THE PROGRESSIVE CORPORATION 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 1O-Q
(Mark One)
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þ |
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Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended September 30, 2007
or
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o |
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Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to
Commission File Number: 1-9518
THE
PROGRESSIVE CORPORATION
(Exact name of registrant as specified in its charter)
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Ohio
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34-0963169 |
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(State or other jurisdiction of
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(I.R.S. Employer |
incorporation or organization)
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Identification No.) |
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6300 Wilson Mills Road, Mayfield Village, Ohio
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44143 |
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(Address of principal executive offices)
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(Zip Code) |
(440) 461-5000
(Registrants telephone number, including area code)
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.
Yes þ No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, or a non-accelerated filer. See definition of accelerated filer and large accelerated
filer in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ Accelerated filer o Non-accelerated filer o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
Indicate the number of shares outstanding of each of the issuers classes of common stock, as
of the latest practicable date.
Common Shares, $1.00 par value: 698,099,891 outstanding at September 30, 2007
TABLE OF CONTENTS
PART I FINANCIAL INFORMATION
Item 1. Financial Statements.
The Progressive Corporation and Subsidiaries
Consolidated Statements of Income
(unaudited)
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Three Months |
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Nine Months |
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Periods Ended September 30, |
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2007 |
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2006 |
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% Change |
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2007 |
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2006 |
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% Change |
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(millions - except per share amounts) |
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Revenues: |
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Net premiums earned |
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$ |
3,461.8 |
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$ |
3,544.3 |
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(2 |
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$ |
10,464.8 |
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$ |
10,609.2 |
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(1 |
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Investment income |
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183.9 |
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169.8 |
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8 |
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514.8 |
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484.0 |
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6 |
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Net realized gains (losses) on securities |
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58.5 |
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2.4 |
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2338 |
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75.2 |
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(24.2 |
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NM |
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Service revenues |
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5.4 |
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7.3 |
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(26 |
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17.5 |
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23.6 |
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(26 |
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Total revenues |
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3,709.6 |
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3,723.8 |
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11,072.3 |
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11,092.6 |
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Expenses: |
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Losses and loss adjustment expenses |
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2,509.1 |
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2,367.7 |
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6 |
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7,398.0 |
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7,034.7 |
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5 |
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Policy acquisition costs |
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347.7 |
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359.7 |
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(3 |
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1,058.1 |
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1,086.7 |
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(3 |
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Other underwriting expenses |
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387.2 |
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365.7 |
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6 |
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1,154.3 |
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1,042.2 |
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11 |
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Investment expenses |
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2.9 |
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2.9 |
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10.3 |
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8.8 |
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17 |
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Service expenses |
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5.4 |
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6.2 |
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(13 |
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15.3 |
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19.3 |
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(21 |
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Interest expense |
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34.7 |
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18.5 |
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88 |
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74.1 |
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58.4 |
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27 |
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Total expenses |
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3,287.0 |
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3,120.7 |
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5 |
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9,710.1 |
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9,250.1 |
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5 |
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Income before income taxes |
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422.6 |
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603.1 |
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(30 |
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1,362.2 |
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1,842.5 |
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(26 |
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Provision for income taxes |
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123.4 |
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193.5 |
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(36 |
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415.8 |
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595.9 |
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(30 |
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Net income |
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$ |
299.2 |
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$ |
409.6 |
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(27 |
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$ |
946.4 |
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$ |
1,246.6 |
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(24 |
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COMPUTATION OF EARNINGS PER SHARE |
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Basic: |
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Average shares outstanding |
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702.6 |
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763.2 |
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(8 |
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720.6 |
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779.7 |
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(8 |
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Per share |
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$ |
.43 |
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$ |
.54 |
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(21 |
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$ |
1.31 |
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$ |
1.60 |
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(18 |
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Diluted: |
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Average shares outstanding |
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702.6 |
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763.2 |
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(8 |
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720.6 |
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779.7 |
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(8 |
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Net effect of dilutive stock-based
compensation |
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8.2 |
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9.0 |
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(9 |
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8.3 |
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9.8 |
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(15 |
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Total equivalent shares |
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710.8 |
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772.2 |
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(8 |
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728.9 |
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789.5 |
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(8 |
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Per share |
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$ |
.42 |
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$ |
.53 |
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(21 |
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$ |
1.30 |
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$ |
1.58 |
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(18 |
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Dividends declared per share1 |
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$ |
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$ |
.00875 |
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NM |
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$ |
2.00 |
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$ |
.02375 |
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NM |
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NM = Not Meaningful |
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See Note 8 Dividends for further discussion. |
See notes to consolidated financial statements.
2
The Progressive Corporation and Subsidiaries
Consolidated Balance Sheets
(unaudited)
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September 30, |
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December 31, |
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2007 |
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2006 |
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2006 |
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(millions) |
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Assets |
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Investments Available-for-sale, at fair value: |
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Fixed maturities (amortized cost: $9,664.2, $10,017.7 and $9,959.6) |
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$ |
9,677.1 |
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$ |
10,044.3 |
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$ |
9,958.9 |
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Equity securities: |
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Preferred stocks1 (cost: $2,358.7, $1,523.0 and $1,761.4) |
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2,312.9 |
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1,535.4 |
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1,781.0 |
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Common equities (cost: $1,388.5, $1,454.9 and $1,469.0) |
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2,453.1 |
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2,215.9 |
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2,368.1 |
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Short-term investments (amortized cost: $374.1, $1,057.3 and $581.0) |
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374.1 |
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1,057.9 |
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581.2 |
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Total investments |
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14,817.2 |
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14,853.5 |
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14,689.2 |
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Cash |
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7.7 |
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14.5 |
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5.6 |
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Accrued investment income |
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140.8 |
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155.5 |
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134.4 |
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Premiums receivable, net of allowance for doubtful accounts of
$116.0, $116.7 and $122.0 |
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2,614.0 |
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2,698.6 |
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2,498.2 |
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Reinsurance recoverables, including $45.5, $58.1 and $72.4 on paid losses |
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355.3 |
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387.0 |
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433.8 |
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Prepaid reinsurance premiums |
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78.1 |
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98.1 |
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89.5 |
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Deferred acquisition costs |
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461.1 |
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477.3 |
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441.0 |
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Income taxes |
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36.1 |
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16.8 |
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Property and equipment, net of accumulated depreciation of
$592.2, $585.5 and $557.0 |
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990.1 |
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941.6 |
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973.4 |
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Other assets |
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201.2 |
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184.0 |
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200.2 |
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Total assets |
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$ |
19,665.5 |
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$ |
19,846.2 |
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$ |
19,482.1 |
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Liabilities and Shareholders Equity |
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Unearned premiums |
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$ |
4,547.4 |
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$ |
4,658.1 |
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$ |
4,335.0 |
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Loss and loss adjustment expense reserves |
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5,920.8 |
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5,724.3 |
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5,725.0 |
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Accounts payable, accrued expenses and other liabilities |
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1,629.0 |
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1,564.3 |
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1,390.0 |
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Income taxes |
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50.9 |
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Debt2 |
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2,173.5 |
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1,185.4 |
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1,185.5 |
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Total liabilities |
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14,321.6 |
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13,132.1 |
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12,635.5 |
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Shareholders equity: |
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Common Shares, $1.00 par value (authorized 900.0; issued 798.2,
798.7 and 798.7, including treasury shares of 100.1, 37.0 and 50.7) |
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698.1 |
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761.7 |
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748.0 |
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Paid-in capital |
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834.2 |
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837.2 |
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847.4 |
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Accumulated other comprehensive income: |
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Net unrealized gains on securities |
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672.6 |
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520.4 |
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596.8 |
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Net unrealized gains on forecasted transactions |
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28.5 |
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7.8 |
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7.5 |
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Retained earnings |
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3,110.5 |
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4,587.0 |
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4,646.9 |
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Total shareholders equity |
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5,343.9 |
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6,714.1 |
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6,846.6 |
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Total liabilities and shareholders equity |
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$ |
19,665.5 |
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$ |
19,846.2 |
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$ |
19,482.1 |
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1 |
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Includes certain hybrid securities reported at fair value. See Note 2 Investments
for further discussion. |
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2 |
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Consists of long-term debt. See Note 5 Debt for further discussion. |
See notes to consolidated financial statements.
3
The Progressive Corporation and Subsidiaries
Consolidated Statements of Cash Flows
(unaudited)
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Nine Months Ended September 30, |
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2007 |
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2006 |
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(millions) |
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Cash Flows From Operating Activities |
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Net income |
|
$ |
946.4 |
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$ |
1,246.6 |
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Adjustments to reconcile net income to net cash provided
by operating activities: |
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Depreciation |
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80.1 |
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|
76.0 |
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Amortization of fixed maturities |
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208.5 |
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162.9 |
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Amortization of stock-based compensation |
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20.8 |
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18.7 |
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Net realized (gains) losses on securities |
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(75.2 |
) |
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24.2 |
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Loss (gain) on disposition of property and equipment |
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|
.3 |
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(5.8 |
) |
Changes in: |
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Premiums receivable |
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(115.8 |
) |
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(197.9 |
) |
Reinsurance recoverables |
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|
78.5 |
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|
18.7 |
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Prepaid reinsurance premiums |
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|
11.4 |
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5.6 |
|
Deferred acquisition costs |
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(20.1 |
) |
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(32.5 |
) |
Income taxes |
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|
14.9 |
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32.0 |
|
Unearned premiums |
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|
212.4 |
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|
323.0 |
|
Loss and loss adjustment expense reserves |
|
|
195.8 |
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|
64.0 |
|
Accounts payable, accrued expenses and other liabilities |
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|
126.1 |
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|
136.5 |
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Other, net |
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(6.9 |
) |
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(68.8 |
) |
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Net cash provided by operating activities |
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|
1,677.2 |
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1,803.2 |
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Cash Flows From Investing Activities |
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Purchases: |
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Fixed maturities |
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(7,391.4 |
) |
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|
(5,203.6 |
) |
Equity securities |
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|
(1,076.5 |
) |
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|
(720.4 |
) |
Short-term investments auction rate securities |
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(7,156.6 |
) |
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(1,339.5 |
) |
Sales: |
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|
Fixed maturities |
|
|
7,106.0 |
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|
4,707.3 |
|
Equity securities |
|
|
553.8 |
|
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|
221.5 |
|
Short-term investments auction rate securities |
|
|
7,325.4 |
|
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|
1,351.6 |
|
Maturities, paydowns, calls and other: |
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|
|
|
|
|
|
Fixed maturities |
|
|
466.6 |
|
|
|
546.3 |
|
Equity securities |
|
|
5.1 |
|
|
|
165.9 |
|
Net (purchases) sales of short-term investments other |
|
|
38.3 |
|
|
|
(294.5 |
) |
Net unsettled security transactions |
|
|
94.6 |
|
|
|
(70.5 |
) |
Purchases of property and equipment |
|
|
(98.8 |
) |
|
|
(267.3 |
) |
Sale of property and equipment |
|
|
1.7 |
|
|
|
14.0 |
|
|
|
|
Net cash used in investing activities |
|
|
(131.8 |
) |
|
|
(889.2 |
) |
Cash Flows From Financing Activities |
|
|
|
|
|
|
|
|
Proceeds from exercise of stock options |
|
|
16.7 |
|
|
|
31.5 |
|
Tax benefit from exercise/vesting of stock-based compensation |
|
|
9.9 |
|
|
|
27.4 |
|
Proceeds from debt1 |
|
|
1,021.7 |
|
|
|
|
|
Payment of debt |
|
|
|
|
|
|
(100.0 |
) |
Dividends paid to shareholders |
|
|
(1,406.5 |
) |
|
|
(18.5 |
) |
Acquisition of treasury shares |
|
|
(1,185.1 |
) |
|
|
(845.5 |
) |
|
|
|
Net cash used in financing activities |
|
|
(1,543.3 |
) |
|
|
(905.1 |
) |
|
|
|
Increase in cash |
|
|
2.1 |
|
|
|
8.9 |
|
Cash, January 1 |
|
|
5.6 |
|
|
|
5.6 |
|
|
|
|
Cash, September 30 |
|
$ |
7.7 |
|
|
$ |
14.5 |
|
|
|
|
|
|
|
1 |
|
Includes a $34.4 million pretax gain received upon closing a forecasted debt issuance
hedge. See Note 5 Debt for further discussion. |
See notes to consolidated financial statements.
4
The Progressive Corporation and Subsidiaries
Notes to Consolidated Financial Statements
(unaudited)
Note 1 Basis of Presentation These financial statements and the notes thereto should be read in
conjunction with The Progressive Corporation and subsidiaries audited financial statements and
accompanying notes included in our Annual Report on Form 10-K for the year ended December 31, 2006.
The consolidated financial statements reflect all normal recurring adjustments which, in the
opinion of management, were necessary for a fair statement of the results for the interim periods
presented. The results of operations for the periods ended September 30, 2007, are not necessarily
indicative of the results expected for the full year.
