For the transition period from to
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(Exact name of registrant as specified in its charter)
Ohio 34-0963169
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6300 Wilson Mills Road, Mayfield Village, Ohio 44143
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Name of each exchange on
Title of each class which registered
Common Shares, $1.00 Par Value New York Stock Exchange
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ]
The aggregate market value of the voting stock held by non-affiliates of the registrant at January 31, 1997: $4,004,326,091.25
The number of the registrant's Common Shares, $1.00 par value, outstanding as of February 28, 1997: 71,806,063
Portions of the registrant's Annual Report to Shareholders for the year ended December 31, 1996 are incorporated by reference in Parts I, II and IV hereof. Portions of the registrant's Proxy Statement dated March 14, 1997, for the Annual Meeting of Shareholders to be held on April 25, 1997, are incorporated by reference in Part III hereof.
The Progressive Corporation and subsidiaries' (collectively, the "Company") 1996 Annual Report to Shareholders (the "Annual Report") contains portions of the information required to be included in this Form 10-K, which are incorporated herein by reference. Cross references to relevant sections of the Annual Report are included under the appropriate items of this Form 10-K.
Portions of the information included in The Progressive Corporation's Proxy Statement dated March 14, 1997, for the Annual Meeting of Shareholders to be held on April 25, 1997 (the "Proxy Statement") have also been incorporated by reference herein and are identified under the appropriate items in this Form 10-K.
(a) General Development of Business
The Progressive Corporation, an insurance holding company formed in 1965, has 85 subsidiaries and one mutual insurance company affiliate. The Progressive Corporation's insurance subsidiaries and its affiliate (collectively, the "Insurance Group") provide personal automobile insurance and other specialty property-casualty insurance and related services throughout the United States and in Canada. The Company's property-casualty insurance products protect its customers against collision and physical damage to their motor vehicles and liability to others for personal injury or property damage arising out of the use of those vehicles.
Of the approximately 260 United States insurance company groups writing private passenger auto insurance, the Company estimates that it ranks sixth in size for 1996. Except as otherwise noted, all industry data and Progressive's market share or ranking in the industry were derived either directly from data reported by A.M. Best Company Inc. ("A.M. Best") or were estimated using A.M. Best data as the primary source. For 1996, the estimated industry premiums written, which include personal auto insurance in the United States and Ontario, Canada, as well as insurance for commercial vehicles, were $129.4 billion, and Progressive's share of this market was approximately 2.6%.
(b) Financial Information About Industry Segments
Incorporated by reference from Note 11, Segment Information, on page 46 of the Company's Annual Report.
(c) Narrative Description of Business
INSURANCE SEGMENT
The Insurance Group offers a number of personal and commercial property-casualty
insurance products primarily related to motor vehicles. Net premiums written
were $3,441.7 million in 1996, compared to $2,912.8 million in 1995 and $2,457.2
million in 1994. The underwriting profit margin was 8.5% in 1996, compared to
5.7% in 1995 and 8.3% in 1994 (excluding the elimination of the "supplemental
reserve." See MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS beginning on page 14 for further discussion.)
The Insurance Group's core business writes insurance for private passenger automobiles, recreational vehicles and small fleets of commercial vehicles. This business frequently has more than one program in a single state, with each targeted to a specific market segment. The core business accounted for 98% of the Company's 1996 total net premiums written.
The core business also writes standard and preferred automobile risks in many states. These products accounted for between 10% and 15% of the Company's total private passenger auto premiums in 1996. The Company's strategy is to build towards becoming a low-cost provider of a full line of auto insurance and related services, distributed through whichever channel the customer prefers. The Insurance Group's goal is to compete successfully in the standard and preferred market, which comprises 80% of the United States' personal automobile insurance market.
The Insurance Group's specialty personal lines products include motorcycle, recreational vehicle, mobile home and boat insurance. The Insurance Group's competitors are specialty companies and large multi-line insurance carriers. Although industry figures are not available, based on the Company's analysis of this market, the Company believes that it is a significant participant in the specialty personal lines market.
Nonstandard commercial vehicle insurance covers commercial vehicle risks that are rejected or cancelled by other insurance companies. Based on the Company's analysis of this market, approximately 40 companies compete for this business on a nationwide basis. State assigned risk plans also provide this coverage.
In 1996, over 90% of the net premiums written by the core business were written through a network of more than 30,000 independent insurance agents located throughout the United States and in Canada. Subject to compliance with certain Company-mandated procedures, these independent insurance agents have the authority to bind the Company to specified insurance coverages within prescribed underwriting guidelines. These guidelines prescribe the kinds and amounts of coverage that may be written and the premium rates that may be charged for specified categories of risk. The agents do not have authority on behalf of the Company to settle or adjust claims, establish underwriting guidelines, develop rates or enter into other transactions or commitments. The Company also markets its products through intermediaries such as employers, other insurance companies and national brokerage agencies, and directly to customers through employed sales people and owned insurance agencies. The core business currently markets personal automobile insurance directly to the public by direct mail, television and radio advertising in Colorado, Connecticut, Florida, Indiana, Michigan, Ohio, Pennsylvania and Texas.
In an effort to manage growth and improve customer service, the Company moved profit and growth responsibility in its core business from 13 divisions to 41 business units. The Company subdivides business units as growth produces enough customers to warrant more local focus. Each business unit is headed by a general manager and is headquartered in or near the market served. The individual business units are responsible for reducing claim costs, improving agent service and relationships, direct marketing and deciding price levels for their territory. Processing is done at seven regional sites located in Austin, Cleveland, Colorado Springs, Ontario, Richmond, Sacramento and Tampa.
In addition, the Company organized process teams made up of people from both staff and line functions to support the business units. The process teams are respectively responsible for product, independent agent marketing, direct marketing, ownership (customer service) and claims. The process teams concentrate on improving the processes fast enough for the Company to meet its high standards for customer service, profit and growth.
UFCC provides physical damage insurance and related tracking services to protect the commercial or retail lender's interest in collateral which is not otherwise insured against these risks. The principal product is collateral protection for automobile lenders, which is sold to financial institutions and/or their customers. Commercial banks are UFCC's largest customer group for these services. This business also serves savings and loans, finance companies and credit unions. According to the Company's analysis of this market, numerous companies offer these products and none of them has a dominant market share.
PLG's principal customers are community banks. Its principal products are liability insurance for directors and officers and employee dishonesty insurance. Progressive shares the risk and premium on these coverages with a small mutual reinsurer controlled by its bank customers. The program is sponsored by the American Bankers Association. This program represented less than one-half percent of the Company's total 1996 net premiums written.
The Motor Carrier business unit primarily manages involuntary Commercial Auto Insurance Procedures. See SERVICE OPERATIONS on page 7 for further discussion.
COMPETITIVE FACTORS
The automobile insurance and other property-casualty markets in which the Company operates are highly competitive. Property-casualty insurers generally compete on the basis of price, consumer recognition, coverages offered, claim handling, financial stability, customer service and geographic coverage. Vigorous competition is provided by large, well-capitalized national companies, some of which have broad distribution networks of employed or captive agents, and by smaller regional insurers. While the Company relies heavily on technology and extensive data gathering and analysis to segment and price markets according to risk potential, some competitors merely price their coverage at rates set lower than the Company's published rates. By avoiding extensive data gathering and analysis, these competitors incur lower underwriting costs. The Company has remained competitive by closely managing expenses and achieving operating efficiencies, and by refining its risk measurement and price segmentation skills. In addition, the Company offers prices for a wide spectrum of risks and seeks to offer a wider array of payment plans, limits of liability and deductibles than its competitors. Superior customer service and claim adjustment are also important factors in the Company's competitive strategy.
LICENSES
The Insurance Group operates under licenses issued by various state or provincial insurance authorities. Such licenses may be of perpetual duration or renewable periodically, provided the holder continues to meet applicable regulatory requirements. The licenses govern the kind of insurance coverages which may be written in the issuing state. Such licenses are normally issued only after the filing of an appropriate application and the satisfaction of prescribed criteria. All licenses which are material to the Company's business are in good standing.
The insurance subsidiaries are generally subject to regulation and supervision by insurance departments of the jurisdictions in which they are domiciled or licensed to transact business. At least one of the subsidiaries is licensed and subject to regulation in each of the 50 states and certain U.S. possessions, in one Canadian province and by Canadian federal authorities. The nature and extent of such regulation and supervision varies from jurisdiction to jurisdiction. Generally, an insurance company is subject to a higher degree of regulation and supervision in its state of domicile. The Company's principal insurance subsidiaries are domiciled in the states of California, Florida, Louisiana, Mississippi, Missouri, New York, Ohio, Pennsylvania, Texas, Washington and Wisconsin. State insurance departments have broad administrative power relating to licensing insurers and agents, regulating premium rates and policy forms, establishing reserve requirements, prescribing accounting methods and the form and content of statutory financial reports, and regulating the type and amount of investments permitted. Rate regulation varies from "file and use" to prior approval to mandated rates. Most jurisdictions prohibit rates that are "excessive, inadequate or unfairly discriminatory."
