Progressive 2015 Annual Report Download - page 48

All assets and liabilities are recorded at fair value at the date of acquisition, as adjusted during 2015. If additional new
information is obtained within 12 months from the date of acquisition about facts and circumstances that existed at the
acquisition date, we will adjust the amounts previously recorded. For income tax purposes, the historical tax bases of the
acquired assets and assumed liabilities were carried over and were not recorded at fair value; therefore, no tax-basis
goodwill was created.
At the date of acquisition, ARX had total fair value assets of $1.8 billion, including investment securities of $1.2 billion, cash
and cash equivalents of $183 million, and prepaid reinsurance premiums of $146 million, and fair value liabilities of
$1.2 billion, including unearned premiums of $550 million, loss and loss adjustment expense reserves of $264 million, and
debt of $185 million. All of ARX’s known contingencies were recognized as of the acquisition date. Subsequent to the date
of acquisition, our consolidated 2015 results included total revenue and net income from ARX of $636.3 million and
$106.8 million, respectively.
16. REDEEMABLE NONCONTROLLING INTEREST
In connection with the acquisition of a controlling interest in ARX, The Progressive Corporation entered into a stockholders’
agreement with the other ARX stockholders. The stockholders’ agreement provides the non-Progressive shareholders with
rights to put all of their shares to us in two installments, one in early 2018 and one in early 2021. The Progressive
Corporation likewise will have the right to call shares from the other ARX shareholders in each of 2018 and 2021. If these
rights are exercised in full when available, our ownership stake in ARX capital stock will exceed 80% in 2018 and will reach
100% in 2021. The purchase prices for shares to be purchased by Progressive pursuant to these put or call rights will be
determined by adding (A) the price per share paid at the closing on April 1, 2015, to (B) the product of the change in the
fully diluted net tangible book value per share of ARX between December 31, 2014 and December 31, 2017 (for the 2018
put or call purchases) or December 31, 2020 (for the 2021 put or call purchases) times a multiple of between 1.0 and 2.0.
The multiple will be determined based on the growth and profitability of ARX’s business over the applicable time period,
pursuant to criteria included in the stockholders’ agreement. Among other provisions, the stockholders’ agreement also
prohibits ARX from taking a number of actions, including the payment of dividends, without the consent of The Progressive
Corporation and two other stockholders.
Since the ARX shares are redeemable upon the occurrence of an event that is not solely within the control of Progressive,
we have recorded the redeemable noncontrolling interest as mezzanine equity on our consolidated balance sheets. The
redeemable noncontrolling interest was initially recorded at a fair value of $411.5 million, representing the minority shares at
the net acquisition price adjusted for the fair value of the put and call rights. The value of the put and call rights on the
acquisition date was based on an internally developed modified binomial model. Subsequent changes to the redeemable
noncontrolling interest are based on the maximum redemption value at the end of the reporting period, as determined in
accordance with the stockholders’ agreement.
The components of redeemable noncontrolling interest (NCI) at December 31, 2015, were:
(millions)
Balance at March 31, 2015 $0
Fair value at date of acquisition 411.5
Net income attributable to NCI 32.9
Other comprehensive loss attributable to NCI (1.1)
Purchase of shares from NCI (12.6)
Change in redemption value of NCI 34.2
Balance at December 31, 2015 $464.9
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