Note 2 Investments The composition of the investment portfolio at September 30 was:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(millions) |
|
|
|
|
|
Gross |
|
|
Gross |
|
|
|
|
|
|
% of |
|
|
|
|
|
|
|
Unrealized |
|
|
Unrealized |
|
|
Fair |
|
|
Total |
|
|
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Value2 |
|
|
Portfolio |
|
|
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities1 |
|
$ |
9,664.2 |
|
|
$ |
80.0 |
|
|
$ |
(67.1 |
) |
|
$ |
9,677.1 |
|
|
|
65.3 |
% |
Equity securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stocks |
|
|
2,358.7 |
|
|
|
12.4 |
|
|
|
(55.2 |
) |
|
|
2,312.9 |
|
|
|
15.6 |
|
Common equities |
|
|
1,388.5 |
|
|
|
1,068.1 |
|
|
|
(3.5 |
) |
|
|
2,453.1 |
|
|
|
16.6 |
|
Short-term investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auction rate municipal obligations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auction rate preferred stocks |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other short-term investments |
|
|
374.1 |
|
|
|
|
|
|
|
|
|
|
|
374.1 |
|
|
|
2.5 |
|
|
|
|
Total short-term investments |
|
|
374.1 |
|
|
|
|
|
|
|
|
|
|
|
374.1 |
|
|
|
2.5 |
|
|
|
|
Total portfolio3 |
|
$ |
13,785.5 |
|
|
$ |
1,160.5 |
|
|
$ |
(125.8 |
) |
|
$ |
14,817.2 |
|
|
|
100.0 |
% |
|
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
$ |
10,017.7 |
|
|
$ |
100.7 |
|
|
$ |
(74.1 |
) |
|
$ |
10,044.3 |
|
|
|
67.7 |
% |
Equity securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stocks |
|
|
1,523.0 |
|
|
|
27.8 |
|
|
|
(15.4 |
) |
|
|
1,535.4 |
|
|
|
10.3 |
|
Common equities |
|
|
1,454.9 |
|
|
|
767.4 |
|
|
|
(6.4 |
) |
|
|
2,215.9 |
|
|
|
14.9 |
|
Short-term investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auction rate municipal obligations |
|
|
199.4 |
|
|
|
|
|
|
|
|
|
|
|
199.4 |
|
|
|
1.3 |
|
Auction rate preferred stocks |
|
|
173.3 |
|
|
|
.6 |
|
|
|
|
|
|
|
173.9 |
|
|
|
1.2 |
|
Other short-term investments |
|
|
684.6 |
|
|
|
|
|
|
|
|
|
|
|
684.6 |
|
|
|
4.6 |
|
|
|
|
Total short-term investments |
|
|
1,057.3 |
|
|
|
.6 |
|
|
|
|
|
|
|
1,057.9 |
|
|
|
7.1 |
|
|
|
|
Total portfolio3 |
|
$ |
14,052.9 |
|
|
$ |
896.5 |
|
|
$ |
(95.9 |
) |
|
$ |
14,853.5 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
1 |
|
Includes $19.3 million of gains on open derivative positions as well as $20.2 million
of collateral in the form of Treasury Notes, delivered to a counterparty on an open derivative
position. |
|
2 |
|
At September 30, 2007, preferred stocks included a $3.0 million change in fair value on
certain hybrid securities (described below) recognized as a realized loss on securities. |
|
3 |
|
Includes net unsettled security acquisitions of $136.5 million and $88.0 million at
September 30, 2007 and 2006, respectively. |
Our fixed maturity securities include debt securities and mandatory redeemable preferred stocks.
The preferred stock portfolio includes nonredeemable preferred stocks, which contain certain
securities that have call features with fixed-rate coupons (i.e., hybrid securities), whereby the
change in value of the call features is a component of the overall change in value of the preferred
stocks. Other short-term investments include Eurodollar deposits, commercial paper and other
investments which are expected to mature within one year. Common equities include common stock and
other risk investments.
5
Our securities are reported at fair value, with the changes in fair value of these securities
(other than hybrid securities) reported as a component of accumulated other comprehensive income,
net of deferred income taxes. The change in fair value of the hybrid securities discussed above is
recorded as a component of net realized gains (losses) on securities, as prescribed by current
accounting guidance.
Note 3 Supplemental Cash Flow Information We paid income taxes of $391.0 million and $534.0
million during the nine months ended September 30, 2007 and 2006, respectively. Total interest
paid was $59.9 million and $63.6 million for the nine months ended September 30, 2007 and 2006,
respectively. Non-cash activity includes changes in net unrealized gains (losses) on investment
securities and dividends accrued for restricted stock awards granted after February 2007, under
which dividends are deferred until the underlying stock vests.
Note 4 Income Taxes In July 2006, FASB Interpretation No. 48, Accounting for Uncertainty in
Income Taxes, was issued, which provides guidance for recognizing and measuring the financial
statement impact of tax positions taken or expected to be taken in a tax return. This
interpretation was effective beginning January 1, 2007. As of January 1, 2007, we had no
unrecognized tax benefits. We analyzed our tax positions in accordance with this interpretation
and determined that it did not result in any changes to our reserve for uncertain tax positions. As
a result, no adjustment to January 1, 2007 retained earnings was required.
We recognize interest and penalties, if any, related to unrecognized tax benefits as a component of
income tax expense. As of January 1, 2007, we had not accrued any interest or penalties related to
unrecognized tax benefits.
The statute of limitations remains open with respect to our federal income tax returns for tax
years 2004 and later. The 2004 through 2006 returns are currently under examination. We have
entered into the Compliance Assurance Program (CAP) for the 2007 tax year. Under the CAP program,
the Internal Revenue Service begins its examination process for the tax year before the tax return
is filed, by examining significant transactions and events as they occur. The goal of the CAP
program is to expedite the exam process and to reduce the level of uncertainty regarding a
taxpayers tax filing positions.
There have been no changes to our liability for unrecognized tax benefits, interest and penalties
during both the third quarter and year-to-date period ended September 30, 2007.
Note 5 Debt Debt at September 30 consisted of:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(millions) |
|
2007 |
|
|
2006 |
|
|
|
Carrying |
|
|
Fair |
|
|
Carrying |
|
|
Fair |
|
|
|
Value |
|
|
Value |
|
|
Value |
|
|
Value |
|
6.375% Senior Notes due 2012 |
|
$ |
348.5 |
|
|
$ |
363.7 |
|
|
$ |
348.2 |
|
|
$ |
366.8 |
|
7% Notes due 2013 |
|
|
149.2 |
|
|
|
161.1 |
|
|
|
149.1 |
|
|
|
164.0 |
|
6 5/8% Senior Notes due 2029 |
|
|
294.4 |
|
|
|
310.1 |
|
|
|
294.3 |
|
|
|
323.5 |
|
6.25% Senior Notes due 2032 |
|
|
393.9 |
|
|
|
396.9 |
|
|
|
393.8 |
|
|
|
408.2 |
|
6.70% Fixed-to-Floating Rate Junior Subordinated
Debentures due 2067 |
|
|
987.5 |
|
|
|
985.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
2,173.5 |
|
|
$ |
2,217.2 |
|
|
$ |
1,185.4 |
|
|
$ |
1,262.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
On June 18, 2007, we issued $1 billion of 6.70% Fixed-to-Floating Rate Junior Subordinated
Debentures due 2067 (the Debentures). The Debentures will become due on June 15, 2037, the
scheduled maturity date, but only to the extent that we have received sufficient net proceeds from
the sale of certain qualifying capital securities. Progressive must use its commercially
reasonable efforts, subject to certain market disruption events, to sell enough qualifying capital
securities to permit repayment of the Debentures in full on the scheduled maturity date or, if
sufficient proceeds are not realized from the sale of such qualifying capital securities by such
date, on each interest payment date
6
thereafter. Any remaining outstanding principal will be due on June 15, 2067, the final maturity
date. The Debentures will bear interest at a fixed annual rate of 6.70% through, but excluding,
June 15, 2017, payable semiannually. Thereafter, the Debentures will bear interest at a rate equal
to the three-month LIBOR plus 2.0175%, payable quarterly. Subject to certain conditions,
Progressive has the right to defer the payment of interest on the Debentures for one or more
periods not exceeding ten consecutive years each. During any such deferral period, among other
conditions, interest would continue to accrue, including interest on the deferred interest, and we
generally would not be able to declare or pay any dividends on or purchase any of our Common
Shares.
Subject to the replacement capital covenant discussed below, the Debentures may be redeemed, in
whole or in part, at any time: (a) prior to June 15, 2017, at a redemption price equal to the
greater of (i) 100% of the principal amount of the Debentures being redeemed, or (ii) a make-whole
amount, in each case plus any accrued and unpaid interest; or (b) on or after June 15, 2017, at a
redemption price equal to 100% of the principal amount of the Debentures being redeemed, plus any
accrued and unpaid interest. In connection with the issuance of the Debentures, Progressive
entered into a replacement capital covenant in which we agreed, for the benefit of the holders of a
senior debt security, that we will not repay, redeem, defease or purchase all or part of the
Debentures before June 15, 2047, unless, subject to certain limitations, we have received proceeds
from the sale of certain replacement capital securities, as defined in the replacement capital
covenant.
Prior to the issuance of the Debentures, we entered into a forecasted debt issuance hedge against a
possible rise in interest rates. Upon issuance of the Debentures, the hedge was closed and we
recognized, as part of accumulated other comprehensive income, an unrealized pretax gain of $34.4
million. This gain is deferred and is being recognized as an adjustment to interest expense over
the 10-year fixed interest rate term of the Debentures.
Note 6 Segment Information Our Personal Lines segment writes insurance for private passenger
automobiles and recreational vehicles. Our Commercial Auto segment writes primary liability and
physical damage insurance for automobiles and trucks owned by small businesses in the specialty
truck and light and local commercial auto markets. Our other indemnity businesses primarily
include writing professional liability insurance for community banks and managing our run-off
businesses. Our service businesses include providing insurance-related services, primarily
providing policy issuance and claims adjusting services for Commercial Auto Insurance
Procedures/Plans (CAIP), which are state-supervised plans serving the involuntary market. All
revenues are generated from external customers.
Following are the operating results for the periods ended September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(millions) |
|
Three Months |
|
|
Nine Months |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
Pretax |
|
|
|
|
|
|
Pretax |
|
|
|
|
|
|
Pretax |
|
|
|
|
|
|
Pretax |
|
|
|
|
|
|
|
Profit |
|
|
|
|
|
|
Profit |
|
|
|
|
|
|
Profit |
|
|
|
|
|
|
Profit |
|
|
|
Revenues |
|
|
(Loss) |
|
|
Revenues |
|
|
(Loss) |
|
|
Revenues |
|
|
(Loss) |
|
|
Revenues |
|
|
(Loss) |
|
Personal Lines |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency |
|
$ |
1,900.5 |
|
|
$ |
110.8 |
|
|
$ |
1,973.0 |
|
|
$ |
223.7 |
|
|
$ |
5,772.3 |
|
|
$ |
406.6 |
|
|
$ |
5,956.9 |
|
|
$ |
723.1 |
|
Direct |
|
|
1,091.6 |
|
|
|
67.9 |
|
|
|
1,091.2 |
|
|
|
142.6 |
|
|
|
3,285.3 |
|
|
|
284.4 |
|
|
|
3,250.4 |
|
|
|
439.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Personal Lines1 |
|
|
2,992.1 |
|
|
|
178.7 |
|
|
|
3,064.2 |
|
|
|
366.3 |
|
|
|
9,057.6 |
|
|
|
691.0 |
|
|
|
9,207.3 |
|
|
|
1,162.3 |
|
Commercial Auto |
|
|
464.3 |
|
|
|
38.1 |
|
|
|
473.8 |
|
|
|
85.8 |
|
|
|
1,391.0 |
|
|
|
161.0 |
|
|
|
1,383.2 |
|
|
|
278.2 |
|
Other indemnity |
|
|
5.4 |
|
|
|
1.0 |
|
|
|
6.3 |
|
|
|
(.9 |
) |
|
|
16.2 |
|
|
|
2.4 |
|
|
|
18.7 |
|
|
|
5.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total underwriting operations |
|
|
3,461.8 |
|
|
|
217.8 |
|
|
|
3,544.3 |
|
|
|
451.2 |
|
|
|
10,464.8 |
|
|
|
854.4 |
|
|
|
10,609.2 |
|
|
|
1,445.6 |
|
Service businesses |
|
|
5.4 |
|
|
|
|
|
|
|
7.3 |
|
|
|
1.1 |
|
|
|
17.5 |
|
|
|
2.2 |
|
|
|
23.6 |
|
|
|
4.3 |
|
Investments2 |
|
|
242.4 |
|
|
|
239.5 |
|
|
|
172.2 |
|
|
|
169.3 |
|
|
|
590.0 |
|
|
|
579.7 |
|
|
|
459.8 |
|
|
|
451.0 |
|
Interest expense |
|
|
|
|
|
|
(34.7 |
) |
|
|
|
|
|
|
(18.5 |
) |
|
|
|
|
|
|
(74.1 |
) |
|
|
|
|
|
|
(58.4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
3,709.6 |
|
|
$ |
422.6 |
|
|
$ |
3,723.8 |
|
|
$ |
603.1 |
|
|
$ |
11,072.3 |
|
|
$ |
1,362.2 |
|
|
$ |
11,092.6 |
|
|
$ |
1,842.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
Private passenger automobile insurance accounted for 90% of the total Personal Lines
segment net premiums earned in the third quarter and 91% in the first nine months of 2007,
respectively, compared to 91% and 92%, respectively, for the same periods last year. |
|
2 |
|
Revenues represent recurring investment income and net realized gains (losses) on
securities; pretax profit is net of investment expenses. |
7
Progressives management uses underwriting margin and combined ratio as primary measures of
underwriting profitability. The underwriting margin is the pretax profit (loss) expressed as a
percentage of net premiums earned (i.e., revenues). Combined ratio is the complement of the
underwriting margin. Following are the underwriting margins/combined ratios for our underwriting
operations for the periods ended September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
Nine Months |
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
|
Under- |
|
|
|
|
|
Under- |
|
|
|
|
|
Under- |
|
|
|
|
|
Under- |
|
|
|
|
writing |
|
Combined |
|
writing |
|
Combined |
|
writing |
|
Combined |
|
writing |
|
Combined |
|
|
Margin |
|
Ratio |
|
Margin |
|
Ratio |
|
Margin |
|
Ratio |
|
Margin |
|
Ratio |
Personal Lines |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency |
|
|
5.8 |
% |
|
|
94.2 |
|
|
|
11.3 |
% |
|
|
88.7 |
|
|
|
7.0 |
% |
|
|
93.0 |
|
|
|
12.1 |
% |
|
|
87.9 |
|
Direct |
|
|
6.2 |
|
|
|
93.8 |
|
|
|
13.1 |
|
|
|
86.9 |
|
|
|
8.7 |
|
|
|
91.3 |
|
|
|
13.5 |
|
|
|
86.5 |
|
Total Personal Lines |
|
|
6.0 |
|
|
|
94.0 |
|
|
|
12.0 |
|
|
|
88.0 |
|
|
|
7.6 |
|
|
|
92.4 |
|
|
|
12.6 |
|
|
|
87.4 |
|
Commercial Auto |
|
|
8.2 |
|
|
|
91.8 |
|
|
|
18.1 |
|
|
|
81.9 |
|
|
|
11.6 |
|
|
|
88.4 |
|
|
|
20.1 |
|
|
|
79.9 |
|
Other indemnity1 |
|
NM |
|
NM |
|
NM |
|
NM |
|
NM |
|
NM |
|
NM |
|
NM |
Total underwriting operations |
|
|
6.3 |
|
|
|
93.7 |
|
|
|
12.7 |
|
|
|
87.3 |
|
|
|
8.2 |
|
|
|
91.8 |
|
|
|
13.6 |
|
|
|
86.4 |
|
|
|
|
1 |
|
Underwriting margins/combined ratios for our other indemnity businesses are not
meaningful (NM) due to the low level of premiums earned by, and the variability of losses in, such
businesses. |
Note 7 Comprehensive Income Total comprehensive income was $353.0 million and $624.6 million
for the three months ended September 30, 2007 and 2006, respectively, and $1,043.2 million and
$1,376.1 million for the nine months ended September 30, 2007 and 2006, respectively.