Insurance departments are charged with the responsibility of ensuring that insurance companies maintain adequate capital and surplus and comply with a variety of operational standards. Insurance companies are generally required to file detailed annual and other reports with the insurance department of each jurisdiction in which they conduct business. Insurance departments are authorized to make periodic and other examinations of regulated insurers' financial condition, adherence to statutory accounting principles and compliance with state insurance laws and regulations.
Insurance holding company laws enacted in many jurisdictions grant to insurance authorities the power to regulate acquisitions of insurers and certain other transactions involving insurers and to require periodic disclosure of certain information. These laws impose prior approval requirements for certain transactions between regulated insurers and their affiliates and generally regulate dividend and other distributions, including loans and cash advances, between regulated insurers and their affiliates. See the "Dividends" discussion in Item 5(c) for further information on such dividend limitations.
Under state insolvency and guaranty laws, regulated insurers can be assessed, or required to contribute to state guaranty funds to cover policyholder losses resulting from insurer insolvencies. Insurers are also required by many states, as a condition of doing business in the state, to provide coverage to certain risks. These so-called "assigned risk" plans generally specify the types of insurance and the level of coverage which must be offered to such involuntary risks, as well as the allowable premium. Many states also have involuntary market plans which hire a limited number of servicing carriers to provide insurance to involuntary risks. These plans, through assessments, pass underwriting and administrative expenses on to insurers that write voluntary coverages.
Insurance companies are generally required by insurance regulators to maintain sufficient surplus to support their writings. Although the ratio of writings to surplus that the regulators will allow is a function of a number of factors, including the type of business being written, the adequacy of the insurer's reserves, the quality of the insurer's assets, and the identity of the regulator, as a general rule, the regulators prefer that annual net written premium be not more than three times the insurer's total policyholders' surplus. Thus, the amount of an insurer's surplus may, in certain cases, limit its ability to grow its business.
Many states have laws and regulations that limit an insurer's ability to exit a market. For example, certain states limit an automobile insurer's ability to cancel and non-renew policies. Furthermore, certain states prohibit an insurer from withdrawing one or more lines of business from the state, except pursuant to a plan that is approved by the state insurance department. The state insurance department may disapprove a plan that may lead to market disruption. Laws and regulations that limit cancellation and non-renewal and that subject program withdrawals to prior approval requirements may restrict an insurer's ability to exit unprofitable markets.
Regulation of insurance constantly changes as real or perceived issues and developments arise. Some changes may be due to technical factors, such as changes in investment laws made to recognize new investment vehicles; other changes result from such general pressures as consumer resistance to price increases and concerns relating to insurer solvency. In recent years, legislation and voter initiatives have been introduced which deal with insurance rate development, rate determination
In some states, the automobile insurance industry has been under pressure in recent years from regulators, legislators or special interest groups to reduce, freeze or set rates to or at levels that are not necessarily related to underlying costs, including initiatives to roll back automobile and other personal lines rates. This kind of activity has adversely affected, and may in the future adversely affect, the profitability and growth of the subsidiaries' automobile insurance business in those jurisdictions, and may limit the subsidiaries' ability to increase rates to compensate for increases in costs. Adverse legislative and regulatory activity limiting the subsidiaries' ability to adequately price automobile insurance may occur in the future. The impact of these regulatory changes on the subsidiaries' businesses cannot be predicted.
The state insurance regulatory framework has come under increased federal scrutiny, and certain state legislatures have considered or enacted laws that alter and, in many cases, expand state authority to regulate insurance companies and insurance holding company systems. Further, the National Association of Insurance Commissioners (NAIC) and state insurance regulators are re-examining existing laws and regulations, specifically focusing on insurance company investments, issues relating to the solvency of insurance companies and further limitations on the ability of regulated insurers to pay dividends. The NAIC also developed a risk-based capital (RBC) program to enable regulators to take appropriate and timely regulatory actions relating to insurers that show signs of weak or deteriorating financial conditions. RBC is a series of dynamic surplus-related formulas which contain a variety of factors that are applied to financial balances based on a degree of certain risks, such as asset, credit and underwriting risks. In addition, from time to time, the United States Congress and certain federal agencies investigate the current condition of the insurance industry to determine whether federal regulation is necessary.
STATUTORY ACCOUNTING PRINCIPLES
The Insurance Group's results are reported in accordance with generally accepted accounting principles (GAAP), which differ from amounts reported under statutory accounting principles (SAP) prescribed by insurance regulatory authorities. Specifically, under GAAP:
1. Commissions, premium taxes and other costs incurred in connection with writing new and renewal business are capitalized and amortized on a pro rata basis over the period in which the related premiums are earned, rather than expensed as incurred, as required by SAP.
2. Certain assets are included in the consolidated balance sheets, which for SAP are charged directly against statutory surplus. These assets consist primarily of premium receivables over 90 days, furniture and equipment and prepaid expenses.
3. Amounts related to ceded reinsurance are shown gross as prepaid reinsurance premiums and reinsurance recoverables, rather than netted against unearned premium reserves and loss and loss adjustment expense reserves, respectively, as required by SAP.
4. Fixed maturities securities, which are classified as available-for-sale, are reported at market values, rather than at amortized cost, or the lower of amortized cost or market depending on the specific type of security as required by SAP. Equity securities are reported at quoted market values which may differ from the NAIC market values as required by SAP.
The differing treatment of income and expense items results in a corresponding difference in Federal income tax expense.
During 1994, the insurance subsidiaries began to reduce loss reserves for anticipated salvage and subrogation recoveries. Previously, salvage and subrogation was not reflected in the statutory financial statements until actually recovered.
The service operations of the diversified business units consist primarily of processing business for involuntary plans and providing claim services to fleet owners and other insurance companies. Total service revenues were $46.2 million in 1996, compared to $38.9 million in 1995 and $41.9 million in 1994. Pretax operating profits for all service businesses were $4.3 million in 1996, compared to $8.7 million and $10.0 million in 1995 and 1994, respectively.
The Motor Carrier business unit currently processes business for the Commercial Auto Insurance Procedures (CAIP) in 27 states, the Florida Joint Underwriters Association (FAJUA) and the New York Public Automobile Pool (NYPAP), which are all part of the involuntary market. As a CAIP servicing carrier, the business unit processes over 40% of the premiums in the CAIP market, without assuming the indemnity risk. It competes with approximately nine other providers nationwide. In 1995, the business unit began processing business for the FAJUA and competes with six other carriers in the state. Beginning in March 1996, the Company began processing business for the NYPAP and was granted a one-third share of new business with a three-year phase-in period.
INVESTMENTS
The Company employs a conservative approach to investment and capital management intended to ensure that there is sufficient capital to support all the insurance premium that can be profitably written. The Company's portfolio is invested primarily in short-term and intermediate-term, investment-grade fixed-income securities. The Company's investment portfolio, at market value, was $4,450.6 million at December 31, 1996, compared to $3,768.0 million at December 31, 1995. Investment income is affected by shifts in the types of investments in the portfolio, changes in interest rates and other factors. Investment income, including net realized gains on security sales, before expenses and taxes, was $232.9 million in 1996, compared to $245.8 million in 1995 and $182.3 million in 1994. See MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS, beginning on page 14 herein for additional discussion.
EMPLOYEES
The number of employees, excluding temporary employees, at December 31, 1996, was 9,557.
LIABILITY FOR PROPERTY-CASUALTY LOSSES AND LOSS ADJUSTMENT EXPENSES
The consolidated financial statements include the estimated liability for unpaid losses and loss adjustment expenses (LAE) of the Company's insurance subsidiaries. Total loss reserves are established at a level that is intended to represent the midpoint of the reasonable range of loss reserve estimates. The liabilities for losses and LAE are determined using actuarial and statistical procedures and represent undiscounted estimates of the ultimate net cost of all unpaid losses and LAE incurred through December 31 of each year. These estimates are subject to the effect of future trends on claim settlement. These estimates are continually reviewed and adjusted as experience develops and new information becomes known. Such adjustments, if any, are reflected in the current results of operations.
