Progressive 2014 Annual Report Download

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NEXT
THE PROGRESSIVE CORPORATION
2014
ANNUAL REPORT TO
SHAREHOLDERS

Table of contents

  • Page 1
    NEXT THE PROGRESSIVE CORPORATION 2014 ANNUAL REPORT TO SHAREHOLDERS

  • Page 2
    THE PROGRESSIVE CORPORATION 2014 ANNUAL REPORT TO SHAREHOLDERS Annual Report App.-A-1

  • Page 3
    ... - except per share amounts) 2014 2013 2012 Revenues Net premiums earned Investment income Net realized gains (losses) on securities: Other-than-temporary impairment (OTTI) losses: Total OTTI losses Non-credit losses, net of credit losses recognized on previously recorded non-credit OTTI losses Net...

  • Page 4
    ...-for-sale, at fair value: Fixed maturities (amortized cost: $13,374.2 and $13,415.3) Equity securities: Nonredeemable preferred stocks (cost: $590.4 and $445.7) Common equities (cost: $1,289.2 and $1,451.1) Short-term investments (amortized cost: $2,149.0 and $1,272.6) Total investments Cash Accrued...

  • Page 5
    The Progressive Corporation and Subsidiaries Consolidated Statements of Changes in Shareholders' Equity For the years ended December 31, (millions - except per share amounts) 2014 2013 2012 Common Shares, $1.00 Par Value Balance, Beginning of year Stock options exercised Treasury shares purchased1 ...

  • Page 6
    ... proceeds from debt issuance Payment of debt Reacquisition of debt Dividends paid to shareholders Acquisition of treasury shares Net cash used in financing activities Effect of exchange rate changes on cash Increase (decrease) in cash Cash, Beginning of year Cash, End of year $ 1,281.0 97.1 78.2 51...

  • Page 7
    ... Insurance Companies) provide personal and commercial automobile insurance and other specialty property-casualty insurance and related services. Our Personal Lines segment writes insurance for personal autos and recreational vehicles through both an independent insurance agency channel and a direct...

  • Page 8
    ..., (ii) market-related factors, such as interest rates or equity market declines, or (iii) credit-related losses, where the present value of cash flows expected to be collected are lower than the amortized cost basis of the security. We analyze our debt securities that are in a loss position to...

  • Page 9
    ...out method and include write-downs on available-for-sale securities considered to have other-than-temporary declines in fair value (excluding non-credit related impairments), as well as holding period valuation changes on derivatives, trading securities, and hybrid instruments (e.g., securities with...

  • Page 10
    ...sell one property originally purchased for a future Service Center site. At December 31, 2014, included in other assets in the consolidated balance sheets is $8.7 million of "held for sale" property, which represents the fair value of this property less the estimated costs to sell. Total capitalized...

  • Page 11
    ...Flow Information Cash includes only bank demand deposits. Non-cash activity includes declared but unpaid dividends. For the years ended December 31, we paid the following: (millions) 2014 2013 2012 Income taxes Interest $515.0 116.0 $497.0 122.3 $389.1 135.0 New Accounting Standards In May 2014...

  • Page 12
    ... Gains (Losses)1 % of Total Fair Value ($ in millions) Cost Fair Value December 31, 2014 Fixed maturities: U.S. government obligations State and local government obligations Foreign government obligations Corporate debt securities Residential mortgage-backed securities Commercial mortgage-backed...

  • Page 13
    ... reported at fair value at December 31: (millions) 2014 2013 Fixed maturities: Corporate debt securities Residential mortgage-backed securities Commercial mortgage-backed securities Other asset-backed securities Total fixed maturities Equity securities: Nonredeemable preferred stocks Total hybrid...

  • Page 14
    ...were on deposit to meet state insurance regulatory and/or rating agency requirements. We did not have any securities of any one issuer, excluding U.S. government obligations, with an aggregate cost or fair value exceeding 10% of total shareholders' equity at December 31, 2014 or 2013. At December 31...

  • Page 15
    ... 12 Months or Greater Total Gross Fair Unrealized No. of Fair Unrealized No. of Fair Unrealized Value Losses Sec. Value Losses Sec. Value Losses December 31, 2013 Fixed maturities: U.S. government obligations State and local government obligations Corporate debt securities Residential mortgage...