Note 8 Dividends In February 2006, Progressives Board of Directors approved a plan to change
Progressives policy of paying a fixed quarterly dividend to a policy of paying an annual variable
dividend, payable shortly after the close of each year, beginning with the 2007 dividend. This
annual dividend will be based on a target percentage of after-tax underwriting income, multiplied
by a companywide performance factor (Gainshare factor). For 2007, the Board established that the
variable dividend will be based on a target percentage of 20% of after-tax underwriting income.
The Gainshare factor can range from zero to two, and will be determined by comparing our operating
performance for the year to certain predetermined profitability and growth objectives approved by
the Board. The year-to-date Gainshare factor was .77 through September 30, 2007. Subject to
declaration by the Board, the record date of the dividend is expected to be in December 2007, with
payment expected in February 2008.
On September 14, 2007, The Progressive Corporation paid the $2.00 per Common Share extraordinary
cash dividend, in the aggregate amount of $1.4 billion, which was declared by the Board of
Directors on June 13, 2007, and paid to shareholders of record as of the close of business on
August 31, 2007.
Note 9 Litigation One or more of The Progressive Corporations insurance subsidiaries are named
as a defendant in various lawsuits arising out of their insurance operations. All legal actions
relating to claims made under insurance policies are considered in establishing our loss and loss
adjustment expense reserves.
In addition, various Progressive entities are named as defendants in a number of class action or
individual lawsuits, the outcomes of which are uncertain at this time. These cases include those
alleging damages as a result of our total loss evaluation methodology or handling, use of
after-market parts, use of consumer reports (such as credit reports) in underwriting and related
notice requirements under the federal Fair Credit Reporting Act, charging betterment in first party
physical damage claims, the adjusting of personal injury protection and medical payment claims, the
use of automated database vendors or products to assist in evaluating certain bodily injury claims,
policy implementation and renewal procedures and cases challenging other aspects of our claims and
marketing practices and business operations.
8
We plan to contest the outstanding suits vigorously, but may pursue settlement negotiations where
appropriate. In accordance with accounting principles generally accepted in the United States of
America (GAAP), we have established accruals for lawsuits as to which we have determined that it is
probable that a loss has been incurred and we can reasonably estimate our potential exposure.
Pursuant to GAAP, we have not established reserves for those lawsuits where the loss is not
probable and/or we are currently unable to estimate reasonably our potential exposure. If any of
these lawsuits results in a judgment against or settlement by us in an amount that is significantly
in excess of the reserve established for such lawsuit (if any), the resulting liability could have
a material effect on our financial condition, cash flows and results of operations.
For a further discussion on our pending litigation, see Item 3-Legal Proceedings in our Annual
Report on Form 10-K for the year ended December 31, 2006, and Part II, Item 1-Legal Proceedings
in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2007.
Note 10 New Accounting Standards In February 2007, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards 159, The Fair Value Option for Financial Assets
and Financial Liabilities (SFAS 159), which permits entities to choose to measure certain
financial assets and financial liabilities at fair value and recognize the unrealized gains and
losses on such items in earnings. SFAS 159 is effective for fiscal years beginning after November
15, 2007 (January 1, 2008 for calendar year companies). We anticipate that SFAS 159 will not have
an impact on our financial condition, cash flows and results of operations based on the composition
of our current investment portfolio.
9
Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations.
I. OVERVIEW
For the third quarter 2007, The Progressive Corporations insurance subsidiaries generated
underwriting profitability of 6.3%, while net premiums written decreased 3%. At September 30,
2007, companywide policies in force, our preferred measure of growth, increased 4% on a
year-over-year basis. For the third quarter 2007, net income was $299.2 million, or $.42 per
share, compared to $409.6 million, or $.53 per share, for the same period last year. The
quarter-over-prior-year quarter decrease in net premiums written and net income reflects the impact
of our recent rate reductions; net income was also affected by unfavorable prior accident year
development recognized during the quarter.
Current market conditions, defined by relative rate stability or reduction, continue to influence
our aggregate premium growth measure, which was relatively flat in Direct auto, down in Agency and
Commercial Auto, and up in our special lines products in the third quarter 2007, compared to the
same period last year. Changes in net premiums written can be explained by some combination of new
business applications (i.e., issued policies), premium per policy and retention. On a
year-over-year basis, for the third quarter 2007, we saw a modest increase in both our new and
renewal application growth in our Personal Lines Business, primarily driven by Direct auto, as well
as in our Commercial Auto Business. We continue to monitor new business application growth on a
state-by-state basis and evaluate the trade-offs between growth and margin in these markets. For
the third quarter, about two-thirds of our states experienced new personal auto application growth,
with two of our largest volume states, Florida and Texas, returning to positive growth in new
applications.
Having concluded that the loss trends of recent years driven largely by reduced frequency were more
systemic than cyclical, we have been adjusting our pricing to reflect our consistently stated goal
of growing as fast as possible at a 96 combined ratio. Our personal and commercial auto products
are priced at lower average written premium per policy than at this time a year ago. On a
year-over-year basis, for the third quarter 2007, total personal auto average written premium per
policy decreased about 6% and Commercial Auto decreased about 8%. Earned premium per earned car
year, another measure of rate change, lags the written premium measure. For the third quarter
2007, as compared to the same period last year, earned premium per earned car year decreased about
5% in our personal auto products and 7% in our commercial auto products. Although adjusting rates
is a continuous process, we believe the most significant downward adjustments are behind us and, in
general, we are closer to our targeted margins in most states and products.
In light of the soft market conditions, we have focused our attention on unit growth. The rating
changes implemented over the last year have been an explicit trade-off of margin for longer-term
customer growth. Companywide policies in force have grown 4% since September 30, 2006 and 5% since
year-end 2006, but have remained relatively flat since the end of the second quarter 2007. Agency
auto policies in force are slightly lower than at this time last year, while the Direct auto counts
are up 6% and Commercial Auto counts are up 7%. To continue to grow policies in force, it is
critical that we retain our customers for longer periods, which is why retention continues to be
one of our most significant initiatives. During the first nine months of 2007, we believe we made
some strides in addressing issues that are keeping us from meeting the long-term rate expectations
of our customers. Retention measures, defined as policy life expectancy, for our private passenger
auto business increased in every tier over year-end 2006. In addition, policy life expectancy is
higher in every tier in our Direct auto and Commercial Auto businesses and in most tiers in our
Agency auto business than it was at the end of the third quarter 2006.
Profitability remains solid for each reporting segment. The 6.3% companywide underwriting profit
margin for the quarter indicates the closure of the gap between our reaffirmed target of a 4%
underwriting margin and the double-digit margins we experienced over the last several years.
Reflected
10
in our results for the third quarter 2007 are .5 points of unfavorable prior accident year
development primarily being driven by our field claims representatives evaluation of larger
individual bodily injury case reserves as well as uninsured motorist case reserves. For the
quarter, we experienced relatively stable auto frequency trends, while severity continues to
increase more than we expected, primarily driven by bodily injury and personal injury protection
severity.
During the third quarter 2007, we announced organizational changes designed to increase our ability
to execute on key strategies, lower our non-claims expense ratio and foster growth through more
competitive pricing, improved customer retention and an increased focus on brand development.
These changes will bring our Agency and Direct auto, as well as our special lines, products
together under one Personal Lines organization. We will continue to price products based, in part,
on how they are distributed to reflect the applicable channel cost. We believe this structure will
reduce the cost of redundancy that developed in areas such as product design, management and policy
servicing, as well as improve our ability to execute on our most significant challenges. We reviewed our
current segment reporting and determined that it was not impacted by this organizational change.
On September 14, 2007, we paid $1.4 billion to shareholders of record as of August 31, 2007,
representing the $2.00 per Common Share extraordinary cash dividend that was part of the
recapitalization plan announced in June 2007. Also, as part of this plan, in June 2007, we issued
$1 billion of 6.70% Fixed-to-Floating Rate Junior Subordinated Debentures due 2067. In addition,
year-to-date through September, we have spent $1.2 billion to repurchase our Common Shares. See
Note 5 Debt and the Capital Resources and Liquidity section below for further details.
We have made no substantial changes in the allocation of our investment portfolio during the
quarter and are well within the range established by our asset allocation strategy of investing
between 75% and 100% of our total portfolio in fixed-income securities, with the balance in common
equities. Within our fixed-income portfolio, during the quarter, we decreased our allocation to
U.S. treasury securities and increased our allocation to all other sectors, most notably preferred
stocks, municipal bonds and corporate bonds. The change in the fixed-income sector allocation is
the result of both active additions to non-treasury bonds, as their pricing became more attractive
during the quarter, and capital management activities. Our investment portfolio produced a fully
taxable equivalent total return of 2.3% for the quarter, with positive total returns in both
fixed-income securities and common stocks. At September 30, 2007, the fixed-income portfolio
duration was 3.4 years, with a weighted average credit quality of AA.
During the third quarter 2007, we performed a detailed review of our asset-backed securities to
identify the extent to which our asset values may have been impacted by the sub-prime mortgage loan
crisis, as well as broader credit market events. At September 30, 2007, we held approximately
$79.3 million of sub-prime mortgage bonds, classified as home equity bonds. In addition, we held
$54.5 million of non-prime collateralized mortgage obligations (Alt-A securities) at quarter end.
Together, these securities had unrealized gains of $3.3 million at September 30, 2007. During the
third quarter 2007, we realized $1.7 million of losses related to other-than-temporarily impaired
sub-prime securities. In addition, we had a credit default swap derivative on an investment-grade
asset-backed index with a notional amount of $140 million. In conjunction with this derivative, we
received $43.3 million of upfront cash, which effectively reduced our maximum economic exposure on
this position to $96.7 million at September 30, 2007. For the third quarter 2007, this derivative
position generated a loss of $23.9 million.
11
II. FINANCIAL CONDITION
A. Capital Resources and Liquidity
Progressive has substantial capital resources. We believe we have sufficient capital resources,
cash flows from operations and borrowing capacity to support our current and anticipated growth,
scheduled principal and interest payments on our debt, expected dividends and other capital
requirements. Our existing debt covenants do not include any rating or credit triggers.