During 1994, based on a review of the adequacy of its total loss reserves, the Company eliminated its $71.0 million "supplemental reserve." See MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS beginning on page 14 for further discussion. The elimination of the supplemental reserve is reflected in the Reconciliation of Net Reserves for Losses and Loss Adjustment Expenses table on page 8 and the Analysis of Loss and Loss Adjustment Expenses Development table on page 9.
The accompanying tables present an analysis of property-casualty losses and LAE. The following table provides a reconciliation of beginning and ending estimated liability balances for 1996, 1995 and 1994 on a GAAP basis.
(millions) 1996 1995 1994
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Balance at January 1 $1,610.5 $1,434.4 $1,348.6
Less reinsurance recoverables on
unpaid losses 296.1 334.2 334.8
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Net balance at January 1 1,314.4 1,100.2 1,013.8
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Incurred related to:
Current year 2,341.9 2,000.4 1,539.8
Prior years (105.8) (56.6) (142.5)
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Total incurred 2,236.1 1,943.8 1,397.3
Paid related to:
Current year 1,424.7 1,204.3 893.9
Prior years 592.9 525.3 417.0
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Total paid 2,017.6 1,729.6 1,310.9
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Net balance at December 31 1,532.9 1,314.4 1,100.2
Plus reinsurance recoverables on
unpaid losses 267.7 296.1 334.2
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Balance at December 31 $1,800.6 $1,610.5 $1,434.4
=================================================================
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The reconciliation above shows a $105.8 million redundancy, which emerged during 1996, in the 1996 liability and a $56.6 million redundancy in the 1995 liability, based on information known as of December 31, 1996 and December 31, 1995, respectively.
The anticipated effect of inflation is explicitly considered when estimating liabilities for losses and LAE. While anticipated increases due to inflation are considered in estimating the ultimate claim costs, the increase in average severities of claims is caused by a number of factors that vary with the individual type of policy written. Future average severities are projected based on historical trends adjusted for anticipated changes in underwriting standards, inflation, policy provisions and general economic trends. These anticipated trends are monitored based on actual development and are modified if necessary.
The Company has not entered into any loss reserve transfers or similar transactions having a material effect on earnings or reserves.
ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSES DEVELOPMENT (millions) YEAR ENDED 1986 1987 1988 1989 1990 1991 1992 1994 1995 1996 LIABILITY FOR UNPAID - -------------------- LOSSES AND LAE $323.8 $471.0 $651.0 $748.6 $791.6 $861.5 $956.4 $1,012.4 $1,098.7$1,314.4 $1,532.9 - -------------- PAID (CUMULATIVE) AS OF: - ----------------------- One year later 142.7 195.0 283.1 293.1 322.4 353.4 366.8 417.0 525.3 593.0 Two years later 204.4 294.9 393.7 446.8 490.8 518.8 520.0 589.8 706.4 Three years later 238.9 339.5 465.0 539.8 570.4 583.2 598.2 664.1 -- Four years later 255.7 369.9 514.0 588.2 600.0 617.6 632.8 -- -- Five years later 264.3 383.5 540.7 603.1 613.6 635.8 -- -- -- Six years later 268.7 389.1 545.1 608.1 624.7 -- -- -- -- Seven years later 270.1 381.9 545.5 614.7 -- -- -- -- -- Eight years later 261.3 384.2 549.0 -- -- -- -- -- -- Nine years later 263.2 386.1 -- -- -- -- -- -- -- Ten years later 264.4 -- -- -- -- -- -- -- -- LIABILITY RE-ESTIMATED - ---------------------- AS OF: - ------ One year later 300.6 446.6 610.3 685.4 748.8 810.0 857.9 869.9 1,042.1 1,208.6 Two years later 293.6 422.2 573.4 677.9 726.5 771.9 765.5 837.8 991.7 Three years later 282.8 402.4 581.3 668.6 712.7 718.7 737.4 811.3 -- Four years later 274.1 403.9 575.1 667.1 683.7 700.1 725.2 -- -- Five years later 275.6 399.6 578.4 654.7 666.3 695.1 -- -- -- Six years later 275.8 400.2 582.2 647.1 664.8 -- -- -- -- Seven years later 277.5 408.5 574.3 645.7 -- -- -- -- -- Eight years later 285.7 408.1 574.4 -- -- -- -- -- -- Nine years later 286.7 407.8 -- -- -- -- -- -- -- Ten years later 285.7 -- -- -- -- -- -- -- CUMULATIVE REDUNDANCY $38.1 $63.2 $76.6 $102.9 $126.8 $166.4 $231.2 $201.1 $107.0 $105.8 - --------------------- PERCENTAGE1 11.8 13.4 11.8 13.7 16.0 19.3 24.2 19.9 9.7 8.0 |
1Cumulative redundancy / liability for unpaid losses and LAE.
The above table presents the development of balance sheet liabilities for 1986 through 1995. The top line of the table shows the estimated liability for unpaid losses and LAE recorded at the balance sheet date for each of the indicated years for the property-casualty insurance subsidiaries only. Similar reserves for the life insurance subsidiary, which are immaterial, are excluded. This liability represents the estimated amount of losses and LAE for claims arising in all prior years that are unpaid at the balance sheet date, including losses that had been incurred but not reported.
The "Cumulative Redundancy" represents the aggregate change in the estimates over all prior years. For example, the 1986 liability has developed redundant by $38.1 million over ten years. That amount has been reflected in income over the ten years and did not have a significant effect on the income of any one year. The effects on income during the past three years due to changes in estimates of the liabilities for losses and LAE is shown in the reconciliation table on page 8 as the "prior accident years"contribution to incurred losses and LAE.
In evaluating this information, note that each cumulative redundancy amount includes the effects of all changes in amounts during the current year for prior periods. For example, the amount of the redundancy related to losses settled in 1989, but incurred in 1986, will be included in the cumulative deficiency or redundancy amount for years 1986, 1987 and 1988. Conditions and trends that have affected development of the liability in the past may not necessarily occur in the future. Accordingly, it generally is not appropriate to extrapolate future redundancies or deficiencies based on this table.
The Analysis of Loss and Loss Adjustment Expenses Development table on page 9 is constructed from Schedule P, Part-1, from the 1991 through 1996 Consolidated Annual Statements, as filed with the state insurance departments, and Schedules O and P filed for years prior to 1991. This development table differs from the development displayed in Schedule P, Part-2 due to the fact Schedule P, Part-2 excludes unallocated loss adjustment expenses and reflects the change in the method of accounting for salvage and subrogation for 1994 and prior.
(d) Financial Information about Foreign and Domestic Operations
The Company operates throughout the United States and in Canada. The amount of Canadian revenues and assets are approximately 2 percent of the Company's consolidated revenues and assets. The amount of operating income (loss) generated by its Canadian operations is immaterial with respect to the Company's consolidated operating income.
In 1994, the Company completed its new corporate office complex on a 42-acre parcel in Mayfield Village, Ohio, owned by a subsidiary. The new facility consists of 517,800 square feet of space and replaced office space held under leases in a number of locations in the Cleveland, Ohio area. The project's cost of $75.5 million was funded through operating cash flows. The Company's central data processing facility occupies a modern, three-story brick, building containing approximately 107,000 square feet of office space, on this same parcel.
The Company also owns six other buildings in suburbs adjoining the corporate office complex and two buildings in Tampa, Florida. In total, these buildings contained approximately 629,100 square feet of office, warehouse and training facility space and are owned by subsidiaries of the Company. These locations are occupied by the Company's business units or other operations.
The Company leases approximately 320,000 square feet of modern office and warehouse space at various locations throughout the United States for its other business units and staff functions. In addition, the Company leases approximately 340 processing and claim offices, or 1,082,000 square feet, at various locations throughout the United States. Two offices are leased in Canada. These leases are generally short-term to medium-term leases of standard commercial office space.
As the Company continues to grow, it expects the need for additional space and is actively engaged in seeking out additional locations to meet its current and anticipated needs.
Incorporated by reference from Note 4, LITIGATION, on page 41 of the Company's Annual Report.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
EXECUTIVE OFFICERS OF THE REGISTRANT
Incorporated by reference from information with respect to executive officers of The Progressive Corporation and its subsidiaries set forth in Item 10 of this Annual Report on Form 10-K.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
AND RELATED STOCKHOLDER MATTERS
(a) Market Information
The Company's Common Shares are traded on the New York Stock Exchange under the symbol PGR. The high and low prices set forth below are as reported on the consolidated transaction reporting system.