  • Page 16
    ...OTTI recorded in accumulated other comprehensive income, reflecting the original non-credit loss at the time the credit impairment was determined: December 31, 2014 2013 (millions) Fixed maturities: Residential mortgage-backed securities Commercial mortgage-backed securities Total fixed maturities...

  • Page 17
    ... 2014, 2013, and 2012, respectively, recognized in income in excess of the cash flows expected to be collected at the time of the write-downs. reductions of prior credit impairments where the current credit impairment requires writing securities down to fair value (i.e., no remaining non-credit loss...

  • Page 18
    ...(losses) for the years ended December 31, were: (millions) 2014 2013 2012 Gross realized gains on security sales Fixed maturities: U.S. government obligations State and local government obligations Corporate and other debt securities Residential mortgage-backed securities Commercial mortgage-backed...

  • Page 19
    ... fixed-income portfolio related to movements in credit spreads and interest rates and sales from our equity-indexed portfolio. In addition, gains and losses reflect recoveries from litigation settlements and holding period valuation changes on hybrids and derivatives. Also included are write-downs...

  • Page 20
    ... Income Statement Pretax Net Realized Gains (Losses) Years ended December 31, 2014 2013 2012 Notional Value1 December 31, Derivatives designated as: 2014 2013 Hedging instruments Closed: Manage interest 31 rate risk Ineffective cash flow hedge Non-hedging instruments Assets: $ 44 $ 54 $ NA...

  • Page 21
    ...in 2009) and two 5-year interest rate swap positions (opened in 2011); in each case, we were paying a fixed rate and receiving a variable rate, effectively shortening the duration of our fixed-income portfolio. As of December 31, 2014 and 2013, the balance of the cash collateral that we had received...

  • Page 22
    ... was: Fair Value Level 2 Level 3 (millions) December 31, 2014 Level 1 Total Cost Fixed maturities: U.S. government obligations State and local government obligations Foreign government obligations Corporate debt securities Subtotal Asset-backed securities: Residential mortgage-backed Commercial...

  • Page 23
    ...) Level 1 Fair Value Level 2 Level 3 Total Cost December 31, 2013 Fixed maturities: U.S. government obligations State and local government obligations Foreign government obligations Corporate debt securities Subtotal Asset-backed securities: Residential mortgage-backed Commercial mortgage...

  • Page 24
    ... (excluding short-term investments), while dealer-quoted prices represented 3%, compared to 98% and 2% at December 31, 2013, respectively. In our process for selecting a source (e.g., dealer, pricing service) to provide pricing for securities in our portfolio, we reviewed documentation from the...

  • Page 25
    ...Value Fair Value Calls/ Net Realized Net Fair Value at Dec. 31, Maturities/ (Gain)/Loss Change in Transfers at Dec. 31, 2013 Paydowns Purchases Sales on Sales Valuation In (Out)1 2014 (millions) Fixed maturities: Asset-backed securities: Residential mortgage-backed Commercial mortgage-backed Total...

  • Page 26
    ... Fair Value Fair Value Calls/ Net Realized Net Fair Value at Dec. 31, Maturities/ (Gain)/Loss Change in Transfers at Dec. 31, 2012 Paydowns Purchases Sales on Sales Valuation In (Out)1 2013 Fixed maturities: Asset-backed securities: Residential mortgage-backed Commercial mortgage-backed Total fixed...

  • Page 27
    ...Level 3 Fair Value Measurements Fair Value Unobservable at Dec. 31, Valuation Unobservable Input 2013 Technique Input Assumption Fixed maturities: Asset-backed securities: Residential mortgage-backed Commercial mortgage-backed Total fixed maturities Equity securities: Nonredeemable preferred stocks...

  • Page 28
    ... into in March 2013, has expired. The Line of Credit is on substantially the same terms and conditions as the prior line of credit. Subject to the terms and conditions of the Line of Credit documents, advances under the Line of Credit (if any) will bear interest at a variable rate equal to the...

