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 Progressive.
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.
Operating
Monitor pricing and reserving discipline
- Manage profitability targets and operational performance at our lowest level of product definition
- Sustain premiums-to-surplus ratios at efficient levels, and below applicable state regulations, for each insurance subsidiary
- Ensure loss reserves are adequate and develop with minimal variance
Investing
Maintain a liquid, diversified, high-quality investment portfolio
- Manage on a total return basis
- Target an allocation of 75% to 100% for fixed-income securities with the balance in common equities
- Manage interest rate, credit, prepayment, extension and concentration risk
Financing
Maintain sufficient capital to support insurance operations
- Maintain debt below 30% of total capital at book value
- Neutralize dilution from equity-based compensation in the year of issuance through share repurchases
- Return underleveraged capital through share repurchases and a variable dividend program based on annual underwriting results
Source: Progressive's 2008 Annual Report
Last updated: February 25, 2009
