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.
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.
Aggregate expense ratios and growth rates disguise the true nature and performance of each business. As such, we report Personal Lines and Commercial Lines 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.
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.
Maintain pricing and reserving discipline
Maintain a liquid, diversified, high-quality investment portfolio
Maintain sufficient capital to support insurance operations
|Target||2013||2012||2011||5 Years1||10 Years1|
|Net premiums written growth|
|Policies in force growth|
|Companywide premiums-to-surplus ratio||(b)||2.9||2.9||2.9||na||na|
|Debt-to-total capital ratio||<30%||23.1%||25.6%||29.6%||na||na|
|Return on average shareholders’ equity|
(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 2013 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.
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, would have owned 153,651 shares, including dividend reinvestment, on December 31, 2013, with a market value of $4,190,063, for a 19.9% compounded annual return, compared to the 10.3% return achieved by investors in the S&P 500 during the same period.
In the ten years since December 31, 2003, Progressive shareholders have realized compounded annual returns, including dividend reinvestment, of 5.4%, compared to 7.4% for the S&P 500. In the five years since December 31, 2008, Progressive shareholders’ returns were 16.6%, compared to 17.9% for the S&P 500. In 2013, the returns were 30.9% on Progressive shares and 32.4% for the S&P 500.
We have consistently paid dividends since we went public in 1971. Assuming dividends were not reinvested, a shareholder who bought 100 shares at the initial public offering would now hold 92,264 shares and would have received cumulative dividends of $535,239, including $26,249 in 2013. In addition to paying dividends, over the years when we have had adequate capital and believed it to be appropriate, we have repurchased our shares. 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 2013, we repurchased 11,023,202 common shares. The total cost to repurchase these shares was $273 million, with an average cost of $24.80 per share. Since 1971, we have spent $8.2 billion repurchasing our shares, at an average cost of $6.96 per share.