Dividends
Year Quarter High Low Close Per Share
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1996 1 $51 1/4 $43 1/2 $44 5/8 $.055
2 48 7/8 40 3/8 46 1/4 .055
3 58 1/2 43 1/8 57 1/4 .060
4 72 1/4 55 3/8 67 3/8 .060
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$72 1/4 $40 3/8 $67 3/8 $.230
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1995 1 $42 1/8 $34 3/4 $40 5/8 $.055
2 41 7/8 37 1/8 38 3/8 .055
3 48 37 3/4 44 3/4 .055
4 49 1/2 41 1/2 48 7/8 .055
-------------------------------------------------------------------------------------------
$49 1/2 $34 3/4 $48 7/8 $.220
===========================================================================================
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The closing price of the Company's Common Shares on February 28, 1997 was $66 1/8.
(b) Holders
There were 4,156 shareholders of record on February 28, 1997.
(c) Dividends
Statutory policyholders' surplus was $1,292.4 million and $1,055.1 million at December 31, 1996 and 1995, respectively. Generally, under state insurance laws, the net admitted assets of insurance subsidiaries available for transfer to a corporate parent are limited to those net admitted assets, as determined in accordance with SAP, which exceed minimum statutory capital requirements. At December 31, 1996, $167.3 million of consolidated statutory policyholders' surplus represents net admitted assets of the insurance subsidiaries that are required to meet minimum statutory surplus requirements in the subsidiaries' states of domicile. Furthermore, state insurance laws limit the amount that can be paid as a dividend or other distribution in any given year without prior regulatory approval and adequate policyholders' surplus must be maintained to support premiums written. Based on the dividend laws currently in effect, the insurance subsidiaries may pay aggregate dividends of $216.4 million in 1997 out of statutory policyholders' surplus, without prior approval by regulatory authorities.
(millions - except per share amounts)
For the years ended December 31,
1996 1995 1994 1993 1992
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Total revenues(1) $3,478.4 $3,011.9 $2,415.3 $1,954.8 $1,738.9
Operating income 309.1 220.1 212.7 197.3 129.8
Net income(1,2,3) 313.7 250.5 274.3 267.3 153.8
Per share:
Operating income(4) 4.08 2.84 2.76 2.61 1.72
Net income(1,2,3,4) 4.11 3.24 3.59 3.58 2.05
Dividends .230 .220 .210 .200 .191
Total assets(3,5) 6,183.9 5,352.5 4,675.1 4,011.3 3,440.9
Funded debt
outstanding 775.7 675.9 675.6 477.1 568.5
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(1)Total revenues for 1992 include $106.0 million ($70.0 million after taxes), or $.97 per share, for the Company's California Proposition 103 reserve reduction.
(2)During 1994, based on a review of the adequacy of its total loss reserves, the Company eliminated its $71.0 million "supplemental reserve" ($46.2 million after tax), resulting in a one-time increase in earnings of $.62 per share. See MANAGEMENT DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS set forth in Item 7 of this Annual Report on Form 10-K for further discussion.
(3)Effective January 1, 1992, the Company adopted SFAS 109 and is able to demonstrate that the benefit of deferred tax assets is fully realizable. The cumulative effect of adopting SFAS 109 increased net income $14.2 million, or $.20 per share.
(4)Presented on a fully diluted basis.
(5)Pursuant to SFAS 113, amounts for 1992 were restated.
FINANCIAL CONDITION
The Progressive Corporation is a holding company and does not have any revenue producing operations of its own. It receives cash through borrowings, equity sales, subsidiary dividends and other transactions, and may use the proceeds to contribute to the capital of its insurance subsidiaries in order to support premium growth, to repurchase its Common Shares and other outstanding securities, to redeem its outstanding securities and for other business purposes. During 1996, the Company repurchased 1.0 million of its Common Shares at a total cost of $41.9 million (average cost of $41.73 per share), .2 million of its 9 3/8% Serial Preferred Shares, Series A, at a total cost of $6.0 million (average cost of $25.60 per share) and redeemed the remaining Preferred Shares at a total cost of $82.1 million, including accrued and unpaid dividends through the redemption date.
During the three-year period ended December 31, 1996, the Company repurchased
2.1 million Common Shares at a total cost of $75.9 million (average cost of
$36.42 per share) and .4 million of its 9 3/8% Serial Preferred Shares, Series
A, at a total cost of $10.6 million (average cost $25.69 per share). The Company
also sold $300.0 million of Notes. During the same period, The Progressive
Corporation received $178.2 million from its insurance subsidiaries, net of
capital contributions made to these subsidiaries. The regulatory restrictions on
subsidiary dividends are described in Item 5(c) on page 12 herein.
The Company has substantial capital resources and is unaware of any trends, events or circumstances that are reasonably likely to affect its capital resources in a material way. The Company also has available a $20.0 million revolving credit agreement. Given its 32% debt to equity ratio, the Company believes it has sufficient borrowing capacity and other capital resources to support current and anticipated growth.
The Company's insurance operations create liquidity by collecting and investing premiums from new and renewal business in advance of paying claims. For the three years ended December 31, 1996, operations generated a positive cash flow of $1,634.1 million, and cash flow is expected to be positive in both the short-term and reasonably foreseeable future. The Company's substantial investment portfolio is highly liquid, consisting almost entirely of readily marketable securities.
In November 1996, the Company signed a definitive agreement to acquire all of Midland Financial Group, Inc.'s outstanding stock (approximately 5.5 million shares) for a total cost of $49.5 million, or $9 per share, in cash. Midland underwrites and markets nonstandard private passenger automobile insurance through approximately 8,500 independent agents across 20 states, primarily in the southern and western United States. During 1996, Midland wrote $116.6 million of net premiums written. The transaction was approved by Midland's shareholders on March 7, 1997, and funded through current investments of the Company.
In January 1997, the Company signed a letter of intent under which it was contemplated that the Company would purchase approximately 11 million newly-issued shares (42% of the outstanding voting stock) of Danielson Holding Corporation for consideration having a total value of approximately $73 million, or $6.60 per share. Danielson is engaged, through its subsidiaries, in insurance services, primarily writing private and commercial nonstandard insurance in California and workers' compensation insurance in California and certain other western states. During 1996, Danielson's insurance subsidiaries wrote $36.1 million of net premiums written. In March 1997, negotiations between Danielson and the Company were terminated by the Company for internal corporate reasons.
The Company does not expect any material changes in its cash requirements and is not aware of any trends, events or uncertainties that are reasonably likely to have a material effect on its liquidity.
In January 1996, the Company began converting its computer systems to be year 2000 compliant (e.g. to recognize the difference between '99 and '00 as one year instead of negative 99 years). At December 31, 1996, approximately 40% of the Company's systems were compliant, with all systems expected to be compliant by the end of 1998. The total cost of the project is estimated to be $4.3 million and is being funded through operating cash flows. The Company is expensing all costs associated with these system changes. As of December 31, 1996, $1.6 million had been expensed.
INVESTMENTS
The Company invests in fixed-maturity, equity and short-term securities. The
Company's investment strategy recognizes its need to maintain capital adequate
to support its insurance operations and commitment to risk adverse investment
policies. Therefore, the Company evaluates the risk/reward trade-offs of
investment opportunities, measuring their effects on stability, diversity,
overall quality and liquidity of the investment portfolio. The majority of the
portfolio is invested in high-grade, fixed-maturity securities, of which short-
and intermediate-term securities represented $3,275.6 million, or 73.6%, in
1996, and $2,876.2 million, or 76.4%, in 1995. Long-term investment-grade
securities were $187.5 million, or 4.2%, in 1996, and $191.9 million, or 5.1%,
in 1995. Non-investment-grade fixed-maturity securities were $105.8 million, or
2.4%, in 1996, and $7.6 million, or .2%, in 1995 and offer the Company high
returns and added diversification without a significant adverse effect on the
stability and quality of the investment portfolio as a whole.
Non-investment-grade securities may involve greater risks often related to
creditworthiness, solvency and relative liquidity of the secondary trading
market. The duration of the fixed-income portfolio was 3.2 years at December 31,
1996.
A relatively small portion of the investment portfolio was invested in
marketable equity securities providing risk/reward balance and diversification.
Common stocks represented $540.1 million, or 12.1%, in 1996, and $310.0 million,
or 8.2%, in 1995. The increase in common stocks reflects the Company's objective
of increasing its position in common stock investments to approximately 15% of
the entire portfolio and to optimize value and further diversify the portfolio
through foreign equity investments. The foreign equity portfolio, which may
utilize stock index futures and foreign currency forwards, comprised $149.5
million of the common stock portfolio at December 31, 1996, and $46.4 million at
December 31, 1995. The remainder of the equity portfolio ($341.6 million, or
7.7%, in 1996, and $382.3 million, or 10.1%, in 1995) was comprised of over 94%
of fixed-rate preferred stocks with mechanisms that may provide an opportunity
to liquidate at par.