In June 2007, we announced a recapitalization plan, which included the following components:
|
|
|
The payment of an extraordinary cash dividend of $2.00 per Common Share. This
extraordinary cash dividend, which aggregated $1.4 billion, was declared by the Board on
June 13, 2007, and was paid on September 14, 2007, to shareholders of record at the close
of business on August 31, 2007. |
|
|
|
|
A new Board authorization for us to repurchase up to 100 million of our Common Shares
over the course of the next 24 months, expiring June 30, 2009. This authorization was in
addition to, and after completion of, the shares that remained available for repurchase
under the Boards April 2006 share repurchase authorization. |
|
|
|
|
The issuance of $1 billion of 6.70% Fixed-to-Floating Rate Junior Subordinated
Debentures due 2067 (the Debentures) on June 18, 2007. The proceeds of the offering were
$987.3 million, before $1.4 million of expenses related to the issuance. In addition, upon
issuance of the Debentures, we closed a forecasted debt issuance hedge, which was entered
into to hedge against a possible rise in interest rates, and recognized a $34.4 million
pretax gain as part of shareholders equity; the gain will be recognized as an adjustment
to interest expense and amortized over 10 years, which represents the fixed rate interest
period of the Debentures. See Note 5 Debt for further discussion of the terms of the
Debentures. |
Progressives insurance operations create liquidity by collecting and investing premiums from new
and renewal business in advance of paying claims. For the nine months ended September 30, 2007,
operations generated a positive cash flow of $1,677.2 million. During the third quarter 2007, we
repurchased 26.2 million Common Shares at a total cost of $561.7 million (average cost of $21.48
per share, representing the weighted average price of shares repurchased before and after the
record date of the $2.00 per Common Share extraordinary cash dividend; see Part II, Item 2(c)-
Share Repurchases, for further information), bringing the total year-to-date repurchases to 53.5
million Common Shares, at a total cost of $1,185.1 million (average cost of $22.16 per share).
Beginning in 2007, we are no longer paying a quarterly dividend on our outstanding Common Shares.
In February 2006, the Board of Directors approved a plan to replace our previous quarterly dividend
policy with an annual variable dividend, using a target percentage of after-tax underwriting income
(20% for 2007) multiplied by a companywide performance factor, referred to as the Gainshare
factor. The Gainshare factor, which is based on predetermined growth and profitability
objectives, can range from zero to two. Based on year-to-date results, the Gainshare factor was .77 through September 30, 2007. Since the final factor will be determined based on our results for
the full year, the final factor may vary significantly from the factor for any interim period.
Subject to declaration by the Board, the record date of the 2007 annual dividend is expected to be
in December 2007, with payment expected in February 2008.
12
B. Commitments and Contingencies
During 2007, we completed construction of four new service centers that provide our concierge level
of claims service, including one new facility in the third quarter 2007. Three of the centers
opened this year replaced previously leased service center locations. In total, we have 54 service
centers in 41 metropolitan areas across the United States serving as our primary approach to damage
assessment and facilitation of vehicle repairs in urban markets. In 2008, we expect to complete
construction of two new service centers; both centers will replace existing leased facilities.
There is currently no other significant construction under way. We own additional land in both
Colorado Springs, Colorado and Mayfield Village, Ohio for future development; both properties are
near current corporate operations. In the spring of 2008, we expect to begin a multi-year project
to construct up to three buildings and three parking garages, together with associated facilities,
for corporate functions in Mayfield Village at a currently estimated total construction cost of
$200 million.
All such construction projects have been, and will continue to be, funded through operating cash
flows.
Off-Balance-Sheet Arrangements
Our off-balance-sheet leverage includes credit default swaps, open investment funding commitments,
and operating leases and service agreements. See the Derivative Instruments section of this
Managements Discussion and Analysis for a summary of our derivative activity since year-end 2006.
There have been no material changes in the other off-balance-sheet items since the discussion in
the notes to the financial statements in Progressives Annual Report on Form 10-K for the year
ended December 31, 2006.
Contractual Obligations
During the third quarter and first nine months of 2007, our contractual obligations have not
changed materially from those discussed in our Annual Report on Form 10-K for the year ended
December 31, 2006.
III. RESULTS OF OPERATIONS UNDERWRITING
A. Growth
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(millions) |
|
THREE MONTHS ENDED |
|
|
NINE MONTHS ENDED |
|
|
|
SEPTEMBER 30, |
|
|
SEPTEMBER 30, |
|
|
|
2007 |
|
|
2006 |
|
|
% Change |
|
|
2007 |
|
|
2006 |
|
|
% Change |
|
NET PREMIUMS WRITTEN |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personal Lines |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency |
|
$ |
1,908.1 |
|
|
$ |
1,990.2 |
|
|
|
(4 |
) |
|
$ |
5,860.5 |
|
|
$ |
6,075.8 |
|
|
|
(4 |
) |
Direct |
|
|
1,131.8 |
|
|
|
1,127.8 |
|
|
|
|
|
|
|
3,375.9 |
|
|
|
3,362.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Personal Lines |
|
|
3,039.9 |
|
|
|
3,118.0 |
|
|
|
(3 |
) |
|
|
9,236.4 |
|
|
|
9,438.0 |
|
|
|
(2 |
) |
Commercial Auto |
|
|
437.0 |
|
|
|
457.5 |
|
|
|
(4 |
) |
|
|
1,435.0 |
|
|
|
1,480.1 |
|
|
|
(3 |
) |
Other indemnity |
|
|
6.3 |
|
|
|
6.0 |
|
|
|
5 |
|
|
|
17.2 |
|
|
|
19.7 |
|
|
|
(13 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total underwriting operations |
|
$ |
3,483.2 |
|
|
$ |
3,581.5 |
|
|
|
(3 |
) |
|
$ |
10,688.6 |
|
|
$ |
10,937.8 |
|
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET PREMIUMS EARNED |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personal Lines |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency |
|
$ |
1,900.5 |
|
|
$ |
1,973.0 |
|
|
|
(4 |
) |
|
$ |
5,772.3 |
|
|
$ |
5,956.9 |
|
|
|
(3 |
) |
Direct |
|
|
1,091.6 |
|
|
|
1,091.2 |
|
|
|
|
|
|
|
3,285.3 |
|
|
|
3,250.4 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Personal Lines |
|
|
2,992.1 |
|
|
|
3,064.2 |
|
|
|
(2 |
) |
|
|
9,057.6 |
|
|
|
9,207.3 |
|
|
|
(2 |
) |
Commercial Auto |
|
|
464.3 |
|
|
|
473.8 |
|
|
|
(2 |
) |
|
|
1,391.0 |
|
|
|
1,383.2 |
|
|
|
1 |
|
Other indemnity |
|
|
5.4 |
|
|
|
6.3 |
|
|
|
(14 |
) |
|
|
16.2 |
|
|
|
18.7 |
|
|
|
(13 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total underwriting operations |
|
$ |
3,461.8 |
|
|
$ |
3,544.3 |
|
|
|
(2 |
) |
|
$ |
10,464.8 |
|
|
$ |
10,609.2 |
|
|
|
(1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13
Net premiums written represent the premiums generated from policies written during the period less
any premiums ceded to reinsurers. Net premiums earned, which are a function of the premiums written
in the current and prior periods, are earned as revenue over the life of the policy using a daily
earnings convention. Policies in force, our preferred measure of growth, represents all policies
under which coverage is in effect as of the end of the period specified. As of September 30, our
policies in force were:
|
|
|
|
|
|
|
|
|
|
|
|
|
(thousands) |
|
2007 |
|
2006 |
|
% Change |
POLICIES IN FORCE |
|
|
|
|
|
|
|
|
|
|
|
|
Personal Lines |
|
|
|
|
|
|
|
|
|
|
|
|
Agency auto |
|
|
4,459.2 |
|
|
|
4,482.4 |
|
|
|
(1 |
) |
Direct auto |
|
|
2,571.9 |
|
|
|
2,418.7 |
|
|
|
6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total auto |
|
|
7,031.1 |
|
|
|
6,901.1 |
|
|
|
2 |
|
Special lines1 |
|
|
3,140.4 |
|
|
|
2,905.5 |
|
|
|
8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Personal Lines |
|
|
10,171.5 |
|
|
|
9,806.6 |
|
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Auto |
|
|
540.9 |
|
|
|
505.8 |
|
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
Includes insurance for motorcycles, recreational vehicles, mobile homes, watercraft,
snowmobiles and similar items, as well as a personal umbrella product. |
Our decline in written premiums for both the third quarter and first nine months of 2007 reflected
market conditions in which rates are stable or decreasing. Competitors actions, such as rate
cutting, increased advertising, higher commission payments to agents and brokers, and a relaxation
of underwriting standards, continue to have an impact on the marketplace. We are continuing to
focus on further developing the Progressive brand and will continue to work with our advertising agencies to identify compelling ways to help consumers understand what sets Progressive
apart.
To analyze growth, we review new policies, rate levels, and the retention characteristics of our
books of business. For the third quarter and first nine months of 2007, new business applications
increased 5% and 3%, respectively, in our Personal Lines Business, compared to decreases of 7% and
8%, respectively, for the same periods last year. We also generated increases in our renewal
business applications of 4% for the third quarter and 3% for the first nine months of 2007,
compared to increases of 6% and 8%, respectively, for the same periods in 2006. In our Commercial
Auto Business, new applications increased 6% and 2% for the third quarter and year-to-date 2007,
respectively, compared to a decrease of 1% in the third quarter 2006 and an increase of 4% for the
first nine months of 2006. Commercial Auto renewal business increased 5% for the third quarter and
6% for the first nine months of 2007, compared to increases of 3% and 5%, respectively, last year.
Recent rate reductions, coupled with shifts in the mix of business, contributed to a 4% decrease in
total auto written premium per policy for the nine months ended September 30, 2007, as compared to
the prior year period. We saw a slight increase in our written premium per policy on new personal
auto business as we ended the third quarter 2007, indicating that most of the rate decreases we
have taken are behind us. Our current pricing levels are
closely aligned with our profitability targets. As such, future rate actions will be driven by net
loss and expense trend projections which, at this time, we view as slightly positive.
Another important element affecting growth is customer retention. One measure of customer
retention is policy life expectancy, which is an estimate of the average length of time that a
policy will remain in force before cancellation or non-renewal. We have seen a lengthening in
policy life expectancy in all of our Direct and Agency private passenger auto tiers when compared
to year-end 2006. On a year-over-year basis, retention has lengthened in all of our Direct auto
tiers and in our standard through ultra-preferred Agency auto tiers. The policy life expectancy in
our Commercial Auto Business increased since both year-end and the end of the third quarter last
year. Realizing the importance that retention has on our ability to continue to grow profitably, we
continue to place increased emphasis on competitive pricing and other retention initiatives for our
current customers.
14
B. Profitability
Profitability for our underwriting operations is defined by pretax underwriting profit, which is
calculated as net premiums earned less losses and loss adjustment expenses, policy acquisition
costs and other underwriting expenses. We also use underwriting profit margin, which is
underwriting profit expressed as a percentage of net premiums earned, to analyze our results. For
the periods ended September 30, our underwriting profitability measures were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
|
Nine Months |
|
(millions) |
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
Underwriting |
|
|
Underwriting |
|
|
Underwriting |
|
|
Underwriting |
|
|
|
Profit (Loss) |
|
|
Profit (Loss) |
|
|
Profit (Loss) |
|
|
Profit (Loss) |
|
|
|
$ |
|
|
Margin |
|
|
$ |
|
|
Margin |
|
|
$ |
|
|
Margin |
|
|
$ |
|
|
Margin |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personal Lines |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Agency |
|
$ |
110.8 |
|
|
|
5.8 |
% |
|
$ |
223.7 |
|
|
|
11.3 |
% |
|
$ |
406.6 |
|
|
|
7.0 |
% |
|
$ |
723.1 |
|
|
|
12.1 |
% |
Direct |
|
|
67.9 |
|
|
|
6.2 |
|
|
|
142.6 |
|
|
|
13.1 |
|
|
|
284.4 |
|
|
|
8.7 |
|
|
|
439.2 |
|
|
|
13.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Personal Lines |
|
|
178.7 |
|
|
|
6.0 |
|
|
|
366.3 |
|
|
|
12.0 |
|
|
|
691.0 |
|
|
|
7.6 |
|
|
|
1,162.3 |
|
|
|
12.6 |
|
Commercial Auto |
|
|
38.1 |
|
|
|
8.2 |
|
|
|
85.8 |
|
|
|
18.1 |
|
|
|
161.0 |
|
|
|
11.6 |
|
|
|
278.2 |
|
|
|
20.1 |
|
Other indemnity1 |
|
|
1.0 |
|
|
NM |
|
|
(.9 |
) |
|
NM |
|
|
2.4 |
|
|
NM |
|
|
5.1 |
|
|
NM |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total underwriting
operations |
|
$ |
217.8 |
|
|
|
6.3 |
% |
|
$ |
451.2 |
|
|
|
12.7 |
% |
|
$ |
854.4 |
|
|
|
8.2 |
% |
|
$ |
1,445.6 |
|
|
|
13.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
Underwriting margins for our other indemnity businesses are not meaningful (NM) due to
the low level of premiums earned by, and the variability of losses in, such businesses. |
The decrease in underwriting profitability primarily reflects the impact of our recent rate
reductions, as well as the unfavorable prior accident year development in both the third quarter
and first nine months of 2007.
