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The Progressive Corporation Annual Variable Dividend Policy

Our dividend is paid annually in a lump sum, in an amount that is calculated on the basis of our insurance operating performance for the year. Our annual dividend policy is intended, along with other tools that we use, to regulate our accumulation of capital beyond what we need to support our business objective of profitable growth and to return capital to shareholders when it is most appropriate to do so. In addition, because we use a factor to determine the annual dividend amount that we also use to determine cash bonuses for our employees, the policy further aligns the interests of our employees with those of our shareholders.

Subject to the limitations discussed below, the annual dividend will be based on the following formula:

Annual Dividend Formula
Dividend amount per share	=	After-Tax Underwriting Income	X	Target Percentage	X	Gainshare Factor
		Common Shares Outstanding at year end

 

After-Tax Underwriting Income

The amount of after-tax underwriting income will be derived from our consolidated insurance underwriting results, using the following calculation:

After-Tax Underwriting Income Calculation

Net premiums earned

Less: Losses and loss adjustment expenses

Policy acquisition costs

Other underwriting expenses

Pre-tax underwriting income

x 65% (represents 1.00 minus the statutory tax rate of 35%)

= After-tax underwriting income

 

Target Percentage

The target percentage will be determined by the Board of Directors on an annual basis and announced to shareholders and the public. For 2008, the Board determined the target percentage to be 20 percent.

Gainshare Factor

The Gainshare factor can range from zero to two and will be determined by comparing our operating performance for the year to certain predetermined profitability and growth objectives. The Gainshare factor is the same factor used to determine payments under the variable cash bonus program currently in place for our employees, referred to as our Gainsharing Program.

Monthly Disclosure

The Gainshare factor and the components of underwriting income are disclosed throughout the year in Progressive's monthly earnings releases; the final amounts will be included in the full-year results published each January.

Timing

Subject to discretion of the Board of Directors, the annual variable dividend is expected to be declared in December of each year, with the record date in January of the succeeding year and payment shortly after the record date.

Limitations

Because the dividend calculation is performance-based, the amount (if any) to be paid in any particular year may not be subject to accurate prediction and will likely vary, perhaps significantly, from the amounts paid in the preceding year(s). In certain years, the variable dividend calculation could equal zero, in which case no dividend would be paid. This could occur if either:

• we have no after-tax underwriting income for the year in question, or
• our Gainshare factor is zero for the year.

In addition, if our after-tax comprehensive income is less than after-tax underwriting income, no dividend will be paid. Comprehensive income is calculated as follows:

Comprehensive Income Calculation
After-tax underwriting income
Add (subtract):	After-tax:
	Service business profit (loss)
	Investment income, net of investment and interest expenses
	Net realized gains (losses) on securities
	Net unrealized gains (losses) on securities
	Net unrealized gains (losses) on forecasted transactions
= After-tax comprehensive income

 

Finally, although it is our intent to calculate an annual dividend based on the formula outlined, the Board could decide to alter our policy or not to pay the annual dividend for 2008 or future years, at any time prior to the declaration of the dividend for the year. Such an action by the Board could result from, among other reasons, changes in the insurance marketplace, changes in our performance or capital needs, changes in federal income tax laws, disruptions of national or international capital markets or other events affecting our business, liquidity or financial position.