As of December 31, 1996, the Company's portfolio had $114.1 million in
unrealized gains, compared to $78.7 million in 1995, resulting from increased
stock prices as the S&P 500 index rose from 615.9 to 740.7 during the year. The
weighted average fully taxable equivalent book yield of the portfolio was 6.7%,
6.9% and 6.7% for the years ended December 31, 1996, 1995 and 1994,
respectively.
The quality distribution of the fixed-income portfolio is as follows:
Percentage at Percentage at
Rating December 31, 1996 December 31, 1995
-----------------------------------------------------------
AAA 62.8% 63.9%
AA 16.2 17.6
A 14.0 13.6
BBB 4.2 4.5
Non Rated/Other 2.8 .4
----- -----
100.0% 100.0%
|
As of December 31, 1996, the Company held $1,088.3 million of asset-backed securities which represented 24.5% of the total investment portfolio. The portfolio included collateralized mortgage obligations (CMOs) and commercial mortgage-backed obligations (CMBs) totaling $303.0 million and $480.2 million, respectively. As of December 31, 1996, the CMO portfolio included sequential bonds representing 88.8% of the CMO portfolio ($269.0 million) with an average life of 2.9 years, and planned amortization class bonds representing 11.2% of the CMO portfolio ($34.0 million) with an average life of 1.4 years. The CMO portfolio had a weighted average Moody's or Standard & Poor's rating of AAA. At December 31, 1996, the CMB portfolio had an average life of 5.4 years and a weighted average Moody's or Standard & Poor's rating of AA-. The CMB portfolio included $122.7 million of CMB interest-only certificates, which had an average life of 5.1 years and a weighted average Moody's or S&P's rating of AAA at December 31, 1996. At December 31, 1996,
Investments in the Company's portfolio have varying degrees of risk. The primary market risk exposure to the fixed-income portfolio is interest rate risk, which is limited by Company restrictions as to the acceptable range of duration. Equity securities generally have greater risks than the non-equity portion of the portfolio since these securities are subordinate to rights of debt holders and other creditors of the issuer and are subject to the volatility of the equity markets. In addition, the foreign equity portfolio is exposed to foreign currency exchange risk, which is reduced by an active hedging policy. The Company regularly evaluates individual holdings for evidence of impairment. Changes in market value are evaluated to determine the extent to which such changes are attributable to: (i) interest rates, (ii) market-related factors other than interest rates and (iii) financial conditions, business prospects and other fundamental factors specific to the issuer. Declines attributable to issuer fundamentals are reviewed in further detail. Available evidence is considered to estimate the realizable value of the investment. When a security in the Company's investment portfolio has a decline in market value which is other than temporary, the Company is required by GAAP to reduce the carrying value of such security to its net realizable value.
Financial instruments with off-balance-sheet risk are used to manage the risks and enhance the yields of the available-for-sale portfolio. This is accomplished by modifying the basis, duration, interest rate or foreign currency characteristics of the portfolio or hedged securities. Net cash requirements are limited to changes in market values which may vary based upon changes in interest rates and other factors. Exposure to credit risk is limited to the carrying value; collateral is not required to support the credit risk. During 1995, the Company added a government bond trading portfolio to benefit from short-term market rate opportunities. The Company has stringent restrictions on the amount of open positions in the trading portfolio limiting its exposure to acceptable levels. At December 31, 1996 and 1995, there were no trading securities or off-balance-sheet trading positions.
Operating income, which excludes net realized gains and losses from security
sales and one-time items, was $309.1 million, or $4.08 per share, in 1996,
$220.1 million, or $2.84 per share, in 1995 and $212.7 million, or $2.76 per
share, in 1994. The GAAP combined ratio was 91.5 in 1996, 94.3 in 1995 and 91.7
(88.5 including the elimination of the "supplemental reserve" discussed below)
in 1994.
Direct premiums written increased 19% to $3,638.4 million in 1996, compared to $3,068.9 million in 1995 and $2,645.1 million in 1994. Net premiums written increased 18% to $3,441.7 million, compared to $2,912.8 million in 1995 and $2,457.2 million in 1994. The difference between direct and net premiums written is largely attributable to premiums written under state-mandated involuntary Commercial Auto Insurance Procedures (CAIP), for which the Company retains no indemnity risk, of $99.5 million in 1996, $105.4 million in 1995 and $115.4 million in 1994. The Company provided policy and claim processing services to 27 state CAIPs in 1996, compared to 28 in 1995 and 1994. Premiums earned, which are a function of the amount of premiums written in the current and prior periods, increased 17% in 1996, compared to 24% in 1995 and 31% in 1994.
The Company's Core business units' net premiums written grew 19%, 21% and 38% in 1996, 1995 and 1994, respectively, primarily driven by an increase in unit sales. In 1996, the Company raised rates an average of 2.5%, compared 6.5% in 1995 and no rate changes in 1994. The Company continues to write standard and preferred auto risks which represented between 10% and 15% of total Core business volume. To encourage writing more standard and preferred risks and to improve customer retention, the Company adjusted the contingent cash incentive compensation program for 1997 to credit its conservative estimates of the increase in value created by adding new customers. The Company believes that growing the numbers of policyholders, particularly standard and preferred risks with their higher retention rates, builds intrinsic
Claim costs, the Company's most significant expense, represent actual payments made and changes in estimated future payments to be made to or on behalf of its policyholders, including expenses required to settle claims and losses. These costs include a loss estimate for future assignments and assessments, based on current business, under state-mandated involuntary automobile programs. Claims costs are influenced by inflation and loss severity and frequency, the impact of which is mitigated by adequate pricing. Increases in the rate of inflation increase loss payments, which are made after premiums are collected. Accordingly, anticipated rates of inflation are taken into account when the Company establishes premium rates and loss reserves. Claim costs, expressed as a percentage of premiums earned, were 70% in 1996, compared to 71% in 1995 and 67% (excluding the elimination of the "supplemental reserve") in 1994.
During 1994, based on a review of the adequacy of its total loss reserves, the Company eliminated its $71.0 million "supplemental reserve," resulting in a one-time increase in earnings of $.62 per share, a 3.2 point increase in the underwriting profit margin and a $46.2 million increase in capital. The Company historically established case and IBNR reserves by product with the objective of being accurate to within plus or minus 2%. Pricing has been based on these estimates of reserves by product. Because the Company desired a very high degree of comfort that aggregate reserves were adequate, aggregate reserves were established near the upper end of the reasonable range of reserves, and the difference between such aggregate reserves and the midpoint of the reasonable range of case and IBNR reserves was called the "supplemental reserve." The Company concluded, after examining its historical aggregate reserves, that the practice of setting aggregate reserves at the upper end of the range of reasonable reserves provided an unnecessarily high level of comfort. At December 31, 1994, even without the high level of comfort provided by the "supplemental reserve," the Company's reserves would have been redundant by approximately 2% to 4% over the previous 5 years. The Company believes that this change in the estimate of its reserves placed it more in line with the practices of other companies in the industry.
Because the Company is primarily an insurer of motor vehicles, it has limited exposure for environmental, product and general liability claims. The Company has established reserves for these exposures, in amounts which it believes to be adequate based on information currently known by it. The Company does not believe that these claims will have a material impact on the Company's liquidity, results of operation, cash flows or financial condition.
During 1994, the Company settled the dispute, arising out of its 1985 acquisition of American Star Insurance Company (since renamed National Continental Insurance Company) over the seller's refusal to pay certain losses on pre-sale business written by American Star. Under the settlement, National Continental received $10.1 million from the seller and agreed to be solely responsible for the next $20 million of gross losses. The seller will thereafter be responsible for half the losses, net of reinsurance, if it achieves certain minimum net worth requirements. In addition to the $10.1 million, National Continental will be entitled to the proceeds of various treaty and facultative reinsurance policies that had been purchased by American Star. National Continental has established reserves for these exposures, which are mainly for product liability and environmental claims, in amounts it believes to be adequate based on information currently available to it, including a study by independent actuaries for the seller. Total reserves on this business are $26.4 million, of which $9.4 million is recoverable from reinsurers. The Company will continue to monitor these exposures, adjust the related reserves appropriately as additional information becomes known and disclose any material developments.
Policy acquisition and other underwriting expenses as a percentage of premiums earned were 22% in 1996, compared to 23% in 1995 and 25% in 1994.
