6Loss and Loss Adjustment Expense Reserves

Activity in the loss and loss adjustment expense reserves is summarized as follows:

(millions)   highlight year2009   2008   2007
Balance at January 1 $ 6,177.4 $ 5,942.7 $ 5,725.0
Less reinsurance recoverables on unpaid losses   244.5   287.5   361.4
Net balance at January 1   5,932.9   5,655.2   5,363.6
Incurred related to:            
Current year   10,040.9   9,981.8   9,845.9
Prior years   (136.0)   33.2   80.3
Total incurred   9,904.9   10,015.0   9,926.2
Paid related to:            
Current year   6,542.2   6,700.4   6,737.2
Prior years   3,172.0   3,036.9   2,897.4
Total paid   9,714.2   9,737.3   9,634.6
Net balance at December 31   6,123.6   5,932.9   5,655.2
Plus reinsurance recoverables on unpaid losses   529.4   244.5   287.5
Balance at December 31 $ 6,653.0 $ 6,177.4 $ 5,942.7

Our objective is to establish case and IBNR reserves that are adequate to cover all loss costs, while sustaining minimal variation from the date that the reserves are initially established until losses are fully developed. Our reserves developed favorably in 2009, compared to unfavorable development in both 2008 and 2007. Total development consists of net changes made by our actuarial department on prior accident year reserves, based on regularly scheduled reviews, claims settling for more or less than reserved, emergence of unrecorded claims at rates different than reserved, and changes in reserve estimates by claim representatives. In 2009, the favorable development was primarily related to lower than expected defense and cost containment reserves and favorable settlements on larger losses in our Commercial Auto business. In 2008, an increase in the number of late reported Commercial Auto claims, and an increase in the estimated severity on these claims, was a primary contributor to the unfavorable development. The unfavorable development in 2007 was due to the settlement of some large outstanding litigation, the number of large losses emerging from prior accident years being more than anticipated, plus the result of reviews of large bodily injury and uninsured motorist claims.

Because we are primarily an insurer of motor vehicles, we have limited exposure to environmental, asbestos, and general liability claims. We have established reserves for such exposures, in amounts that we believe to be adequate based on information currently known. These claims are not expected to have a material effect on our liquidity, financial condition, cash flows, or results of operations.

We write personal and commercial auto insurance in the coastal states, which could be exposed to hurricanes or other natural catastrophes. Although the occurrence of a major catastrophe could have a significant effect on our monthly or quarterly results, we believe that, based on historical performance, such an event would not be so material as to disrupt the overall normal operations of Progressive. We are unable to predict the frequency or severity of any such events that may occur in the near term or thereafter.


The Progressive Corporation   6300 Wilson Mills Road   Mayfield Village, Ohio 44143   440.461.5000   progressive.com