  • Page 29
    ... are as follows: (millions) Year Payments 2015 2016 2017 2018 2019 Thereafter Total $ 0 0 0 0 0 2,182.8 $2,182.8 5. INCOME TAXES The components of our income tax provision were as follows: (millions) 2014 2013 2012 Current tax provision Deferred tax expense (benefit) Total income tax provision...

  • Page 30
    ...related to prior years" in the table above. 2014 The favorable prior year reserve development was primarily attributable to accident year 2010. Favorable reserve development in our Commercial Lines business was partially offset by unfavorable development in our Agency auto business. Our Direct auto...

  • Page 31
    ... recoveries in this channel. Our personal auto product's development was primarily attributable to unfavorable development in our Florida PIP coverage and an increase in our estimate of bodily injury severity for accident year 2011. Unfavorable development in our Commercial Lines business reflects...

  • Page 32
    ... 2014, the insurance subsidiaries paid aggregate cash dividends of $1,000.2 million to the parent company. Based on the dividend laws currently in effect, the insurance subsidiaries could pay aggregate dividends of $1,346.5 million in 2015 without prior approval from regulatory authorities, provided...

  • Page 33
    ...cash bonus program for a limited number of senior executives and our Gainsharing program for other employees; the structures of these programs are similar in nature. Equity incentive compensation plans provide for the granting of restricted stock awards and restricted stock unit awards (collectively...

  • Page 34
    ... currently grant restricted stock awards to our non-employee directors as their sole compensation for serving as members of the Board of Directors. The restricted stock awards are issued as time-based awards. The vesting period (i.e., requisite service period) must be a minimum of six months and one...

  • Page 35
    ... agencies). The Direct business includes business written directly by us online, by phone, or on mobile devices. We also sell personal auto physical damage and property damage liability insurance via the Internet in Australia. For the years ended December 31, 2014, 2013, and 2012, net premiums...

  • Page 36
    ...of the total Personal Lines segment net premiums earned in 2014, compared to 91% in 2013 and 2012; insurance for our special lines products (e.g., motorcycles, ATVs, RVs, mobile homes, watercraft, and snowmobiles) accounted for the balance of the Personal Lines net premiums earned. profit (loss) for...

  • Page 37
    ... at December 31, 2013 Other comprehensive income (loss) before reclassifications: Investment securities Net non-credit related OTTI losses, adjusted for valuation changes Forecasted transactions Foreign currency translation adjustment Total other comprehensive income (loss) before reclassifications...

  • Page 38
    ... at December 31, 2012 Other comprehensive income (loss) before reclassifications: Investment securities Net non-credit related OTTI losses, adjusted for valuation changes Forecasted transactions Foreign currency translation adjustment Total other comprehensive income (loss) before reclassifications...

  • Page 39
    ...Other insurance companies face many of these same issues. The lawsuits discussed below are in various stages of development. We plan to contest these suits vigorously, but may pursue settlement negotiations in some cases, if appropriate. The outcomes of pending cases are uncertain at this time. App...

  • Page 40
    ... the labor rates our insurance subsidiaries pay to auto body repair shops. One patent matter alleging that Progressive infringes on patented marketing technology. Two putative class action lawsuits alleging that Progressive steers customers to Service Centers and network shops to have their vehicles...

  • Page 41
    ... a preferred provider discount to medical payment claims. This case was accrued for and settled in 2013. One putative class action lawsuit challenging the manner in which Progressive charges premium and assesses total loss claims for commercial vehicle stated amount policies. This case was accrued...

  • Page 42
    ... our policy, or not to pay the annual variable dividend, at any time prior to the declaration of the dividend for the year. Such an action by the Board could result from, among other reasons, changes in the insurance marketplace, changes in our performance or capital needs, changes in federal income...

  • Page 43
    ... accounting principles. A company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide...

  • Page 44
    ... Progressive's management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Rule 13a-15(f) under the Securities Exchange Act of 1934. Our internal control structure was designed under the supervision of our Chief Executive...

  • Page 45
    ... - signed a purchase agreement to acquire an additional 62% ownership stake in ARX Holding Corp., the parent company of American Strategic Insurance, our current provider of homeowners insurance in our "bundled" auto-homeowners insurance package offered through our Agency channel; the estimated cost...

