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2004 |
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The Progressive Corporation and Subsidiaries Notes to Consolidated Financial Statements December 31, 2004, 2003 and 2002 |
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9 Segment Information |
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The Company writes personal automobile and other specialty property-casualty insurance and provides related services throughout the United States. The Company's Personal Lines segment writes insurance for private passenger automobiles and recreation vehicles, which is generated either by an agency or written directly by the Company. The Personal Lines-Agency channel includes business written by the Company's network of more than 30,000 independent insurance agencies and strategic alliance business relationships (other insurance companies, financial institutions, employers and national brokerage agencies). The Personal Lines-Direct channel includes business written through 1-800-PROGRESSIVE and online at progressive.com. The Personal Lines segment includes both the Agency and Direct channels. The Personal Lines-Agency channel and the Personal Lines-Direct channel are each organized into six geographical regions. Currently, both the Agency channel and the Direct channel have three General Managers responsible for two regions each. Each channel has a Group President and a process team, with local managers at the state level. Each of the six regions has a Claims business General Manager responsible for claims handling in the region. The Company's Commercial Auto segment writes primary liability and physical damage insurance for automobiles and trucks owned by small businesses. The Company's other businesses-indemnity primarily includes writing professional liability insurance for community banks and managing the Company's run-off businesses, including the wind-down of the Company's lender's collateral protection program. The Company's other businesses-service includes providing insurance-related services, primarily processing CAIP business. All revenues are generated from external customers and the Company does not have a reliance on any major customer. The Company evaluates segment profitability based on pretax underwriting and service profit (loss). Pretax profit (loss) is defined as underwriting profit (loss) for the Personal Lines, Commercial Auto and other businesses-indemnity as well as service profit (loss) for the other businesses-service. Underwriting profit (loss) is calculated as net premiums earned less loss and loss adjustment expenses, policy acquisition costs and other underwriting expenses. Service profit (loss) is the difference between service revenues and service expenses. Expense allocations are based on certain assumptions and estimates; stated segment operating results would change if different methods were applied. The Company does not allocate assets or income taxes to operating segments. In addition, the Company does not separately identify depreciation and amortization expense by segment and such disclosure would be impractical. Companywide depreciation expense was $99.4 million in 2004, $89.3 million in 2003 and $83.9 million in 2002. The accounting policies of the operating segments are the same as those described in Note 1 — Reporting and Accounting Policies. Following are the operating results for the years ended December 31: 
1) Personal automobile insurance accounted for 93% of the total Personal Lines segment net premiums earned in 2004, 2003 and 2002. 2) Revenues represent recurring investment income and net realized gains (losses) on securities; pretax profit is net of investment expenses. 3) Represents interest income related to an income tax refund the Company received in 2004. See Note 3 — Income Taxes for further discussion. The Company's management uses underwriting margin and combined ratio as primary measures of underwriting profitability. The underwriting margin is the pretax profit (loss) expressed as a percent of net premiums earned (i.e., revenues). Combined ratio is the complement of the underwriting margin. Following are the underwriting margins/combined ratios for the Company's underwriting operations as of December 31: 
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