45