  • Page 46
    ... profitability in our Commercial Lines business was due to a lower loss ratio, following rate increases taken during the last two years, lower frequency, mainly in our truck business, and favorable case reserve development in 2014. During the year, we recognized about one loss ratio point...

  • Page 47
    ... Agency channel by signing a purchase agreement to acquire a controlling interest in the parent company of American Strategic Insurance, our current homeowners insurance provider in this channel. During 2014, on a year-over-year basis, our written premium per policy for our Agency and Direct auto...

  • Page 48
    ... common shares and paying dividends to our shareholders in accordance with our financial policies. In addition, in December 2014, we signed a purchase agreement to acquire a controlling interest in ARX Holding Corp., the parent company of American Strategic Insurance (ASI), for an estimated cost of...

  • Page 49
    ... special dividends did not affect our annual variable dividend program in those years. B. Liquidity and Capital Resources Progressive's insurance operations create liquidity by collecting and investing premiums from new and renewal business in advance of paying claims. As an auto insurer, our claims...

  • Page 50
    ... two layers and provides maximum flexibility to repurchase stock or other securities, acquisition-related commitments, 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...

  • Page 51
    ... Annual Report. In addition, we annually publish a comprehensive Report on Loss Reserving Practices, which was most recently filed with the SEC on a Form 8-K on August 8, 2014, that further discusses our claims payment development patterns. During the last three years, the only other significant new...

  • Page 52
    ... coverage was in effect as of the end of the period specified. As of December 31, our policies in force were: (thousands) 2014 2013 2012 POLICIES IN FORCE Personal Lines Agency auto Direct auto Total auto Special lines1 Total Personal Lines Growth over prior year POLICIES IN FORCE Commercial Lines...

  • Page 53
    ... have a better loss experience. More and more of our customers, especially Direct auto customers, are now multi-product customers with combinations of special lines, homeowners, or renters, as well as auto coverage. As of December 31, 2014, PHA was available to Direct customers in 49 states, Agency...

  • Page 54
    ... the claim. We also allow consumers to use their phone's camera to photograph their driver license and/or current insurance card to provide easy data fill for quotes started from our mobile application in 36 states and the District of Columbia. Our Commercial Lines customers can also now view their...

  • Page 55
    ...-3 month policy life expectancy, which reflects more recent experience, is primarily due to rate increases in both our Agency and Direct channels in early 2014, compared to relatively stable rates in 2013. The methodology for calculating our policy life expectancy in our Commercial Lines business...

  • Page 56
    ...Accounting Policies for a discussion of the effect of changing estimates. Our total loss and loss adjustment expense ratio decreased 0.7 points in 2014 and decreased 1.6 points in 2013, compared to the prior year. Our accident year loss and LAE ratio, which excludes the impact of prior accident year...

  • Page 57
    ... coverage insures against damage to a customer's vehicle due to various causes other than collision, such as windstorm, hail, theft, falling objects, and glass breakage. Total personal auto incurred severity (i.e., average cost per claim, including both paid losses and the change in case...

  • Page 58
    ...as part of the total prior accident years' development. "All other development" represents claims settling for more or less than reserved, emergence of unrecorded claims at rates different than anticipated in our incurred but not recorded (IBNR) reserves, and changes in reserve estimates on specific...

  • Page 59
    ... Prior Year 2014 2013 2012 Net premiums written Net premiums earned Policies in force 8% 8% 2% 6% 7% 3% 8% 7% 4% Progressive's Personal Lines business writes insurance for personal autos and recreational vehicles and represented 90% of our total net premiums written for both 2014 and 2013 and...

  • Page 60
    ... The special lines products had a favorable effect on the total Personal Lines combined ratio of 1.3 points in 2014, 1.0 point in 2013, and 0.6 points in 2012. In 2014, the lack of severe storms helped increase the profitability on our special lines products. We report our Agency and Direct business...

  • Page 61
    ...Our Commercial Lines business represented 10% of our total net premiums written in both 2014 and 2013 and 11% in 2012. Even though we continue to write over 90% of our Commercial Lines business through the Agency channel, net premiums written through the Direct channel increased by 13% in 2014. App...

  • Page 62
    ... and gas/service station businesses, and For-hire livery - non-fleet (i.e., five or fewer vehicles) taxis, black-car services, and airport taxis. Business auto is the largest business market target, measured by premium volume, and accounts for approximately one third of our total Commercial Lines...