Further underwriting results for our Personal Lines Business, including its channel components, the
Commercial Auto Business and other indemnity businesses, were as follows (details discussed below):
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
THREE MONTHS ENDED |
|
NINE MONTHS ENDED |
|
|
SEPTEMBER 30, |
|
SEPTEMBER 30, |
|
|
2007 |
|
2006 |
|
Change |
|
2007 |
|
2006 |
|
Change |
UNDERWRITING PERFORMANCE |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personal Lines Agency |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss adjustment expense ratio |
|
|
73.0 |
|
|
|
68.2 |
|
|
4.8 pts. |
|
|
71.7 |
|
|
|
67.7 |
|
|
4.0 pts. |
Underwriting expense ratio |
|
|
21.2 |
|
|
|
20.5 |
|
|
.7 pts. |
|
|
21.3 |
|
|
|
20.2 |
|
|
1.1 pts. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio |
|
|
94.2 |
|
|
|
88.7 |
|
|
5.5 pts. |
|
|
93.0 |
|
|
|
87.9 |
|
|
5.1 pts. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Personal Lines Direct |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss adjustment expense ratio |
|
|
71.9 |
|
|
|
66.0 |
|
|
5.9 pts. |
|
|
70.2 |
|
|
|
66.3 |
|
|
3.9 pts. |
Underwriting expense ratio |
|
|
21.9 |
|
|
|
20.9 |
|
|
1.0 pts. |
|
|
21.1 |
|
|
|
20.2 |
|
|
.9 pts. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio |
|
|
93.8 |
|
|
|
86.9 |
|
|
6.9 pts. |
|
|
91.3 |
|
|
|
86.5 |
|
|
4.8 pts. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Personal Lines |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss adjustment expense ratio |
|
|
72.6 |
|
|
|
67.4 |
|
|
5.2 pts. |
|
|
71.2 |
|
|
|
67.2 |
|
|
4.0 pts. |
Underwriting expense ratio |
|
|
21.4 |
|
|
|
20.6 |
|
|
.8 pts. |
|
|
21.2 |
|
|
|
20.2 |
|
|
1.0 pts. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio |
|
|
94.0 |
|
|
|
88.0 |
|
|
6.0 pts. |
|
|
92.4 |
|
|
|
87.4 |
|
|
5.0 pts. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial Auto |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss adjustment expense ratio |
|
|
72.3 |
|
|
|
62.7 |
|
|
9.6 pts. |
|
|
68.1 |
|
|
|
60.8 |
|
|
7.3 pts. |
Underwriting expense ratio |
|
|
19.5 |
|
|
|
19.2 |
|
|
.3 pts. |
|
|
20.3 |
|
|
|
19.1 |
|
|
1.2 pts. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio |
|
|
91.8 |
|
|
|
81.9 |
|
|
9.9 pts. |
|
|
88.4 |
|
|
|
79.9 |
|
|
8.5 pts. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Underwriting Operations1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss and loss adjustment expense ratio |
|
|
72.5 |
|
|
|
66.8 |
|
|
5.7 pts. |
|
|
70.7 |
|
|
|
66.3 |
|
|
4.4 pts. |
Underwriting expense ratio |
|
|
21.2 |
|
|
|
20.5 |
|
|
.7 pts. |
|
|
21.1 |
|
|
|
20.1 |
|
|
1.0 pts. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Combined ratio |
|
|
93.7 |
|
|
|
87.3 |
|
|
6.4 pts. |
|
|
91.8 |
|
|
|
86.4 |
|
|
5.4 pts. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accident year Loss and loss
adjustment
expense ratio |
|
|
72.0 |
|
|
|
68.8 |
|
|
3.2 pts. |
|
|
70.1 |
|
|
|
68.6 |
|
|
1.5 pts. |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
Combined ratios for the other indemnity businesses are not presented separately
due to the low level of premiums earned by, and the variability of losses in, such businesses.
These businesses generated an underwriting profit (loss) of $1.0 million and $(.9) million for the
three months ended September 30, 2007 and 2006, respectively, and $2.4 million and $5.1 million for
the nine months ended September 30, 2007 and 2006, respectively. |
15
Losses and Loss Adjustment Expenses (LAE)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(millions) |
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
Change in net loss and LAE reserves |
|
$ |
92.5 |
|
|
$ |
37.0 |
|
|
$ |
247.4 |
|
|
$ |
82.3 |
|
Paid losses and LAE |
|
|
2,416.6 |
|
|
|
2,330.7 |
|
|
|
7,150.6 |
|
|
|
6,952.4 |
|
|
|
|
|
|
Total incurred losses and LAE |
|
$ |
2,509.1 |
|
|
$ |
2,367.7 |
|
|
$ |
7,398.0 |
|
|
$ |
7,034.7 |
|
|
|
|
|
|
Claims costs, our most significant expense, represent payments made, and estimated future payments
to be made, to or on behalf of our policyholders, including expenses needed to adjust or settle
claims. These costs include an estimate for costs related to assignments, based on current
business, under state-mandated automobile insurance programs. Claims costs are defined by loss
severity and frequency and are influenced by inflation and driving patterns, among other factors.
Accordingly, estimated changes in these factors are taken into account when we establish premium
rates and loss reserves. Results would differ if different assumptions were made.
We experienced an increase in total auto paid severity of about 2% for the third quarter 2007 and
approximately 3.5% for the trailing 12-month period, compared to the same periods last year. The
increase was primarily in our bodily injury and personal injury protection coverages, while we have
seen a decrease in severity for collision.
Auto accident frequency was relatively flat in both the third quarter 2007 and the trailing
12-month period ending September 30, 2007, as compared to the same periods last year. Although
frequency for the trailing 12 months is less than the prior year periods, the rate of change is
below that experienced in the prior two years. We cannot predict the degree or direction of
frequency change that we will experience in the future. We continue to analyze trends to
distinguish changes in our experience from external factors versus those resulting from shifts in
the mix of our business.
The table below presents the actuarial adjustments implemented and the loss reserve development
experienced in the following periods:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(millions) |
|
Three Months Ended |
|
|
Nine Months Ended |
|
|
|
September 30, |
|
|
September 30, |
|
|
|
2007 |
|
|
2006 |
|
|
2007 |
|
|
2006 |
|
ACTUARIAL ADJUSTMENTS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Favorable/(Unfavorable) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prior accident years |
|
$ |
(.8 |
) |
|
$ |
28.3 |
|
|
$ |
32.9 |
|
|
$ |
123.0 |
|
Current accident year |
|
|
(4.1 |
) |
|
|
11.6 |
|
|
|
(6.3 |
) |
|
|
33.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Calendar year actuarial adjustment |
|
$ |
(4.9 |
) |
|
$ |
39.9 |
|
|
$ |
26.6 |
|
|
$ |
156.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
PRIOR ACCIDENT YEARS DEVELOPMENT |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Favorable/(Unfavorable) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actuarial adjustment |
|
$ |
(.8 |
) |
|
$ |
28.3 |
|
|
$ |
32.9 |
|
|
$ |
123.0 |
|
All other development |
|
|
(17.8 |
) |
|
|
41.0 |
|
|
|
(92.3 |
) |
|
|
118.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total development |
|
$ |
(18.6 |
) |
|
$ |
69.3 |
|
|
$ |
(59.4 |
) |
|
$ |
241.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Increase) decrease to
calendar year combined ratio |
|
(.5) pts. |
|
2.0 pts. |
|
(.6) pts. |
|
2.3 pts. |
|
|
|
|
|
|
|
|
|
|
|
|
|
16
Total development consists both of actuarial adjustments and all other development. The actuarial
adjustments represent the net changes made by our actuarial department to both current and prior
accident year reserves based on regularly scheduled reviews. All other development represents
claims settling for more or less than reserved, emergence of unrecorded claims at rates different
than reserved and changes in reserve estimates on specific claims. Although we believe that the
development from both the actuarial adjustments and all other development generally results from
the same factors, as discussed below, we are unable to quantify the portion of the reserve
adjustments that might be applicable to any one or more of those underlying factors.
As reflected in the table above, we experienced unfavorable total development through the first
nine months of 2007, compared to favorable development in the same period last year. The 2007
development primarily reflects unfavorable development from accident years greater than one year
old (i.e., accident year 2005 and prior) as discussed below. The total prior accident years loss
reserve development experienced in the nine month period ended September 30, 2007, which increased
the reported combined ratio by .6 points, had no effect on our total Personal Lines Business, but
was unfavorable in our Commercial Auto Business (both the specialty truck and light and local
products). The unfavorable Commercial Auto development in 2007 primarily reflected a higher than
expected number of large case reserve changes associated with prior accident years, as well as an
increase in the number and severity of late reported claims in excess of our original estimate.
Changes in our estimate of severity, from what we originally expected when establishing the
reserves to what we are observing in the data as it develops, is the principal cause of prior
accident year development. In the first nine months of 2007, we experienced unfavorable reserve
development after several years of recognizing favorable development. The unfavorable development
in 2007 was driven by the settlement of several pending lawsuits, the emergence of higher than
expected losses from prior years and reviews of larger bodily injury severity and uninsured
motorist exposures.
In 2006, we saw severity estimates develop more favorably than what was originally expected when
reserves were set. Although we were unable to quantify the contribution of each factor to the
overall favorable reserve development, we believe that the favorable changes in these estimates
were related to factors as diverse as improved vehicle safety, more conservative jury awards,
better fraud control and tenure of our claims personnel.
Our analysis of the current situation and historical trends leads us to believe that cost increases
will be more directly related to things such as medical costs and litigation settlements. We are
seeing severity trend reach historically more normal levels. We continue to focus on our loss
reserve analysis, attempting to enhance accuracy and to further our understanding of our loss
costs. A detailed discussion of our loss reserving practices can be found in our Report on Loss
Reserving Practices, which was filed in a Form 8-K on June 28, 2007.
Underwriting Expenses
Our companywide underwriting expense ratio increased .7 points and 1.0 points for the third quarter
and first nine months of 2007, respectively, as compared to the same periods last year. The
increase primarily reflects lower earned premium due to recent rate reductions, increases in our
infrastructure costs (salaries, benefits and information technology) and an increase in advertising
expenditures, primarily in our Direct channel.
17
C. Personal Lines
Progressives Personal Lines Business writes insurance for private passenger automobiles and
recreational vehicles, and represented approximately 87% of both our third quarter and year-to-date
2007 and 2006 net premiums written. Private passenger auto represented approximately 90% of our
total Personal Lines net premiums written in the third quarter and first nine months of both 2007
and 2006, with the special lines products (e.g., motorcycles, watercraft and RVs) making up the
balance. Net premiums written for private passenger auto decreased 3% for both the third quarter
and first nine months of 2007, while net premiums written in special lines increased 5% for both
the same periods. Policies in force grew 2% in auto and 8% in special lines from September 30, 2006
to September 30, 2007.
Total Personal Lines generated combined ratios of 94.0 and 92.4 for the third quarter and first
nine months of 2007, respectively, compared to 88.0 and 87.4 for the same periods last year,
reflecting our recent rate reductions. Since the special lines products are normally used more in
the warmer weather months, we typically experience higher loss costs during those periods. As such,
for the third quarter 2007, the special lines results had an unfavorable effect on the total
Personal Lines combined ratio of about 1 point, but had a lesser unfavorable effect in the third
quarter last year. We believe the greater impact this year was partially due to milder weather in
September 2007 in the northeastern and midwestern part of the United States. For the first nine
months of both 2007 and 2006, the special lines results had a favorable impact of about .5 points
on the total Personal Lines combined ratio.
The Agency Business
The Agency business includes business written by the more than 30,000 independent insurance
agencies that represent Progressive, as well as brokerages in New York and California. New business
auto applications for the Agency business increased slightly for both the third quarter and first
nine months of 2007, as compared to the same periods last year; renewal applications were
relatively flat for both periods. By quarter end, we saw new Agency auto application growth in 29
states, including Texas and Florida, two of our larger volume states. On the other hand, some of
our other big states have not yet seen this growth, thus hindering our overall Agency auto growth.
Written premium per policy on total Agency auto business was down about 5% on a
quarter-over-prior-year quarter basis and down 4% over last year on a year-to-date basis, driven by
a decrease of written premium per policy in both new and renewal auto business.
For the third quarter and first nine months of 2007, the rate of conversion (i.e., converting a
quote to a sale) was down on a significant increase in the number of auto quotes. Within the Agency
business, we are continuing to see a shift from traditional agent quoting, where the conversion
rate is remaining stable, to quotes generated through third-party comparative rating systems, where
the conversion rate is lower. Agency auto policies in force decreased 1% as compared to September
30, 2006. Retention increased in each of the Agency auto risk tiers when compared to year-end 2006
and was up in the standard through ultra-preferred tiers when compared to the end of the third
quarter 2006.
The Direct Business
The Direct business includes business written directly by Progressive online and over the phone.
For the third quarter and first nine months of 2007, the Direct business experienced a solid
increase in both new and renewal auto applications. As in Agency auto, Texas and Florida, along
with 36 other states, saw an increase in new applications by quarter end. For the same periods,
there were decreases in written premium per policy for both new and renewal business; total Direct
auto written premium per policy was down about 7% on a quarter-over-prior-year quarter basis and
down 6% on a year-over-year basis.
For both the third quarter and the first nine months of 2007, the overall Direct business
conversion rate increased while the number of total quotes decreased. Although the rate of
conversion increased on both
18
Internet-initiated and phone-initiated business, the rate of change was greater for Internet than
for phones. Policies in force increased 6% as of the end of the third quarter 2007, compared to the
same period last year. Direct auto has seen an increase in retention in each tier for the third
quarter when compared to year-end 2006 and the end of the third quarter 2006.
