Progressive 2014 Annual Report Download - page 50

During the last three years, we retired the entire $150 million of our 7% Senior Notes due 2013 and the entire $350 million
of our 6.375% Senior Notes due 2012, each at maturity. We have no scheduled debt maturities in the next five years.
Based upon our capital planning and forecasting efforts, we believe that we have sufficient capital resources, cash flows
from operations, and borrowing capacity to support our current and anticipated business, scheduled principal and interest
payments on our debt, any declared dividends, acquisition-related commitments, and other expected capital requirements.
The covenants on our existing debt securities do not include any rating or credit triggers that would require an adjustment of
the interest rate or an acceleration of principal payments in the event our securities are downgraded by a rating agency.
We seek to deploy capital in a prudent manner and use multiple data sources and modeling tools to estimate the frequency,
severity, and correlation of identified exposures, including, but not limited to, catastrophic and other insured losses, natural
disasters, and other significant business interruptions, to estimate our potential capital needs.
Management views our capital position as consisting of 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 combined ratio of 96 or better. 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, and 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. Regulatory restrictions on
subsidiary dividends are discussed in Note 8 – Statutory Financial Information.
• 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, 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 two years, our total capital exceeded the sum of our regulatory capital layer plus our self-
constructed extreme contingency layer. At December 31, 2014, we held total capital (debt plus equity) of $9.1 billion,
compared to $8.1 billion at December 31, 2013. During the year, we issued $350 million of our 4.35% Senior Notes in April
2014 and declared our annual variable dividend of $404.1 million in December.
Short-Term Borrowings
During the last three years, we did not engage in short-term borrowings to fund our operations or for liquidity purposes. 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 2014, we renewed our unsecured, discretionary line of credit (the “Line of Credit”) with PNC Bank, National
Association (PNC) in the maximum principal amount of $100 million. The prior line of credit, which was entered into during
2013, had expired. The Line of Credit is on substantially the same terms and conditions as the prior line of credit. All
advances under this agreement are subject to PNC’s discretion, would bear interest at a variable daily rate, and must be
repaid on the earlier of the 30th day after the advance or the expiration date of the facility, March 25, 2015. We had no
borrowings under either line of credit throughout 2014 or 2013. Our intent is to renew this line of credit for an additional year.
We did not enter into any repurchase commitment transactions during 2014. In 2013, we entered into repurchase
commitment transactions, which were open for a total of 48 days. In these transactions, we loaned U.S. Treasury securities
to internally approved counterparties in exchange for cash equal to the fair value of the securities. These transactions were
entered into as overnight arrangements, and we had no open repurchase commitments at December 31, 2013. During the
period, we invested in repurchase transactions in 2013, the largest single outstanding balance was $252.5 million, which
was open for six days; the average daily balance was $94.8 million. 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.
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