  • Page 63
    ... rejection forms; labor rates paid to auto body repair shops; employment related practices, including federal wage and hour claims; alleged patent infringement; and cases challenging other aspects of our claims or marketing practices or other business operations. Other insurance companies face many...

  • Page 64
    ...Total Portfolio Duration (years) ($ in millions) Fair Value Rating1 2014 Fixed maturities Nonredeemable preferred stocks Short-term investments Total fixed-income securities Common equities Total portfolio2,3 2013 Fixed maturities Nonredeemable preferred stocks Short-term investments Total fixed...

  • Page 65
    ..., 2014 and 2013: % of Total Portfolio ($ in millions) Fair Value 2014 Group I securities: Non-investment-grade fixed maturities Redeemable preferred stocks1 Nonredeemable preferred stocks Common equities Total Group I securities Group II securities: Other fixed maturities2 Short-term investments...

  • Page 66
    ... Sold Write-downs on Securities Held at Period End (millions) 2014 Prime collateralized mortgage obligations Alt-A collateralized mortgage obligations Home equity (sub-prime bonds) Total residential mortgage-backed securities Commercial mortgage-backed securities: interest only Total fixed income...

  • Page 67
    ... the change in value resulting from movements in the underlying market rates of debt securities held. The duration of the fixed-income portfolio was 1.6 years at December 31, 2014, compared to 2.0 years at December 31, 2013, reflecting our preference for shorter duration positioning during times of...

  • Page 68
    ... and short-term investments, during 2015. Cash from interest and dividend payments provides an additional source of recurring liquidity. Included in the fixed-income portfolio are U.S. government obligations, which include U.S. Treasury Notes and interest rate swaps. Although the interest rate swaps...

  • Page 69
    ...housing, and other types of structured debt. The increase in asset-backed securities since December 31, 2013, was mainly in our residential mortgage-backed securities and in our other asset-backed securities, where we acquired a combination of automobile and credit card receivable-backed securities...

  • Page 70
    ... are assigned by NRSROs; when we assign the NAIC ratings, all of our home equity securities are rated investment grade and classified as Group II. We added to our home-equity exposure in 2014. We feel that the market for home equity loan-backed bonds continues to trade with greater return potential...

  • Page 71
    ... credit quality rating and fair value of our CMBS bond and IO portfolios: Commercial Mortgage-Backed Securities (at December 31, 2014)1 Non-Investment AAA AA A BBB Grade ($ in millions) Category Total % of Total Multi-borrower Single-borrower Total CMBS bonds IO Total fair value % of Total fair...

  • Page 72
    ... held by the state housing finance agencies, the overall credit quality rating was AA+. Most of these mortgages were supported by FHA, VA, or private mortgage insurance providers. CORPORATE SECURITIES Included in our fixed-income securities at December 31, 2014 and 2013, were $2,836.7 million and...

  • Page 73
    ... is calculated to reflect the call, floor, and floating rate features. Although a preferred security may remain outstanding if not called, its interest rate duration will reflect the variable nature of the dividend. The overall credit quality rating was BB+ at December 31, 2014 and 2013. Our non...

  • Page 74
    ... 2013 2012 Open: 10-year 10-year 10-year 5-year 5-year 9-year Total open positions Closed: 5-year 5-year 9-year Total closed positions Total interest rate swaps NA = Not Applicable 04/2013 04/2013 04/2013 05/2011 08/2011 12/2009 04/2023 04/2023 04/2023 05/2016 08/2016 01/2019 Receive variable...

  • Page 75
    ... our FTE total returns for our portfolio, including the net gains (losses) on our derivative positions, for the years ended December 31, follows: 2014 2013 2012 Fixed-income securities: U.S. Treasury Notes Municipal bonds Corporate bonds Commercial mortgage-backed securities Collateralized mortgage...

  • Page 76
    ... vary depending on the change in mix of class of drivers insured by Progressive, but the frequency projections for these lines of business is generally stable in the short term, because a large majority of the parties involved in an accident report their claims within a short time period after the...