Service businesses generated a pretax operating profit of $4.3 million in 1996, compared to $8.7 million in 1995 and $10.0 million in 1994. The decrease in operating profit is partially attributable to new businesses entered into during 1996.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995: EXCEPT FOR HISTORICAL INFORMATION, THE MATTERS DISCUSSED IN THIS ANNUAL REPORT ON FORM 10-K ARE FORWARD-LOOKING STATEMENTS THAT ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES THAT COULD CAUSE THE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE PROJECTED, INCLUDING ACCEPTANCE OF THE PRODUCTS, PRICING COMPETITION, MARKET CONDITIONS AND OTHER RISKS DETAILED FROM TIME TO TIME IN THE COMPANY'S SEC REPORTS. THE COMPANY ASSUMES NO OBLIGATION TO UPDATE THE INFORMATION IN THIS ANNUAL REPORT.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The Consolidated Financial Statements of the Company, along with the related notes, supplementary data and report of independent accountants, are incorporated by reference from the Company's 1996 Annual Report, pages 33 through 46 and pages 50 through 55.
The following note is hereby added to Item 8 of the Company's 1996 Annual Report on Form 10-K, supplementing the Notes to the Consolidated Financial Statements which are incorporated by reference therein:
Note 1. Reporting and Accounting Policies
New Accounting Standards - In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards (SFAS) 128, "Earnings Per Share." The statement simplifies the computation of earnings per share (EPS). Under the statement, primary EPS would be replaced by a simpler calculation called "basic" EPS. Basic EPS would be calculated by dividing income available to common shareholders by the weighted average number of shares outstanding. Stock options and other common stock equivalents (CSE) would be excluded from the basic EPS calculation. The current fully diluted EPS would be replaced with "diluted" EPS. The primary difference in the diluted EPS calculation would require the average common stock price be used in determing the number of CSE relating stock options, rather than the greater of the average price or closing price. SFAS 128 requires dual presentation of basic and diluted EPS on the face of the income statement, including a reconciliaiton of the numerator and denominator used in computing basic and diluted EPS. For 1996, the Company would have reported basic EPS of $4.29 and diluted EPS of $4.14. SFAS 128 is effective for periods beginning after December 15, 1997. Earlier application is not permitted.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
A description of the directors, all of whom have been nominated for election as directors at the 1997 Annual Meeting of Shareholders of the Registrant, is incorporated herein by reference from the section entitled "Election of Directors" in the Proxy Statement, pages 3 and 4.
A description of the executive officers of the Registrant and its subsidiaries follows. These descriptions reflect the Company's termination of its officership program and consequent elimination of many officer positions, effective December 31, 1993. Unless otherwise indicated, the executive officer has held the position(s) indicated for at least the last five years.
Offices Held and
Name Age Last Five Years' Business Experience
---- --- ------------------------------------
Peter B. Lewis 63 Chairman since April 1993; President, Chief Executive Officer and a director of the
Registrant and Progressive Casualty Insurance Company ("Progressive Casualty"),
the principal subsidiary of the Registrant.
Alan R. Bauer 44 Process Leader for International and Internet Operations since December 1996;
Independent Agent Marketing Process Leader from March 1996 to December 1996; West
Division President prior to March 1996.
Charles B. Chokel 43 Treasurer of the Registrant since December 1994; Chief Financial Officer of the
Registrant; Senior Vice President - Finance of Progressive Casualty prior to December
1993.
Allan W. Ditchfield 59 Chief Information Officer of the Registrant; Senior Vice President - Information
Services of Progressive Casualty prior to December 1993.
W. Thomas Forrester II 48 Ownership Process Leader of the Registrant since March 1996; Central States Division
President from January 1995 to March 1996; Diversified Division President in 1994;
CAIP/Transportation Division President in 1993; CAIP Division President in 1992.
William H. Graves 40 Claims Process Leader of the Registrant since March 1996; South Central Division
President prior to March 1996.
Daniel R. Lewis 50 Independent Agent Marketing Process Leader of the Registrant since December 1996;
General Manager of South Florida Community from November 1994 to December 1996;
Treasurer of the Registrant and Central Division President prior to December 1994.
Robert J. McMillan 45 Product Process Leader of the Registrant since March 1996; Florida Division President
prior to March 1996.
Glenn M. Renwick 41 Direct Marketing Process Leader since March 1996; Director of Consumer Marketing prior
to March 1996.
David M. Schneider 59 Chief Legal Officer and Secretary of the Registrant; Senior Vice President of
Progressive Casualty prior to December 1993.
Tiona M. Thompson 46 Chief Human Resources Officer of the Registrant since December 1993; Vice President -
Human Resources of Progressive Casualty prior to December 1993.
|
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference from the section of the Proxy Statement entitled "Executive Compensation," pages 8 through 20.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
Incorporated by reference from the section of the Proxy Statement entitled "Security Ownership of Certain Beneficial Owners and Management," pages 5 through 7.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a)(1) Listing of Financial Statements
The following consolidated financial statements of the Registrant and its subsidiaries, included in the Registrant's Annual Report, are incorporated by reference in Item 8:
*Not covered by Report of Independent Accountants.
(a)(2) Listing of Financial Statement Schedules
The following financial statement schedules of the Registrant and its subsidiaries, Report of Independent Accountants and Consent of Independent Accountants are included in Item 14(d):
(a)(3) Listing of Exhibits
See exhibit index contained herein at pages 37 through 41. Management contracts and compensatory plans and arrangements are identified in the Exhibit Index as Exhibit Nos. (10)(A) through (10)(O).
(b) Reports on Form 8-K
None.
(c) Exhibits
The exhibits in response to this portion of Item 14 are submitted concurrently with this report.
(d) Financial Statement Schedules
The response to this portion of Item 14 is located at pages 28 through 36.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
March 31, 1997 BY: /s/ Peter B. Lewis
------------------
Peter B. Lewis
Chairman, President and Chief
Executive Officer
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated.
/s/ Peter B. Lewis Chairman, President, Chief Executive March 31, 1997 - --------------------------------------- Officer and a Director Peter B. Lewis /s/ Charles B. Chokel Treasurer and Chief Financial Officer March 31, 1997 - --------------------------------------- Charles B. Chokel /s/ Jeffrey W. Basch Chief Accounting Officer March 31, 1997 - --------------------------------------- Jeffrey W. Basch Milton N. Allen* Director March 31, 1997 - --------------------------------------- Milton N. Allen B. Charles Ames* Director March 31, 1997 - --------------------------------------- B. Charles Ames Charles A. Davis* Director March 31, 1997 - --------------------------------------- Charles A. Davis Stephen R. Hardis* Director March 31, 1997 - --------------------------------------- Stephen R. Hardis Janet Hill* Director March 31, 1997 - --------------------------------------- Janet Hill Norman S. Matthews* Director March 31, 1997 - --------------------------------------- Norman S. Matthews |
Donald B. Shackelford* Director March 31, 1997
- ---------------------------------------
Donald B. Shackelford
Paul B. Sigler* Director March 31, 1997
- ---------------------------------------
Paul B. Sigler
* DAVID M. SCHNEIDER, by signing his name hereto, does sign this document on
behalf of the persons indicated above pursuant to a power of attorney duly
executed by such persons.
By /s/ David M. Schneider March 31, 1997
-------------------------
David M. Schneider
Attorney-in-fact
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ITEM 14(D)
To the Board of Directors and Shareholders, The Progressive Corporation:
Our report on the consolidated financial statements of The Progressive Corporation and subsidiaries has been incorporated by reference in this Form 10-K from page 33 of the 1996 Annual Report to Shareholders of The Progressive Corporation. In connection with our audits of such financial statements, we have also audited the related financial statement schedules listed in the index on pages 21 and 22 of this Form 10-K.
In our opinion, the financial statement schedules referred to above, when considered in relation to the basic financial statements taken as a whole, present fairly, in all material respects, the information required to be included therein.
Cleveland, Ohio
January 21, 1997
To the Board of Directors and Shareholders, The Progressive Corporation:
We consent to the incorporation by reference in the Registration Statement of The Progressive Corporation on Form S-3 (File No. 333-01745) filed March 15, 1996, the Registration Statement on Form S-8 (File No. 33-57121) filed December 29, 1994, the Registration Statement on Form S-8 (File No. 33-64210) filed June 10, 1993, the Registration Statement on Form S-8 (File No. 33-51034) filed August 20, 1992, the Registration Statement on Form S-8 (File No. 33-46944) filed April 3, 1992, the Registration Statement on Form S-8 (File No. 33-38793) filed February 4, 1991, the Registration Statement on Form S-8 (File No. 33-38107) filed December 6, 1990, the Registration Statement on Form S-8 (File No. 33-37707) filed November 9, 1990, the Registration Statement on Form S-8 (File No. 33-33240) filed January 31, 1990, and the Registration Statement on Form S-8 (File No. 33-16509) filed August 14, 1987, of our reports dated January 21, 1997, on our audits of the consolidated financial statements and financial statement schedules of The Progressive Corporation and subsidiaries as of December 31, 1996 and 1995, and for each of the three years in the period ended December 31, 1996, which reports are included in this Annual Report on Form 10-K.