D. Commercial Auto
Progressives Commercial Auto Business writes primary liability and physical damage insurance for
automobiles and trucks owned by small businesses, with the majority of our customers insuring three
or fewer vehicles. For both the third quarter and first nine months of 2007 and 2006, the
Commercial Auto Business represented approximately 13% of our total net premiums written. The
Commercial Auto Business, which is distributed through both the independent agency and direct
channels, operates in the specialty truck and light and local commercial auto markets. The
specialty truck commercial auto market, which accounts for slightly more than half of the total
Commercial Auto premiums and approximately 40% of the vehicles we insure in this business, includes
dump trucks, logging trucks, tow trucks, local cartage and other short-haul commercial vehicles.
The remainder is in the light and local commercial auto market, which includes autos, vans and
pick-up trucks used by artisans, such as contractors, landscapers and plumbers, and a variety of
other small businesses.
Policies in force for the Commercial Auto Business increased 7% as of September 30, 2007, as
compared to the same period last year. New business applications increased modestly for the third
quarter 2007 and increased to a lesser extent year-to-date, while renewal applications increased
modestly for both periods, as compared to the same periods last year. In January 2007, we entered
Massachusetts with our Commercial Auto product, bringing the total number of states in which we
write Commercial Auto insurance to 49; we do not currently write Commercial Auto in Hawaii. Written
premium per policy in both our new and renewal businesses experienced decreases for the third
quarter and the first nine months of 2007; total Commercial Auto written premium per policy was
down about 8% on a quarter-over-prior-year quarter basis and 5% year-over-year. Retention measures
in each tier have increased since both year-end 2006 and the end of the third quarter 2006.
Although Commercial Auto differs from Personal Lines auto in its customer base and products
written, both businesses require the same fundamental skills, including disciplined underwriting
and pricing, as well as excellent claims service. Since the Commercial Auto policies have higher
limits (up to $1 million) than Personal Lines auto, we analyze the large loss trends and reserving
in more detail to allow us to react quickly to changes in this exposure.
E. Other Indemnity
Progressives other indemnity businesses, which represented less than 1% of our year-to-date net
premiums earned as of September 30, 2007, primarily include writing professional liability
insurance for community banks and our run-off businesses. The underwriting profit (loss) in these
businesses may fluctuate widely due to the low premium volume, variability in losses, and the
run-off nature of some of these products.
19
F. Service Businesses
Our service businesses include providing insurance-related services. Our principal service business
is providing policy issuance and claims adjusting services for the Commercial Auto Insurance
Procedures/Plans (CAIP), which are state-supervised plans serving the involuntary market. These
service businesses represent less than 1% of our year-to-date revenues. The significant decrease in
service business revenues reflects the continuing cyclical downturn in the involuntary commercial
auto market.
G. Income Taxes
Income taxes are comprised of net income taxes payable and net deferred tax assets and liabilities.
A deferred tax asset/liability is a tax benefit/expense that will be realized in a future tax
return. Progressives income tax position was a net liability at September 30, 2007, compared to a
net asset at both September 30, 2006 and December 31, 2006. The movement in the income tax balance
from September 30, 2006 and December 31, 2006, primarily reflects larger unrealized gains in our
investment portfolios, which increased the deferred tax liability.
20
IV. RESULTS OF OPERATIONS INVESTMENTS
A. Portfolio Allocation
The composition of the investment portfolio at September 30 was:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions) |
|
|
|
|
|
% of |
|
|
|
|
|
|
Fair |
|
Total |
|
Duration |
|
|
|
|
Value |
|
Portfolio |
|
(Years) |
|
Rating1 |
|
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-income securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
$ |
9,677.1 |
|
|
|
65.3 |
% |
|
|
4.0 |
|
|
AA+ |
Preferred stocks |
|
|
2,312.9 |
|
|
|
15.6 |
|
|
|
1.6 |
|
|
|
A- |
|
Short-term investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auction rate municipal obligations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auction rate preferred stocks |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other short-term investments |
|
|
374.1 |
|
|
|
2.5 |
|
|
|
<1 |
|
|
AA- |
|
|
|
|
|
|
|
|
|
|
|
Total short-term investments |
|
|
374.1 |
|
|
|
2.5 |
|
|
|
<1 |
|
|
AA- |
|
|
|
|
|
|
|
|
|
|
|
Total fixed-income
securities |
|
|
12,364.1 |
|
|
|
83.4 |
|
|
|
3.4 |
|
|
AA |
Common equities |
|
|
2,453.1 |
|
|
|
16.6 |
|
|
na |
|
na |
|
|
|
|
|
|
|
|
|
|
|
Total portfolio2,3 |
|
$ |
14,817.2 |
|
|
|
100.0 |
% |
|
|
3.4 |
|
|
AA |
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-income securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
$ |
10,044.3 |
|
|
|
67.7 |
% |
|
|
3.7 |
|
|
AA+ |
Preferred stocks |
|
|
1,535.4 |
|
|
|
10.3 |
|
|
|
1.6 |
|
|
|
A- |
|
Short-term investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auction rate municipal obligations |
|
|
199.4 |
|
|
|
1.3 |
|
|
|
<1 |
|
|
AAA- |
Auction rate preferred stocks |
|
|
173.9 |
|
|
|
1.2 |
|
|
|
<1 |
|
|
|
A+ |
|
Other short-term investments |
|
|
684.6 |
|
|
|
4.6 |
|
|
|
<1 |
|
|
|
A+ |
|
|
|
|
|
|
|
|
|
|
|
|
Total short-term investments |
|
|
1,057.9 |
|
|
|
7.1 |
|
|
|
<1 |
|
|
AA- |
|
|
|
|
|
|
|
|
|
|
|
Total fixed-income securities |
|
|
12,637.6 |
|
|
|
85.1 |
|
|
|
3.1 |
|
|
AA |
Common equities |
|
|
2,215.9 |
|
|
|
14.9 |
|
|
na |
|
na |
|
|
|
|
|
|
|
|
|
|
|
Total portfolio2,3 |
|
$ |
14,853.5 |
|
|
|
100.0 |
% |
|
|
3.1 |
|
|
AA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
na = not applicable |
|
1 |
|
Credit quality ratings are assigned by nationally recognized securities rating
organizations. To calculate the weighted average credit quality ratings, we weight individual
securities based on market value and assign a numeric score to each credit rating based on a scale
from 0-5. |
|
2 |
|
Includes net unsettled security acquisitions of $136.5 million and $88.0 million at
September 30, 2007 and 2006, respectively. |
|
3 |
|
September 30, 2007 and 2006 totals include $1.9 billion and $2.1 billion,
respectively, of securities in the portfolio of a consolidated, non-insurance subsidiary of the
holding company. |
Unrealized Gains and Losses
As of September 30, 2007, our portfolio had $1,034.7 million of net unrealized gains, recorded as
part of accumulated other comprehensive income, compared to $800.6 million at September 30, 2006
and $918.2 million at December 31, 2006. During the third quarter 2007, the total portfolios
unrealized gain position increased by $83.7 million resulting from an increase of $55.6 million in
the fixed-income portfolio, due to a decrease in interest rates during the quarter, and an increase
in the common stock portfolio of $28.1 million, reflecting movement in the market. See Note 2
Investments for a further break-out of our gross unrealized gains and losses.
21
Fixed-Income Securities
The fixed-income portfolio, which includes fixed-maturity securities, short-term investments and
preferred stocks, had a duration of 3.4 years at September 30, 2007, compared to 3.1 years at both
December 31, 2006, and September 30, 2006. The fixed-maturity securities and short-term
securities, as reported in the balance sheets, were comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions) |
|
September 30, 2007 |
|
September 30, 2006 |
|
|
|
|
|
Investment-grade fixed maturities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Short/intermediate term |
|
$ |
9,598.9 |
|
|
|
95.5 |
% |
|
$ |
10,867.5 |
|
|
|
97.9 |
% |
Long term1 |
|
|
109.3 |
|
|
|
1.1 |
|
|
|
36.7 |
|
|
|
.3 |
|
Non-investment-grade fixed maturities2 |
|
|
343.0 |
|
|
|
3.4 |
|
|
|
198.0 |
|
|
|
1.8 |
|
|
|
|
|
|
Total |
|
$ |
10,051.2 |
|
|
|
100.0 |
% |
|
$ |
11,102.2 |
|
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
1 |
|
Long term includes securities with expected liquidation dates of 10 years or greater.
Asset-backed securities are reported at their weighted average maturity based upon their projected
cash flows. All other securities that do not have a single expected maturity date are reported at
their average maturity. |
|
2 |
|
These securities are non-rated or have a quality rating of BB+ or lower. |
Included in the fixed-income portfolio are asset-backed securities, which were comprised of the
following at September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions) |
|
|
|
|
|
% of Asset-Backed |
|
|
Duration |
|
|
|
|
|
Fair Value |
|
|
Securities |
|
|
(years) |
|
|
Rating |
|
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized mortgage obligations1 |
|
$ |
731.1 |
|
|
|
27.7 |
% |
|
|
1.4 |
|
|
AAA- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial mortgage-backed obligations |
|
|
921.5 |
|
|
|
34.9 |
|
|
|
2.8 |
|
|
AA |
Commercial mortgage-backed obligations: interest-only |
|
|
824.9 |
|
|
|
31.2 |
|
|
|
1.9 |
|
|
AAA- |
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal commercial mortgage-backed
obligations |
|
|
1,746.4 |
|
|
|
66.1 |
|
|
|
2.4 |
|
|
AA+ |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other asset-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automobile |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Home equity2 |
|
|
79.3 |
|
|
|
3.0 |
|
|
|
.1 |
|
|
A+ |
Other |
|
|
83.0 |
|
|
|
3.2 |
|
|
|
1.2 |
|
|
A |
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal other asset-backed securities |
|
|
162.3 |
|
|
|
6.2 |
|
|
|
.7 |
|
|
A+ |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total asset-backed securities |
|
$ |
2,639.8 |
|
|
|
100.0 |
% |
|
|
2.0 |
|
|
AA+ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Collateralized mortgage obligations1 |
|
$ |
493.5 |
|
|
|
23.3 |
% |
|
|
1.9 |
|
|
AAA |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Commercial mortgage-backed obligations |
|
|
703.7 |
|
|
|
33.3 |
|
|
|
3.4 |
|
|
AAA- |
Commercial mortgage-backed obligations: interest-only |
|
|
767.3 |
|
|
|
36.3 |
|
|
|
2.2 |
|
|
AAA- |
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal commercial mortgage-backed
obligations |
|
|
1,471.0 |
|
|
|
69.6 |
|
|
|
2.7 |
|
|
AAA- |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other asset-backed securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automobile |
|
|
.4 |
|
|
|
|
|
|
|
.1 |
|
|
AAA |
Home equity2 |
|
|
43.7 |
|
|
|
2.1 |
|
|
|
.4 |
|
|
AAA |
Other |
|
|
105.1 |
|
|
|
5.0 |
|
|
|
1.0 |
|
|
A+ |
|
|
|
|
|
|
|
|
|
|
|
|
|
Subtotal other asset-backed securities |
|
|
149.2 |
|
|
|
7.1 |
|
|
|
.9 |
|
|
AA- |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total asset-backed securities |
|
$ |
2,113.7 |
|
|
|
100.0 |
% |
|
|
2.4 |
|
|
AAA- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1 |
|
Includes $54.5 million of Alt-A, non-prime bonds (low document/no document or
non-conforming prime loans) with a net unrealized loss of $.3 million and a credit quality of AAA
for 2007; 2006 includes $68.9 million of Alt-A with a net unrealized loss of $.3 million and a
credit quality of AAA. |
|
2 |
|
Represents sub-prime bonds with a net unrealized gain of $3.6 million for 2007 and a
net unrealized loss of $.3 million for 2006; these bonds are unrelated to the asset-backed
derivative position discussed below. |
22
Common Equities
Common equities, as reported in the balance sheets, were comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
($ in millions) |
|
September 30, 2007 |
|
September 30, 2006 |
|
|
|
|
|
Common stocks |
|
$ |
2,438.7 |
|
|
|
99.4 |
% |
|
$ |
2,200.7 |
|
|
|
99.3 |
% |
Other risk investments |
|
|
14.4 |
|
|
|
.6 |
|
|
|
15.2 |
|
|
|
.7 |
|
|
|
|
|
|
Total common equities |
|
$ |
2,453.1 |
|
|
|
100.0 |
% |
|
$ |
2,215.9 |
|
|
|
100.0 |
% |
|
|
|
|
|
Common stocks are managed externally to track the Russell 1000 Index with an anticipated annual
tracking error of +/- 50 basis points. To maintain high correlation with the Russell 1000, we held
657 out of 1,013, or approximately 65%, of the common stocks comprising the index at September 30,
2007. Our individual holdings are selected based on their contribution to the correlation with the
index. Our common equity allocation and management strategy are intended to provide
diversification for the total portfolio and focus on changes in value of the equity portfolio
relative to the change in value of the index on an annual basis. For the first nine months of 2007
and 2006, the GAAP basis total return (not fully taxable equivalent adjusted) was within the
designated tracking error.
Other risk investments include private equity investments and limited partnership interests in
private equity and mezzanine investment funds, which have no off-balance-sheet exposure or
contingent obligations, except for $.2 million of open funding commitments at September 30, 2007.
