Consistent achievement of superior results requires that our people understand Progressive’s objectives and their specific roles, and that their personal objectives dovetail with Progressive’s. Our objectives are ambitious, yet realistic. Progressive monitors its financial policies continuously and strives to meet these targets annually. Experience always clarifies objectives and illuminates better policies. We constantly evolve as we monitor the execution of our policies and progress toward achieving our objectives.
Objectives
> Profitability Progressive’s most important goal is for our insurance subsidiaries to produce an aggregate calendar year underwriting profit of at least 4%. Our business is a composite of many product offerings defined in part by product type, distribution channel, geography, customer tenure, and underwriting grouping. Each of these products has targeted operating parameters based on level of maturity, underlying cost structures, customer mix, and policy life expectancy. Our aggregate goal is the balanced blend of these individual performance targets in any calendar year.
> Growth Our goal is to grow as fast as possible, constrained only by our profitability objective and our ability to provide high-quality customer service. Progressive is a growth-oriented company and management incentives are tied to profitable growth.
We report Personal Lines and Commercial Auto results separately. We further break down our Personal Lines’ results by channel (Agency and Direct) to give shareholders a clearer picture of the business dynamics of each distribution method and their respective rates of growth. Aggregate expense ratios and aggregate growth rates disguise the true nature and performance of each business.
Financial Policies
Progressive balances operating risk with risk of investing and financing activities in order to have sufficient capital to support all the insurance we can profitably underwrite and service. Risks arise in all operational and functional areas, and therefore must be assessed holistically, accounting for the offsetting and compounding effects of the separate sources of risk within Progressive.
We use risk management tools to quantify the amount of capital needed, in addition to surplus, to absorb consequences of events such as unfavorable loss reserve development, litigation, weather-related catastrophes, and investment-market corrections. Our financial policies define our allocation of risk and we measure our performance against them. If, in our view, future opportunities meet our financial objectives and policies, we will invest capital in expanding business operations. Underleveraged capital will be returned to investors. We expect to earn a return on equity greater than its cost. Presented is an overview of Progressive’s Operating, Investing, and Financing policies.
> Operating
Monitor pricing and reserving discipline
- – Manage profitability targets and operational performance at our lowest level of product definition
- – Sustain premiums-to-surplus ratios at efficient levels, and at or below applicable state regulations, for each insurance subsidiary
- – Ensure loss reserves are adequate and develop with minimal variance
> Investing
Maintain a liquid, diversified, high-quality investment portfolio
- – Manage on a total return basis
- – Manage interest rate, credit, prepayment, extension, and concentration risk
- – Allocate portfolio between two groups:
Group I - Target 0% to 25% (common equities; nonredeemable preferred stocks; redeemable preferred stocks, except for 50% of investment-grade redeemable preferred stocks with cumulative dividends; and all other non-investment-grade fixed-maturity securities)
Group II - Target 75% to 100% (short-term securities and all other fixed-maturity securities)
> Financing
Maintain sufficient capital to support insurance operations
- – Maintain debt below 30% of total capital at book value
- – Neutralize dilution from equity-based compensation in the year of issuance through share repurchases
- – Return underleveraged capital through share repurchases, special dividends, and a variable dividend program based on annual underwriting results
Objectives and Policies Scorecard
| Target | > 2012 | 2011 | 2010 | 5 Years1 | 10 Years1 | |
|---|---|---|---|---|---|---|
| Financial Results | ||||||
| Underwriting margin | ||||||
| –Progressive2 | 4% | 4.4% | 7.0% | 7.6% | 6.5% | 9.1% |
| –Industry3 | na | |||||||| | (1.6)% | (.4)% | (.1)% | 1.6% |
| Net premiums written growth | ||||||
| –Progressive | (a) | 8% | 5% | 3% | 4% | 6% |
| –Industry3 | na | |||||||| | 2% | 2% | 0% | 2% |
| Policies in force growth | ||||||
| –Personal auto | (a) | 4% | 5% | 8% | 5% | 6% |
| –Special lines | (a) | 4% | 5% | 5% | 5% | 9% |
| –Commercial Auto | (a) | 2% | 0% | 0% | (1)% | 6% |
| Companywide premiums-to-surplus ratio | (b) | 2.9 | 2.9 | 2.9 | na | na |
| Investment allocation | ||||||
| –Group I | (c) | 21% | 21% | 22% | na | na |
| –Group II | (c) | 79% | 79% | 78% | na | na |
| Debt-to-total capital ratio | <30% | 25.6% | 29.6% | 24.5% | na | na |
| Return on average shareholders’ equity | ||||||
| –Net income | (d) | 14.5% | 16.5% | 17.1% | 14.1% | 19.8% |
| –Comprehensive income | (d) | 17.4% | 15.0% | 22.3% | 16.1% | 21.3% |
(a) Grow as fast as possible, constrained only by our profitability objective and our ability to provide high-quality customer service.
(b) Determined separately for each insurance subsidiary.
(c) Allocate portfolio between two groups:
Group I – Target 0% to 25% (common equities; nonredeemable preferred stocks; redeemable preferred stocks, except for 50% of investment-grade redeemable preferred stocks with cumulative dividends; and all other non-investment-grade fixed-maturity securities)
Group II – Target 75% to 100% (short-term securities and all other fixed-maturity securities)
(d) Progressive does not have a predetermined target for return on average shareholders’ equity.
na = not applicable
1 Represents results over the respective time period; growth represents average annual compounded rate of increase (decrease).
2 Expressed as a percentage of net premiums earned. Underwriting profit is calculated by subtracting losses and loss adjustment expenses, policy acquisition costs, and other underwriting expenses from the total of net premiums earned and fees and other revenues.
3 Represents private passenger auto insurance market data as reported by A.M. Best Company, Inc. The industry underwriting margin excludes the effect of policyholder dividends. Final comparable industry data for 2012 will not be available until our third quarter report. The 5- and 10-year growth rates are presented on a one-year lag basis for the industry.
Achievements
We are convinced that the best way to maximize shareholder value is to achieve these financial objectives and policies consistently. A shareholder who purchased 100 shares of Progressive for $1,800 in our first public stock offering on April 15, 1971, owned 92,264 shares on December 31, 2012, with a market value of $1,946,770, for a 18.9% compounded annual return, compared to the 6.6% return achieved by investors in the Standard & Poor’s 500 during the same period. In addition, the shareholder received dividends of $129,834 in 2012, bringing their total dividends received to $508,990 since the shares were purchased.
In the ten years since December 31, 2002, Progressive shareholders have realized compounded annual returns, including dividend reinvestment, of 8.1%, compared to 7.1% for the S&P 500. In the five years since December 31, 2007, Progressive shareholders’ returns were 5.1%, compared to 1.7% for the S&P 500. In 2012, the returns were 15.4% on Progressive shares and 15.9% for the S&P 500.
Over the years, when we have had adequate capital and believed it to be appropriate, we have repurchased our shares. In addition, as our Financial Policies state, we will repurchase shares to neutralize the dilution from equity-based compensation programs and return any underleveraged capital to investors. During 2012, we repurchased 8,597,918 common shares. The total cost to repurchase these shares was $174 million, with an average cost of $20.26 per share. Since 1971, we have spent $7.9 billion repurchasing our shares, at an average cost of $6.79 per share.