Cleveland, Ohio
March 31, 1997
THE PROGRESSIVE CORPORATION AND SUBSIDIARIES
- --------------------------------------------
(millions)
December 31, 1996
-----------------------------------------------------------------
Amount At Which Shown
In The
Type of Investment Cost Market Value Balance Sheet
-----------------------------------------------------------------
Fixed Maturities:
Available-for-sale:
United States Government and
government agencies and
authorities $ 830.1 $ 829.1 $ 829.1
States, municipalities and political
subdivisions 1,314.7 1,331.3 1,331.3
Asset-backed securities 1,084.3 1,088.3 1,088.3
Foreign government obligations 48.7 51.1 51.1
Corporate and other debt securities 49.9 52.1 52.1
Redeemable preferred stock 56.4 57.3 57.3
-----------------------------------------------------------------
Total fixed maturities 3,384.1 3,409.2 3,409.2
-----------------------------------------------------------------
Equity securities:
Common stocks 458.9 540.1 540.1
Preferred stocks 333.8 341.6 341.6
-----------------------------------------------------------------
Total equity securities 792.7 881.7 881.7
-----------------------------------------------------------------
Short-term investments 159.7 159.7 159.7
-----------------------------------------------------------------
Total investments $4,336.5 $4,450.6 $4,450.6
=================================================================
|
The Company did not have any securities of one issuer with an aggregate cost or market value exceeding 10% of total shareholders' equity at December 31, 1996.
CONDENSED STATEMENTS OF INCOME
THE PROGRESSIVE CORPORATION (PARENT COMPANY)
- --------------------------------------------
(millions)
Years Ended December 31,
1996 1995 1994
----------------------------------------------------
Revenues
Dividends from subsidiaries* $125.0 $120.8 $ 53.0
Intercompany investment income* 36.5 37.2 29.8
----------------------------------------------------
161.5 158.0 82.8
----------------------------------------------------
Expenses
Interest expense 61.4 57.1 56.7
Other operating costs and expenses 4.1 3.6 3.8
Loss on disposition of subsidiary* -- -- 5.3
----------------------------------------------------
65.5 60.7 65.8
----------------------------------------------------
Operating income and income before income
taxes and other items below 96.0 97.3 17.0
Income tax benefit (10.2) (7.3) (12.2)
----------------------------------------------------
Income before equity in undistributed earnings of
subsidiaries 106.2 104.6 29.2
Equity in undistributed net income of consolidated
subsidiaries* 207.5 145.9 245.1
----------------------------------------------------
Net income $313.7 $250.5 $274.3
====================================================
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*Eliminated in consolidation.
See notes to condensed financial statements.
CONDENSED BALANCE SHEETS
THE PROGRESSIVE CORPORATION (PARENT COMPANY)
- --------------------------------------------
(millions)
December 31,
1996 1995
-----------------------------------------------
ASSETS
Investment in non-consolidated affiliates $ .4 $ .4
Investment in subsidiaries* 1,755.7 1,456.7
Receivable from subsidiary* 695.8 660.8
Intercompany receivable* 6.6 25.6
Income taxes 13.0 26.1
Other assets 2.8 1.6
-----------------------------------------------
TOTAL ASSETS $2,474.3 $2,171.2
===============================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Accounts payable and accrued expenses $ 22.1 $ 20.3
Funded debt 775.3 675.1
-----------------------------------------------
Total liabilities 797.4 695.4
-----------------------------------------------
Shareholders' equity:
Preferred Shares, no par value (authorized 20.0
Serial Preferred Shares and 5.0 Voting
Preference Shares)
9 3/8% Serial Preferred Shares, Series A (cumulative,
liquidation preference of $25 per share, issued and
outstanding 0 and 3.4 shares) -- 83.6
Common Shares, $1.00 par value, authorized 200.0
shares, issued 83.1, including treasury
shares of 11.6 and 11.0 71.5 72.1
Paid-in capital 381.8 374.8
Net unrealized appreciation of investment
in equity securities of consolidated subsidiaries 74.0 51.1
Retained earnings 1,149.6 894.2
-----------------------------------------------
Total shareholders' equity 1,676.9 1,475.8
-----------------------------------------------
TOTAL LIABILITIES AND
SHAREHOLDERS' EQUITY $2,474.3 $2,171.2
===============================================
|
*Eliminated in consolidation.
See notes to condensed financial statements.
CONDENSED STATEMENTS OF CASH FLOWS
THE PROGRESSIVE CORPORATION (PARENT COMPANY)
- --------------------------------------------
(millions)
Years Ended December 31,
1996 1995 1994
--------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $313.7 $250.5 $274.3
Adjustments to reconcile net income to net cash
used in operating activities:
Equity in income of consolidated subsidiaries (332.5) (266.7) (298.1)
Amortization -- -- 1.5
Changes in:
Intercompany receivable or payable 19.0 1.6 (61.1)
Accounts payable and accrued expenses 1.8 1.3 12.9
Income taxes 13.1 3.9 24.3
Other, net (.9) (.1) 1.0
--------------------------------------------------
Net cash provided by (used in) operating 14.2 (9.5) (45.2)
activities
CASH FLOWS FROM INVESTING ACTIVITIES:
Additional investments in equity securities of
consolidated subsidiaries (42.2) (42.1) (56.9)
Return of capital from consolidated subsidiary .5 -- 20.1
Purchase of consolidated subsidiaries (26.6) -- --
Dividends received from consolidated subsidiaries 125.0 120.8 53.0
--------------------------------------------------
Net cash provided by investing activities 56.7 78.7 16.2
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options 6.9 10.1 2.7
Tax benefits from the exercise of stock options 5.9 8.5 2.4
Redemption of Preferred shares (80.8) -- --
Proceeds from funded debt 99.6 -- 198.4
Receivable from subsidiary (35.0) (61.4) (114.8)
Dividends paid to shareholders (19.6) (24.1) (23.4)
Acquisition of treasury shares (47.9) (2.3) (36.3)
--------------------------------------------------
Net cash provided by (used in) financing
activities (70.9) (69.2) 29.0
--------------------------------------------------
Change in cash -- -- --
Cash, beginning of year -- -- --
--------------------------------------------------
Cash, end of year $ -- $ -- $ --
==================================================
|
See notes to condensed financial statements.
NOTES TO CONDENSED FINANCIAL STATEMENTS
The accompanying condensed financial statements of The Progressive Corporation (the "Registrant") should be read in conjunction with the consolidated financial statements and notes thereto of The Progressive Corporation and subsidiaries included in the Registrant's 1996 Annual Report.
STATEMENTS OF CASH FLOWS -- For the purpose of the Statements of Cash Flows, cash includes only bank demand deposits. The Registrant paid income taxes of $120.4 million in 1996, and $75.5 million, and $89.8 million in 1995 and 1994, respectively. Total interest paid was $60.2 million for 1996, $56.5 million for 1995 and $49.8 million for 1994.
DEBT -- Funded debt at December 31 consisted of:
(millions) 1996 1995
---------------------------------------------------------
7.30% Notes $ 99.6 $ --
6.60% Notes 198.8 198.7
7% Notes 148.3 148.3
8 3/4% Notes 29.5 29.2
10% Notes 149.6 149.5
10 1/8% Subordinated Notes 149.5 149.4
---------------------------------------------------------
$775.3 $675.1
=========================================================
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Funded debt is the amount the Registrant has borrowed and contributed to the capital of its insurance subsidiaries or borrowed for other long-term purposes.
In May 1990, the Registrant entered into a revolving credit arrangement with National City Bank, which is reviewed by the bank annually. Under this agreement, the Registrant had the right to borrow up to $50.0 million. In February 1994, the Registrant reduced this revolving credit arrangement to $20.0 million. By selecting from available credit options, the Registrant may elect to pay interest at rates related to the London interbank offered rate, the bank's base rate or at a money market rate. A commitment fee is payable on any unused portion of the committed amount at the rate of .125% per annum. At December 31, 1996 and 1995, the Registrant had no borrowings under this arrangement.
In May 1996, the Registrant sold $100.0 million of noncallable 7.30% Notes due 2006 with interest payable semiannually. The fair value of these Notes was $101.7 million at December 31, 1996.