Trading Securities
Trading securities may be entered into from time to time for the purpose of near-term profit
generation. We have not entered into any trading securities during the last two years.
Derivative Instruments
From time to time, we invest in derivative instruments. At September 30, 2007, we held interest
rate swaps on 5-year and 10-year Treasury Notes, with a combined notional value of $1 billion, to
extend the investment portfolios overall duration. For the third quarter and first nine months of
2007, the interest rate swap positions generated holding period realized gains of $19.9 million and
$18.7 million, respectively. Total net realized gains, including net interest expense, were $19.7
million and $18.5 million for the third quarter and year-to-date 2007. We had no interest rate
swaps during 2006.
During the third quarter 2007, we bought credit default protection using a credit default swap
derivative on a corporate non-investment-grade index, with a notional amount of $75 million.
During the third quarter 2007, we also closed $135 million of notional credit default exposure on a
corporate non-investment-grade index and $40 million notional exposure on a corporate
investment-grade index. For the third quarter and first nine months of 2007, the open and closed
derivative positions generated net realized gains of $2.3 million ($.6 million on the open
positions and $1.7 million on the closed positions) and $8.8 million ($.6 million open and $8.2
million closed), respectively. We had no corporate investment- or non-investment-grade index
derivatives during 2006.
Additionally, during the second and third quarters of 2007, we sold credit default protection using
credit default swap derivatives on an investment-grade asset-backed index with a credit quality of
BBB-, comprised of approximately 20 home equity bonds in the sub-prime sector, with a notional
amount of $140 million. We matched these notional amounts with Treasury Notes with the same
maturity and principal value to cover our off-balance-sheet exposure. We received upfront cash
payments of $43.3 million on these open swap positions, effectively reducing our maximum exposure
of loss to $96.7 million. During 2006, we sold credit protection in the form of credit default
swaps on three separate corporate issuers with a notional amount of $100 million, also matched with
equivalent Treasury Notes; these derivatives positions were closed by year-end 2006.
23
Following is a summary of our net realized gains (losses) on the credit default protection we sold
using credit default swaps and matched with Treasury Notes for the periods ended September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(millions) |
|
Three Months |
|
Nine Months |
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
|
|
|
|
Credit default swap |
|
$ |
(23.9 |
) |
|
$ |
1.5 |
|
|
$ |
(22.5 |
) |
|
$ |
10.0 |
|
Treasury Notes |
|
|
3.3 |
|
|
|
.5 |
|
|
|
3.4 |
|
|
|
|
|
|
|
|
|
|
Combined gain (loss) |
|
$ |
(20.6 |
) |
|
$ |
2.0 |
|
|
$ |
(19.1 |
) |
|
$ |
10.0 |
|
|
|
|
|
|
For all of the derivative positions discussed above, realized holding period gains and losses are
netted with any upfront cash that may be exchanged under the contract to determine if the net
position should be classified either as an asset or a liability. To be reported as a component of
the available-for-sale portfolio, the realized gain on the derivative position at period end would
have to exceed any upfront cash received (net derivative asset). On the other hand, a net
derivative liability would reflect realized losses plus the amount of upfront cash received (or
netted if upfront cash was paid) and would be reported as a component of other liabilities. These
net derivative assets/liabilities are not separately disclosed on the balance sheet due to the
immaterial effect on our financial condition, cash flows and results of operations.
In addition, during the second quarter 2007, we entered into a forecasted debt issuance hedge
against a possible rise in interest rates in anticipation of issuing our $1 billion of 6.70%
Fixed-to-Floating Rate Junior Subordinated Debentures due 2067 (the Debentures). The hedge was
designated as and qualified for hedge accounting treatment as a cash flow hedge under current
accounting guidance. Upon issuance of the Debentures, the hedge was closed, and we recognized a
pretax gain of $34.4 million, which is recorded as part of accumulated other comprehensive income.
The $34.4 million gain is deferred and is being recognized as an adjustment to interest expense over the
10-year fixed interest rate term of the Debentures.
B. Investment Results
Recurring investment income (interest and dividends, before investment and interest expense)
increased 8% for the third quarter of 2007, primarily related to higher average assets due to the
issuance of the $1 billion Debentures late in the second quarter 2007, which securities were held
until the payment of the special dividend in mid-September. For the first nine months of 2007, the
increase was 6%, primarily the result of higher yields, with the remainder the result of modestly
higher average assets.
We report total return to reflect more accurately the management philosophy governing the portfolio
and our evaluation of investment results. The fully taxable equivalent (FTE) total return includes
recurring investment income, net realized gains (losses) on securities and changes in unrealized
gains (losses) on securities. We generated the following investment results for the periods ended
September 30:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months |
|
Nine Months |
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
Pretax recurring investment book yield |
|
|
4.9 |
% |
|
|
4.8 |
% |
|
|
4.8 |
% |
|
|
4.6 |
% |
Weighted average FTE book yield |
|
|
5.7 |
% |
|
|
5.5 |
% |
|
|
5.6 |
% |
|
|
5.3 |
% |
FTE total return: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-income securities |
|
|
2.3 |
% |
|
|
3.4 |
% |
|
|
4.5 |
% |
|
|
4.5 |
% |
Common stocks |
|
|
2.1 |
% |
|
|
5.1 |
% |
|
|
9.8 |
% |
|
|
8.7 |
% |
Total portfolio |
|
|
2.3 |
% |
|
|
3.6 |
% |
|
|
5.3 |
% |
|
|
5.1 |
% |
24
Realized Gains and Losses
The components of net realized gains (losses) for the periods ended September 30 were:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(millions) |
|
Three Months |
|
Nine Months |
|
|
2007 |
|
2006 |
|
2007 |
|
2006 |
|
|
|
|
|
Gross realized gains: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
$ |
67.6 |
|
|
$ |
13.9 |
|
|
$ |
91.7 |
|
|
$ |
19.2 |
|
Preferred stocks |
|
|
|
|
|
|
.3 |
|
|
|
3.4 |
|
|
|
.3 |
|
Common equities |
|
|
13.9 |
|
|
|
1.7 |
|
|
|
32.1 |
|
|
|
21.0 |
|
Short-term investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auction rate municipal obligations |
|
|
|
|
|
|
|
|
|
|
.1 |
|
|
|
.1 |
|
Auction rate preferred stocks |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other short-term investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives1 |
|
|
22.0 |
|
|
|
2.0 |
|
|
|
27.3 |
|
|
|
10.0 |
|
|
|
|
|
|
|
|
|
103.5 |
|
|
|
17.9 |
|
|
|
154.6 |
|
|
|
50.6 |
|
|
|
|
|
|
Gross realized losses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
|
6.2 |
|
|
|
11.4 |
|
|
|
21.0 |
|
|
|
57.9 |
|
Preferred stocks |
|
|
9.9 |
|
|
|
4.1 |
|
|
|
23.1 |
|
|
|
7.3 |
|
Common equities |
|
|
8.3 |
|
|
|
|
|
|
|
16.2 |
|
|
|
9.4 |
|
Short-term investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auction rate municipal obligations |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
.1 |
|
Auction rate preferred stocks |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
.1 |
|
Other short-term investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives1 |
|
|
20.6 |
|
|
|
|
|
|
|
19.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
45.0 |
|
|
|
15.5 |
|
|
|
79.4 |
|
|
|
74.8 |
|
|
|
|
|
|
Net realized gains (losses) on securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed maturities |
|
|
61.4 |
|
|
|
2.5 |
|
|
|
70.7 |
|
|
|
(38.7 |
) |
Preferred stocks |
|
|
(9.9 |
) |
|
|
(3.8 |
) |
|
|
(19.7 |
) |
|
|
(7.0 |
) |
Common equities |
|
|
5.6 |
|
|
|
1.7 |
|
|
|
15.9 |
|
|
|
11.6 |
|
Short-term investments: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Auction rate municipal obligations |
|
|
|
|
|
|
|
|
|
|
.1 |
|
|
|
|
|
Auction rate preferred stocks |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(.1 |
) |
Other short-term investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivatives1 |
|
|
1.4 |
|
|
|
2.0 |
|
|
|
8.2 |
|
|
|
10.0 |
|
|
|
|
|
|
|
|
$ |
58.5 |
|
|
$ |
2.4 |
|
|
$ |
75.2 |
|
|
$ |
(24.2 |
) |
|
|
|
|
|
Per share (diluted basis) |
|
$ |
.05 |
|
|
$ |
|
|
|
$ |
.07 |
|
|
$ |
(.02 |
) |
|
|
|
|
|
|
|
|
1 |
|
Includes the effect of the Treasury Notes that were matched with the swaps, where
applicable. |
Gross realized gains and losses were the result of customary investment sales transactions in our
fixed-income portfolio, affected by movements in credit spreads and interest rates, as well as the
rebalancing of our equity-indexed portfolio. In addition, for the three months ended September 30,
2007, gains and losses also reflect the sales of securities to fund the $1.4 billion extraordinary
dividend payment.
Gross realized losses include write-downs for securities determined to be other-than-temporarily
impaired in our fixed-income and/or equity portfolios. As of September 30, 2007, gross realized
losses also included $3.0 million of losses related to certain hybrid securities reported at fair
value.
OTHER-THAN-TEMPORARY IMPAIRMENT (OTI)
Realized losses may include write-downs of securities determined to have had an
other-than-temporary decline in market value. We routinely monitor our portfolio for pricing
changes that might indicate potential impairments, and perform detailed reviews of securities with
unrealized losses based on predetermined criteria. In such cases, changes in fair value are
evaluated to determine the extent to which such changes are attributable to (i) fundamental factors
specific to the issuer, such as financial conditions, business prospects or other factors, or (ii)
market-related factors, such as interest rates or equity market declines.
25
Fixed-income and equity securities with declines attributable to issuer-specific fundamentals are
reviewed to identify all available evidence, circumstances and influences to estimate the potential
for, and timing of, recovery of the investments impairment. An other-than-temporary impairment
loss is deemed to have occurred when the potential for, and timing of, recovery does not satisfy
the criteria set forth in the current accounting guidance.
For fixed-income investments with unrealized losses due to market or industry-related declines
where we have the intent and ability to hold the investment for the period of time necessary to
recover a significant portion of the investments impairment and collect the interest obligation,
declines are not deemed to qualify as other than temporary. Our policy for common stocks with
market-related declines is to recognize impairment losses on individual securities with losses that
are not reasonably expected to be recovered under historical market conditions when the security
has been in such a loss position for three consecutive quarters.
When a security in our investment portfolio has an unrealized loss in fair value that is deemed to
be other than temporary, we reduce the book value of such security to its current market value,
recognizing the decline as a realized loss in the income statement. All other unrealized gains or
losses are reflected in shareholders equity. The write-down activity for the periods ended
September 30 was as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(millions) |
|
Three Months |
|
Nine Months |
|
|
|
|
|
|
Write- |
|
Write-downs |
|
|
|
|
|
Write- |
|
Write-downs |
|
|
|
|
|
|
downs |
|
On |
|
|
|
|
|
downs |
|
On |
|
|
Total |
|
On |
|
Securities |
|
Total |
|
On |
|
Securities |
|
|
Write- |
|
Securities |
|
Held at |
|
Write- |
|
Securities |
|
Held at |
|
|
downs |
|
Sold |
|
Period End |
|
downs |
|
Sold |
|
Period End |
|
|
|
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income1 |
|
$ |
8.5 |
|
|
$ |
|
|
|
$ |
8.5 |
|
|
$ |
19.3 |
|
|
$ |
|
|
|
$ |
19.3 |
|
Common equities |
|
|
1.3 |
|
|
|
|
|
|
|
1.3 |
|
|
|
1.7 |
|
|
|
.4 |
|
|
|
1.3 |
|
|
|
|
|
|
Total portfolio |
|
$ |
9.8 |
|
|
$ |
|
|
|
$ |
9.8 |
|
|
$ |
21.0 |
|
|
$ |
.4 |
|
|
$ |
20.6 |
|
|
|
|
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income |
|
$ |
.4 |
|
|
$ |
|
|
|
$ |
.4 |
|
|
$ |
1.5 |
|
|
$ |
.3 |
|
|
$ |
1.2 |
|
Common equities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2.4 |
|
|
|
2.0 |
|
|
|
.4 |
|
|
|
|
|
|
Total portfolio |
|
$ |
.4 |
|
|
$ |
|
|
|
$ |
.4 |
|
|
$ |
3.9 |
|
|
$ |
2.3 |
|
|
$ |
1.6 |
|
|
|
|
|
|
|
|
|
1 |
|
Includes $1.7 million related to a sub-prime mortgage debt security determined to be other-than-temporarily impaired. |
The following table stratifies the gross unrealized losses in our portfolio at September 30, 2007,
by duration in a loss position and magnitude of the loss as a percentage of the cost of the
security. The individual amounts represent the additional OTI loss we would have recognized in the
income statement if our policy for market-related declines was different than that stated above.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(millions) |
|
|
|
|
|
Total Gross |
|
|
|
|
|
|
Fair |
|
|
Unrealized |
|
|
Decline of Investment Value |
|
Total Portfolio |
|
Value |
|
|
Losses |
|
|
>15% |
|
|
>25% |
|
|
>35% |
|
|
>45% |
|
Unrealized loss for 1 quarter |
|
$ |
1,653.7 |
|
|
$ |
28.6 |
|
|
$ |
.5 |
|
|
$ |
.2 |
|
|
$ |
|
|
|
$ |
|
|
Unrealized loss for 2 quarters |
|
|
846.4 |
|
|
|
26.0 |
|
|
|
.4 |
|
|
|
.3 |
|
|
|
|
|
|
|
|
|
Unrealized loss for 3 quarters |
|
|
477.1 |
|
|
|
23.0 |
|
|
|
.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized loss for 1 year or longer |
|
|
3,117.3 |
|
|
|
48.2 |
|
|
|
.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
6,094.5 |
|
|
$ |
125.8 |
|
|
$ |
1.4 |
|
|
$ |
.5 |
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We determined that none of the securities represented by the table above met the criteria for
other-than-temporary impairment write-downs.