  • Page 77
    ... commercial auto physical damage claims and our non-auto lines of business; no change in estimates is presented due to the immaterial level of these reserves. Note: Every percentage point change in our estimate of severity for the 2014, 2013, and 2012 accident years would affect our personal auto...

  • Page 78
    ... through 2013. The last line in the triangle for each year represents the following: Re-estimated reserves = Total amount paid to-date + Re-estimated liability for unpaid losses and LAE-net Changes in the estimated severity and the actual number of late reported claims are the cause of the change in...

  • Page 79
    ... rates or equity market declines (e.g., negative return at either a sector index level or at the broader market level); or (iii) credit-related losses, where the present value of cash flows expected to be collected is lower than the amortized cost basis of the security. Fixed-income securities...

  • Page 80
    ...; our continued access to and functionality of third-party systems that are critical to our business; court decisions, new theories of insurer liability or interpretations of insurance policy provisions and other trends in litigation; changes in health care and auto and property repair costs; and...

  • Page 81
    ... Year Summary - Selected Financial Information (unaudited) (millions - except ratios, policies in force, per share amounts, and number of people employed) 2014 2013 2012 2011 2010 Net premiums written Growth Net premiums earned Growth Policies in force (thousands): Personal Lines Growth Commercial...

  • Page 82
    ... to the annual variable dividend, Progressive's Board declared special cash dividends of $1.00 per common share in 2013, 2012, and 2010, and $2.00 per common share in 2007. Progressive paid quarterly dividends prior to 2007. NA = Not applicable due to the net loss reported for 2008. App.-A-81

  • Page 83
    ... annual rate of return, assuming dividend reinvestment. 2 The 3 Represents 4 Progressive maintains an annual variable dividend policy under which a dividend is typically declared each December and paid early the following year. In addition to the annual variable dividend, in each of December 2013...

  • Page 84
    ... at the close of trading on December 31, 2009) 2010 2011 2012 2013 2014 PGR S&P Index P/C Group *Assumes reinvestment of dividends Source: Value Line Publishing LLC $116.90 115.06 120.73 $117.09 117.49 129.51 $135.25 136.29 155.29 $177.00 180.43 209.45 $186.47 205.13 239.91 App.-A-83

  • Page 85
    ...on a total personal auto basis, in each case calculated from the date of loss. Since physical damage claims pay out so quickly, the chart is calibrated on a monthly basis, as compared to a quarterly basis for the bodily injury and total auto payments. Physical Damage 100% 90% Percent Paid 80% 70...

  • Page 86
    ...% 0 4 Counts 8 Dollars 12 16 20 24 28 32 36 Quarters Note: The above graphs are presented for our personal auto products on an accident period basis and are based on three years of actual experience for physical damage and nine years for bodily injury and total personal auto. App.-A-85

  • Page 87
    ... risk is represented in terms of changes in fair value due to selected hypothetical movements in market rates. Bonds and preferred stocks are individually priced to yield to the worst case scenario, which includes any issuer-specific features, such as a call option. Asset-backed securities and state...

  • Page 88
    ...Progressive Corporation and Subsidiaries Net Premiums Written by State (unaudited) ($ in millions) 2014 2013 2012 2011 2010 Florida Texas California New York Ohio Georgia New Jersey Pennsylvania Michigan Louisiana All other Total....8 11.1% 9.1 6.3 4.7 4.5 4.9 3.1 4.2 3.1 3.2 45.8 100.0% App.-A-87

  • Page 89
    ... Customer Service Personal autos, motorcycles, and recreational vehicles Commercial autos/trucks To receive a quote To report a claim For customer service: If you bought your policy through an independent agent or broker If you bought your policy directly through Progressive online or by phone If...

  • Page 90
    ... trauma and economic costs of auto accidents; and (ii) The Progressive Insurance Foundation, which provides matching funds to eligible 501(c)(3) charitable organizations to which Progressive employees contribute. Social Responsibility Progressive uses an interactive online format to communicate our...

  • Page 91
    ... Officer Susan Patricia Griffith President of Customer Operations Valerie Krasowski Chief Human Resource Officer John P. Sauerland Personal Lines Group President Michael D. Sieger Claims Operations Leader Raymond M. Voelker Chief Information Officer ©2015 The Progressive Corporation App...