PROGRESSIVE CORP annual report, FY2009

The Progressive Corporation: FY2009 Form 10-K Summary

Business context and reporting period

The filing is Progressive’s Form 10-K for the fiscal year ended December 31, 2009, rather than a standalone fourth-quarter report. Progressive is an insurance holding company whose subsidiaries primarily write personal and commercial automobile insurance throughout the United States. The company began selling personal auto insurance in Australia in December 2009; Australian revenue and assets were insignificant.

Personal Lines represented approximately 89% of 2009 net premiums written; Commercial Auto represented approximately 11%.
U.S. personal auto market share was approximately 7.6% in 2009, compared with 7.3% in 2008.
Progressive ranked fourth in both the U.S. private passenger auto and commercial auto markets based on the company’s estimates.

Financial performance and key metrics

Metric	2009	2008	2007
Total revenues	$14,563.6 million	$12,840.1 million	$14,686.8 million
Net income (loss)	$1,057.5 million	$(70.0) million	$1,182.5 million
Diluted net income per share	$1.57	$(0.10) basic	$1.65
Comprehensive income (loss)	$1,752.2 million	$(614.7) million	$1,071.0 million
Net premiums written	$14.0 billion	$13.6 billion	$13.8 billion
Combined ratio	91.6	94.6	92.6
Total assets	$20,049.3 million	$18,250.5 million	$18,843.1 million
Debt outstanding	$2,177.2 million	$2,175.5 million	$2,173.9 million

Net premiums written increased approximately 3% from 2008, while reported revenue increased approximately 13%. The 91.6 combined ratio indicates underwriting profitability before investment income and other items. The filing text provided does not present a consolidated operating margin or a complete consolidated cash-flow statement in the extracted sections; the consolidated cash-flow information is incorporated by reference from the Annual Report.

Premium revenue was $14,012.8 million, compared with $13,631.4 million in 2008.
Net investment income, excluding realized gains and losses, was $495.9 million, compared with $628.9 million in 2008.
Total investment income, including net realized gains and losses before expenses and taxes, was $534.1 million, compared with a $(807.4) million loss in 2008.
The investment portfolio had a fair value of $14.7 billion at year-end 2009, up from $13.0 billion at year-end 2008, and was primarily invested in short-term and intermediate-term fixed-income securities.
Losses and loss-adjustment expenses incurred were $9,904.9 million, including $10,040.9 million for the current accident year and favorable prior-year development of $136.0 million.
Gross unpaid losses and loss-adjustment expense reserves were $6,653.0 million at December 31, 2009, compared with $6,177.4 million at December 31, 2008; net reserves were $6,123.6 million.

Liquidity, capital, debt and shareholder returns

Consolidated statutory policyholders’ surplus was $5.0 billion at December 31, 2009, compared with $4.5 billion at year-end 2008.
The combined premiums-to-surplus ratio was 2.8-to-1, and management reported that risk-based capital ratios were well above minimum requirements.
Approximately $2.2 billion was available in a non-insurance subsidiary and could be contributed to insurance subsidiaries to support growth if needed.
Insurance subsidiaries could pay aggregate dividends of $1,008.5 million in 2010 without prior regulatory approval, subject to applicable restrictions.
The holding company had no cash balance but had unrestricted access to marketable securities held by a non-insurance investment subsidiary; $2.2 billion was available at year-end 2009.
Debt outstanding was $2.177 billion, consisting primarily of senior notes and $1.0 billion of 6.70% fixed-to-floating-rate junior subordinated debentures due 2067.
Progressive paid a $0.1613 per-share annual dividend in February 2010, or approximately $108.5 million. No dividend was paid for 2008 because the company reported an after-tax comprehensive loss.
The company repurchased 5.2 million shares in the fourth quarter of 2009 at an average price of $16.79 per share. A 50 million-share repurchase authorization remained in place, with 40.3 million shares available at year-end.

Material changes versus prior comparable periods

Net income recovered to $1,057.5 million from a $70.0 million loss in 2008, principally reflecting improved investment results and stronger underwriting performance.
The combined ratio improved from 94.6 to 91.6, reflecting improved underwriting profitability.
Investment results reversed sharply from a $807.4 million pretax loss in 2008 to a $534.1 million pretax gain in 2009, including realized gains and losses.
Net premiums written increased to $14.0 billion from $13.6 billion. Personal Lines volume increased, while Commercial Auto volume declined from $1.70 billion to $1.53 billion.
Agency distribution declined to 59% of Personal Lines volume from 62%, while Direct distribution increased to 41% from 38%.
Prior-year reserve development improved from $33.2 million of unfavorable development in 2008 to $136.0 million of favorable development in 2009, primarily due to lower-than-expected defense and cost-containment reserves and favorable large-loss settlements in Commercial Auto.
Comprehensive income improved to $1,752.2 million from a $614.7 million loss, benefiting from the recovery in investment values.
The company agreed to sell its community bank professional liability program, with closing expected in the first half of 2010. The transaction was not expected to materially affect financial condition, results, or cash flows.

Outlook, risks and unusual items

Management stated that it focuses on long-term enterprise value rather than short-term earnings expectations and does not provide earnings estimates. The company intended to continue expanding its personal umbrella product in 2010, while its annual variable dividend policy was increased from a 20% target factor for 2009 to 25% for 2010, subject to performance, comprehensive income and Board approval.

Major insurance risks include inaccurate pricing, adverse claims frequency or severity trends, reserve deficiencies, medical and vehicle repair inflation, severe weather and other catastrophes.
Regulatory and legislative risks include rate-approval constraints, restrictions on policy cancellation or market withdrawals, insurance insolvency assessments, privacy requirements and potential limits on the use of credit information in underwriting.
Litigation risks include challenges to credit-based underwriting, bodily injury and personal injury protection claims handling, direct repair and service-center programs, policy interpretation and renewal practices. The filing does not provide a clear aggregate estimate of potential exposure from pending litigation.
Investment and liquidity risks include interest-rate changes, credit deterioration, equity-market volatility, concentration, prepayment risk and the inability to liquidate securities on favorable terms.
As a holding company, Progressive depends on dividends and other distributions from regulated insurance subsidiaries to fund debt service, shareholder dividends, repurchases and other obligations.
Operational risks include information-technology failures, cybersecurity incidents, business interruptions, third-party service-provider failures and difficulty maintaining adequate staffing.
Loss reserves are inherently uncertain and ultimate paid claims could materially exceed recorded reserves, adversely affecting earnings, liquidity or capital.

Important facts for investors to verify

Review the incorporated Annual Report and consolidated cash-flow statement for operating cash flow, capital expenditures and investing and financing flows, which are not fully reproduced in the extracted filing text.
Reconcile the improvement in net income and comprehensive income to underwriting results, realized investment gains and changes in unrealized investment values.
Assess the sustainability of the 91.6 combined ratio and the favorable $136.0 million prior-year reserve development.
Review debt maturities, interest obligations and any restrictions associated with the junior subordinated debentures, including potential dividend restrictions if interest is deferred.
Monitor regulatory developments involving insurance rates, credit information, privacy, market exits and required capital or guaranty-fund assessments.
Review Note 12 litigation disclosures and subsequent filings for developments that could create material costs or operational restrictions.
Verify the terms and shareholder approval status of the 2010 Equity Incentive Plan and the status of the proposed community bank program sale.