Since total unrealized losses are already a component of our shareholders equity, any recognition
of additional OTI losses would have no effect on our comprehensive income or book value.
26
C. Repurchase Transactions
During the quarter, we entered into repurchase commitment transactions, whereby we loaned U.S.
Treasury securities to accredited brokerage firms in exchange for cash equal to the fair value of
the securities. These internally managed transactions are typically overnight arrangements. The
cash proceeds were invested in AA or higher financial institution obligations with yields that
exceeded our interest obligation on the borrowed cash. We are able to borrow the cash at low rates
since the securities loaned are in either short supply or high demand. Our interest rate exposure
does not increase or decrease since the borrowing and investing periods match. During the nine
months ended September 30, 2007, our largest single outstanding balance of repurchase commitments
was $2.4 billion open for 4 days, with an average daily balance of $.7 billion for the period. We
had no open repurchase commitments at September 30, 2007 or 2006. We earned income of $1.9 million
and $1.1 million on repurchase commitments during the three months ended September 30, 2007 and
2006, respectively, and earned $3.0 million and $3.6 million for the nine months ended September
30, 2007 and 2006, respectively.
Safe Harbor Statement Under the Private Securities Litigation Reform Act of 1995: Statements
in this report that are not historical fact are forward-looking statements that are subject to
certain risks and uncertainties that could cause actual events and results to differ materially
from those discussed herein. These risks and uncertainties include, without limitation,
uncertainties related to estimates, assumptions and projections generally; inflation and changes in
economic conditions (including changes in interest rates and financial markets); the accuracy and
adequacy of our pricing and loss reserving methodologies; the competitiveness of our pricing and
the effectiveness of our initiatives to retain more customers; initiatives by competitors and the
effectiveness of our response; our ability to obtain regulatory approval for requested rate changes
and the timing thereof; the effectiveness of our brand strategy and advertising campaigns relative
to those of competitors; legislative and regulatory developments; disputes relating to intellectual
property rights; the outcome of litigation pending or that may be filed against us; weather
conditions (including the severity and frequency of storms, hurricanes, snowfalls, hail and winter
conditions); changes in driving patterns and loss trends; acts of war and terrorist activities; our
ability to maintain the uninterrupted operation of our facilities, systems (including information
technology systems) and business functions; court decisions and trends in litigation and health
care and auto repair costs; and other matters described from time to time in our releases and
publications, and in our periodic reports and other documents filed with the United States
Securities and Exchange Commission. In addition, investors should be aware that generally accepted
accounting principles prescribe when a company may reserve for particular risks, including
litigation exposures. Accordingly, results for a given reporting period could be significantly
affected if and when a reserve is established for one or more contingencies. Reported results,
therefore, may appear to be volatile in certain accounting periods.
27
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
The duration of the financial instruments subject to interest rate risk was 3.4 years at September
30, 2007 and 3.1 years at December 31, 2006. The weighted average beta of the equity portfolio was
1.0 at both September 30, 2007 and December 31, 2006, meaning that our equity portfolio generally
moved in tandem with the overall stock market. Although components of the portfolio have changed,
no material changes have occurred in the total market risk since reported in our Annual Report on
Form 10-K for the year ended December 31, 2006.
We use Value-at-Risk (VaR) to estimate the investment portfolios exposure to short-term
volatility, and to support long-term capital planning. The VaR quantifies the potential reductions
in market value of our portfolio for the subsequent 66 trading days (three-month interval) at the
99th percentile loss. During the second quarter 2007, we changed from reporting the 95th
percentile loss to the 99th percentile loss to align with the current trends in risk management;
prior periods were restated. The 99th percentile is analogous to a 1 in 100-year event. The VaR
of the total investment portfolio is less than the sum of the two components (fixed income and
common equity) due to the benefit of diversification.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, |
|
June 30, |
|
March 31, |
|
December 31, |
|
September 30, |
($ in millions) |
|
2007 |
|
2007 |
|
2007 |
|
2006 |
|
2006 |
|
|
|
66-Day VaR |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fixed-income portfolio |
|
$ |
(324.5 |
) |
|
$ |
(279.7 |
) |
|
$ |
(210.5 |
) |
|
$ |
(234.1 |
) |
|
$ |
(225.3 |
) |
% of portfolio |
|
|
(2.6 |
)% |
|
|
(2.0 |
)% |
|
|
(1.7 |
)% |
|
|
(1.9 |
)% |
|
|
(1.8 |
)% |
% of shareholders
equity |
|
|
(6.1 |
)% |
|
|
(5.1 |
)% |
|
|
(3.0 |
)% |
|
|
(3.4 |
)% |
|
|
(3.4 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common equity portfolio |
|
$ |
(440.9 |
) |
|
$ |
(319.1 |
) |
|
$ |
(316.5 |
) |
|
$ |
(196.5 |
) |
|
$ |
(230.6 |
) |
% of portfolio |
|
|
(18.0 |
)% |
|
|
(12.6 |
)% |
|
|
(13.2 |
)% |
|
|
(8.3 |
)% |
|
|
(10.4 |
)% |
% of shareholders
equity |
|
|
(8.3 |
)% |
|
|
(5.8 |
)% |
|
|
(4.6 |
)% |
|
|
(2.9 |
)% |
|
|
(3.4 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total portfolio |
|
$ |
(470.0 |
) |
|
$ |
(465.5 |
) |
|
$ |
(337.1 |
) |
|
$ |
(300.9 |
) |
|
$ |
(349.8 |
) |
% of portfolio |
|
|
(3.2 |
)% |
|
|
(2.9 |
)% |
|
|
(2.2 |
)% |
|
|
(2.0 |
)% |
|
|
(2.4 |
)% |
% of shareholders equity |
|
|
(8.8 |
)% |
|
|
(8.5 |
)% |
|
|
(4.9 |
)% |
|
|
(4.4 |
)% |
|
|
(5.2 |
)% |
Item 4. Controls and Procedures.
Progressive, under the direction of the Chief Executive Officer and the Chief Financial Officer,
has established disclosure controls and procedures that are designed to ensure that information
required to be disclosed by us in the reports that we file or submit under the Securities Exchange
Act of 1934 is recorded, processed, summarized and reported within the time periods specified in
the Securities and Exchange Commissions rules and forms. The disclosure controls and procedures
are also intended to ensure that such information is accumulated and communicated to our
management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate,
to allow timely decisions regarding required disclosures.
The Chief Executive Officer and the Chief Financial Officer reviewed and evaluated Progressives
disclosure controls and procedures as of the end of the period covered by this report. Based on
that review and evaluation, the Chief Executive Officer and the Chief Financial Officer concluded
that Progressives disclosure controls and procedures are effectively serving the stated purposes
as of the end of the period covered by this report.
During the third quarter 2007, management implemented changes in Progressives internal control
over financial reporting that have materially affected, or are reasonably likely to materially
affect, our internal control over financial reporting. Management implemented controls in response
to a material weakness which existed in our internal control over financial reporting whereby
effective controls were not maintained to ensure that dividends were accurately accrued on the
declaration date in accordance with GAAP. We documented the appropriate accounting treatment for
declared dividends and incorporated such accounting treatment in the procedures applied in
preparation of all of our publicly released financial statements. This issue was identified in
July 2007 and promptly remediated prior to the filing of, and was discussed in more detail in, our
Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2007.
28
PART II OTHER INFORMATION
Item 1A. Risk Factors.
There have been no material changes in the risk factors that were discussed in our Annual Report on
Form 10-K for the year ended December 31, 2006.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
(c) Share Repurchases
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
ISSUER PURCHASES OF EQUITY SECURITIES |
|
|
|
Total Number of |
|
|
|
|
|
Total Number of Shares |
|
Maximum Number of Shares That |
2007 |
|
Shares |
|
Average Price Paid |
|
Purchased as Part of Publicly |
|
May Yet Be Purchased Under the |
Calendar Month |
|
Purchased |
|
per Share |
|
Announced Plans or Programs |
|
Plans or Programs |
|
July1 |
|
|
4,012,175 |
|
|
NM |
|
|
60,000,000 |
|
|
|
|
|
July2 |
|
|
5,496,825 |
|
|
NM |
|
|
5,496,825 |
|
|
|
94,503,175 |
|
|
|
|
|
|
|
|
|
|
|
|
July Total3 |
|
|
9,509,000 |
|
|
$ |
22.37 |
|
|
NM |
|
NM |
August3 |
|
|
9,523,632 |
|
|
|
22.04 |
|
|
|
15,020,457 |
|
|
|
84,979,543 |
|
September |
|
|
7,116,800 |
|
|
|
19.54 |
|
|
|
22,137,257 |
|
|
|
77,862,743 |
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
26,149,432 |
|
|
$ |
21.48 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NM = Not Meaningful |
|
1 |
|
Pursuant to the April 2006 authorization (discussed below) |
|
2 |
|
Pursuant to the June 2007 authorization (discussed below) |
|
3 |
|
Reflects repurchases prior to the August 31, 2007, record date of the $2.00 per Common
Share extraordinary cash dividend paid in September 2007. As a result, the average price paid per
share is higher than for September share repurchases. |
Progressives financial policies state that we will repurchase shares to neutralize dilution from
equity-based compensation in the year of issuance and to return underleveraged capital to
investors.
In April 2006, the Board of Directors authorized the repurchase of up to 60 million Common Shares.
Repurchases under this authorization were completed in July 2007.
In June 2007, the Board approved a new authorization to repurchase up to 100 million Common Shares,
to be used in addition to, and after completion of, the remaining repurchases available under the
April 2006 authorization. This new Board authorization will expire on June 30, 2009. Shares
repurchased under this authorization may be accomplished through open
market purchases or otherwise, and may include trading plans entered into with one or more brokerage firms in accordance with Rule 10b5-1 under the
Securities Exchange Act of 1934. In June 2007, we entered into a 10b5-1 trading plan to permit,
under certain circumstances specified in the plan, the repurchase of our Common Shares during
periods that are otherwise restricted under our internal policies; this plan expired in August
2007. In August 2007, we entered into a new 10b5-1 trading plan, which is scheduled to expire in
December 2007, unless sooner terminated by us.
29
Item 5. Other Information.
President and CEO Glenn M. Renwicks letter to shareholders with respect to our third quarter 2007
results is included as Exhibit 99 to this Quarterly Report on Form 10-Q. The letter is also posted
on Progressives Web site at progressive.com/annualreport.
Item 6. Exhibits.
See exhibit index on page 32.
30
SIGNATURES
Pursuant to the requirements 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.
|
|
|
|
|
|
THE PROGRESSIVE CORPORATION
(Registrant)
|
|
Date: November 1, 2007 |
BY: |
/s/ Brian C. Domeck
|
|
|
|
Brian C. Domeck |
|
|
|
Vice President and Chief Financial Officer |
|
31
EXHIBIT INDEX
|
|
|
|
|
|
|
|
|
Exhibit |
|
Form |
|
|
|
|
No. Under |
|
10-Q |
|
|
|
|
Reg. S-K, |
|
Exhibit |
|
|
|
If
Incorporated by Reference, Documents with |
Item 601 |
|
Number |
|
Description of Exhibit |
|
Which Exhibit was Previously Filed with SEC |
|
|
|
|
|
|
|
|
|
(10)(iii)
|
|
|
10.1 |
|
|
First Amendment to
The Progressive
Corporation Executive
Separation Allowance
Plan (2006 Amendment
and Restatement)
|
|
Filed herewith |
|
(12)
|
|
|
12 |
|
|
Computation of Ratio
of Earnings to Fixed
Charges
|
|
Filed herewith |
|
(31)
|
|
|
31.1 |
|
|
Rule
13a-14(a)/15d-14(a)
Certification of the
Principal Executive
Officer, Glenn M.
Renwick
|
|
Filed herewith |
|
(31)
|
|
|
31.2 |
|
|
Rule
13a-14(a)/15d-14(a)
Certification of the
Principal Financial
Officer, Brian C.
Domeck
|
|
Filed herewith |
|
(32)
|
|
|
32.1 |
|
|
Section 1350
Certification of the
Principal Executive
Officer, Glenn M.
Renwick
|
|
Filed herewith |
|
(32)
|
|
|
32.2 |
|
|
Section 1350
Certification of the
Principal Financial
Officer, Brian C.
Domeck
|
|
Filed herewith |
|
(99)
|
|
|
99 |
|
|
Letter to
Shareholders from
Glenn M. Renwick,
President and Chief
Executive Officer
|
|
Filed herewith |
32