In January 1994, the Registrant sold $200.0 million of noncallable 6.60% Notes due 2004 with interest payable semiannually. The fair value of the Notes was $197.1 million and $203.6 million at December 31, 1996 and 1995, respectively.
In October 1993, the Registrant sold $150.0 million of noncallable 7% Notes due 2013 with interest payable semiannually. The fair value of these Notes was $144.3 million and $156.6 million at December 31, 1996 and 1995, respectively.
In May 1989, the Registrant issued $30.0 million of 8 3/4% Notes due 1999 with interest payable semiannually. The fair value of these Notes was $31.6 million and $32.7 million at December 31, 1996 and 1995, respectively.
NOTES TO CONDENSED FINANCIAL STATEMENTS
In December 1988, the Registrant sold $150.0 million of 10% Notes due 2000 and $150.0 million of 10 1/8% Subordinated Notes due 2000. All such Notes are noncallable with interest payable semiannually on both issues. The fair value of the 10% Notes and 10 1/8% Subordinated Notes were $167.8 million and $168.4 million, respectively, at December 31, 1996, and $175.9 million and $176.1 million, respectively, at December 31, 1995.
As of December 31, 1996, the Registrant was in compliance with its debt covenants.
Aggregate principal payments on funded debt outstanding at December 31, 1996 are $0 for 1997 and 1998, $30.0 million for 1999, $300.0 million for 2000, $0 for 2001, and $450.0 million thereafter.
INCOME TAXES -- The Registrant files a consolidated Federal income tax return with all eligible subsidiaries. The Federal income taxes in the accompanying Condensed Balance Sheets represent amounts recoverable from the Internal Revenue Service by the Registrant as agent for the consolidated tax group. The Registrant and its subsidiaries have adopted, pursuant to a written agreement, a method of allocating consolidated Federal income taxes. Amounts allocated to the subsidiaries under the written agreement are included in Intercompany Receivable from Subsidiaries in the accompanying Condensed Balance Sheets.
INVESTMENTS IN CONSOLIDATED SUBSIDIARIES -- The Registrant, through its investment in consolidated subsidiaries, recognizes the changes in unrealized gains (losses) on equity securities of the subsidiaries. These amounts were:
(millions) 1996 1995 1994
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Unrealized gains (losses):
Available-for-sale: fixed maturities $(18.3) $ 86.1 $(73.4)
equity securities 53.7 40.0 (25.4)
Deferred income taxes (12.5) (44.3) 34.6
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$ 22.9 $ 81.8 $(64.2)
=================================================================
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OTHER MATTERS -- The information relating to incentive compensation plans is incorporated by reference from Note 8, EMPLOYEE BENEFIT PLANS, "Incentive Compensation Plans" on pages 44 and 45 of the Registrant's 1996 Annual Report.
THE PROGRESSIVE CORPORATION AND SUBSIDIARIES
- --------------------------------------------
(millions)
Future
policy Other
benefits, policy Benefits,
Deferred losses, claims claims,
policy claims and and losses and
acquisition loss Unearned benefits Premium Investment settlement
Segment costs expenses(2) premiums payable revenue income(1) expenses(2)
------------------------------------------------------------------------------------
Year ended December 31, 1996:
Insurance Lines $200.1 $1,800.6 $1,467.3 $ -- $3,199.3 $225.8 $2,236.1
====================================================================================
Year ended December 31, 1995:
Insurance Lines $181.9 $1,610.5 $1,209.6 $ -- $2,727.2 $199.1 $1,943.8
====================================================================================
Year ended December 31, 1994:
Insurance Lines $161.6 $1,434.4 $1,036.7 $ -- $2,191.1 $158.5 $1,397.3
====================================================================================
Amortization
of deferred
policy Other Net
acquisition operating premiums
Segment costs expenses written
------------------------------------------------
Year ended December 31, 1996:
Insurance Lines $482.6 $208.5 $3,441.7
================================================
Year ended December 31, 1995:
Insurance Lines $459.6 $167.2 $2,912.8
================================================
Year ended December 31, 1994:
Insurance Lines $391.5 $150.8 $2,457.2
================================================
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(1)Excluding investment expenses of $6.1 million in 1996, $8.1 million in 1995 and $8.7 million in 1994.
(2)During 1994, based on a review of the adequacy of its total loss reserves, the Company eliminated its $71.0 million "supplemental reserve." See MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS beginning on page 14 for further discussion.
THE PROGRESSIVE CORPORATION AND SUBSIDIARIES
- --------------------------------------------
(millions)
Assumed Percentage
Year Ended Ceded to From of Amount
Gross Amount Other Other Assumed
December 31, 1996 Companies Companies Net Amount to Net
- ----------------- -----------------------------------------------------------------------------------
Life Insurance in force $ .1 $ .1 $ -- $ -- --
===================================================================================
Premiums earned:
Accident and health $ -- $ -- $ -- $ -- --
Property and liability 3,380.7 185.2 3.8 3,199.3 .1%
Life -- -- -- -- --
------------------------------------------------------------------
Total premiums earned $3,380.7 $185.2 $3.8 $3,199.3 --
==================================================================
December 31, 1995
- ------------------
Life Insurance in force $ .4 $ .1 $ -- $ .3 --
==================================================================================
Premiums earned:
Accident and health $ -- $ -- $ -- $ -- --%
Property and liability 2,895.9 168.8 .1 2,727.2 --
Life -- -- -- -- --
------------------------------------------------------------------
Total premiums earned $2,895.9 $168.8 $ .1 $2,727.2 --
==================================================================
December 31, 1994
- -----------------
Life Insurance in force $ .7 $ .2 $ -- $ .5 --
==================================================================================
Premiums earned:
Accident and health $ -- $ -- $ -- $ -- --
Property and liability 2,378.4 192.2 4.9 2,191.1 .2%
Life -- -- -- -- --
------------------------------------------------------------------
Total premiums earned $2,378.4 $192.2 $4.9 $2,191.1
==================================================================
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THE PROGRESSIVE CORPORATION AND SUBSIDIARIES
- --------------------------------------------
(millions)
Paid Losses and
Losses and Loss Adjustment Expenses Loss Adjustment
Incurred Related to Expenses
-------------------------------------------------- -------------------
Current Prior
Year Ended Year Years
-------------------------- ---------------------
December 31, 1996 $2,341.9 $(105.8) $2,017.6
========================= ====================== ===================
December 31, 1995 $2,000.4 $(56.6) $1,729.6
========================= ====================== ===================
December 31, 1994(1) $1,539.8 $(142.5) $1,310.9
========================= ====================== ===================
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Pursuant to Rule 12-18 of Regulation S-X. See Schedule III, page 34, for the additional information required in Schedule VI.
(1)During 1994, based on a review of the adequacy of its total loss reserves, the Company eliminated its $71.0 million "supplemental reserve." See MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS beginning on page 14 for further discussion.
EXHIBIT INDEX
Exhibit Form
Under 10-K
Reg. Exhi- If Incorporated by Reference, Documents
S-K, bit with Which Exhibit was Previously Filed
Item 601 No. Description of Exhibit with SEC
- -------------------------------------------------------------------------------------------------------------------------------
(3)(i) 3(A) Amended Articles of Incorporation of The Progressive Quarterly Report on Form 10-Q
Corporation ("Progressive"), as amended (Filed with SEC on April 23, 1993; see
Exhibit 3 therein)
(3)(ii) 3(B) Code of Regulations of Progressive Filed herewith
(4) 4(A) $4,000,000 Hillsborough County Industrial Development Annual Report on Form 10-K (Filed with SEC on
Authority Industrial Development Revenue Bonds, Series March 28, 1995; see Exhibit 4(A) therein)
1982 (dated December 16, 1982); Loan and Debt
Obligation Agreement; Indenture of Trust; Mortgage
and Security Agreement; Unconditional Guaranty
(4) 4(B) Indenture dated as of November 15, 1988 between Annual Report on Form 10-K (Filed with SEC on
Progressive and State Street Bank and Trust Company March 29, 1994; see Exhibit 4(B) therein)
(successor in interest to Rhode Island Hospital Trust
National Bank), as Trustee ("Subordinated Indenture") (including
Table of Contents and cross-reference sheet)
(4) 4(C) Form of 10 1/8% Subordinated Notes due 2000 issued in Annual Report on Form 10-K (Filed with SEC on
the aggregate principal amount of $150,000,000 under the March 29, 1994; see Exhibit 4(C) therein)
Subordinated Indenture
(4) 4(D) Indenture dated as of November 15, 1988 between Annual Report on Form 10-K (Filed with SEC on
Progressive and State Street Bank and Trust Company March 29, 1994; see Exhi |