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, tenure of the customer 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 (Drive 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 the Company.

We use risk management tools to quantify the amount of capital needed, in addition to surplus, to absorb consequences of foreseeable 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.

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 23,066 shares on December 31, 2005, with a market value of $2,693,650, for a 23.5% compounded annual return, compared to the 7.5% return achieved by investors in the Standard & Poor’s 500 during the same period. In addition, the shareholder received dividends of $2,768 in 2005, bringing total dividends received to $34,335 since the shares were purchased.

In the ten years since December 31, 1995, Progressive shareholders have realized compounded annual returns, including dividend reinvestment, of 22.0%, compared to 9.1% for the S&P 500. In the five years since December 31, 2000, Progressive shareholders’ returns were 27.8%, compared to .6% for the S&P 500. In 2005, the returns were 37.9% on Progressive shares and 4.9% 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 2005, the Company repurchased 5,197,686 Common Shares during the year at a total cost of $482.8 million with an average cost of $92.89 per share. Since 1971, we spent $3.4 billion repurchasing our shares, at an average cost of $14.24 per share.

Operations Summary

Drive® Insurance from Progressive

Progressive DirectSM

Commercial Auto