The Progressive Corporation 10-K/FYE 12-31-03
 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

     
(Mark One)
[ü]   Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2003
or
     
[   ]   Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from                   to                 
     
Commission file number  1-9518

THE PROGRESSIVE CORPORATION


(Exact name of Registrant as specified in its charter)
     
Ohio   34-0963169

 
(State or other jurisdiction of
incorporation or organization)
  (I.R.S. Employer
Identification No.)
     
6300 Wilson Mills Road, Mayfield Village, Ohio   44143

 
(Address of principal executive offices)   (Zip Code)

(440) 461-5000


(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

     
    Name of each exchange on
           Title of each class             which registered
     
Common Shares, $1.00 Par Value   New York Stock Exchange

 

Securities registered pursuant to Section 12(g) of the Act:

None


(Title of class)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.                  [ü] Yes [   ] No

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.                   [ü]

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).         [ü] Yes [   ] No

The aggregate market value of the voting stock held by non-affiliates of the Registrant at June 30, 2003: $14,489,967,235

The number of the Registrant’s Common Shares, $1.00 par value, outstanding as of January 31, 2004: 216,944,715

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s Proxy Statement for the Annual Meeting of Shareholders to be held on April 16, 2004, to be filed on or about March 8, 2004, and the Annual Report to Shareholders, included as Exhibit 13 to this Form 10-K, are incorporated by reference in Parts I, II, III and IV hereof.

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INTRODUCTION

Portions of the information included in The Progressive Corporation’s Proxy Statement to be filed on or about March 8, 2004, for the Annual Meeting of Shareholders to be held on April 16, 2004 (the “Proxy Statement”) have been incorporated by reference herein and are identified under the appropriate items in this Form 10-K. The Progressive Corporation and subsidiaries’ (collectively, the “Company”) 2003 Annual Report to Shareholders (the “Annual Report”), which will be attached as an Appendix to the 2004 Proxy Statement, is included as Exhibit 13 to this Form 10-K. Cross references to relevant sections of the Annual Report are included under the appropriate items of this Form 10-K.

PART I

ITEM 1. BUSINESS

          (a) General Development of Business

The Progressive insurance organization began business in 1937. The Progressive Corporation, an insurance holding company formed in 1965, has 68 subsidiaries, 1 mutual insurance company affiliate and 1 reciprocal insurance company affiliate. The Progressive Corporation’s insurance subsidiaries and affiliates provide personal automobile insurance and other specialty property-casualty insurance and related services throughout the United States. The Company’s property-casualty insurance products protect its customers against collision and physical damage to their motor vehicles, uninsured and underinsured bodily injury, and liability to others for personal injury or property damage arising out of the use of those vehicles. The Company’s non-insurance subsidiaries generally support the Company’s insurance and investment operations.

          (b) Financial Information About Industry Segments

Incorporated by reference from Note 9, Segment Information, beginning on page App.-B-19 of the Annual Report, which is included as Exhibit 13 to this Form 10-K.

          (c) Narrative Description of Business

The Company offers a number of personal and commercial property-casualty insurance products primarily related to motor vehicles. Net premiums written were $11.9 billion in 2003, compared to $9.5 billion in 2002 and $7.3 billion in 2001. The underwriting profit was 12.7% in 2003, 7.6% in 2002 and 4.8% in 2001.

Personal Lines

The Company’s Personal Lines segment writes insurance for private passenger automobiles and recreation and other vehicles. This business frequently offers more than one program in a single state, with each targeted to a specific market or customer group. Personal Lines accounted for 88% of total net premiums written in 2003 and 2002 and 89% in 2001. The Company’s strategy is to become the low-cost provider of a full line of auto insurance products and related services, distributed through whichever channel the customer prefers.

Of the approximately 300 United States insurance companies/groups with annual private passenger auto insurance premiums over $5 million annually, the Company ranked third in size for 2002 based on net premiums written, and believes that it held this position for 2003. For 2003, the estimated industry net premiums written, for personal auto insurance in the United States and Canada, were $149.5 billion, and the Company’s share of this market was approximately 7.0%, compared to $139.6 billion and 6.0%, respectively, in 2002, and $127.9 billion and 5.1% in 2001. Except as otherwise noted, all industry data and the Company’s market share or ranking in the industry either were derived directly from data reported by A.M. Best Company Inc. (“A.M. Best”) or were estimated using A.M. Best data as the primary source.

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Private passenger automobile insurance is comprised of preferred, standard and nonstandard automobile risks and represents 93% of total Personal Lines net premiums written by the Company. The Company actively participates in the market for each of these risks, with the objective of offering an accurate rate for every risk. Volume potential is driven by the Company’s ability to price competitively, brand recognition and the actions of the Company’s competitors, among other factors. See “Competitive Factors” on page 10 of this report for further discussion.

The Company’s specialty Personal Lines products include insurance for motorcycles, recreation vehicles, mobile homes, watercraft, snowmobiles and similar items. These specialty products represent 7% of the Company’s total Personal Lines net premiums written and are primarily distributed by independent agents. Due to the nature of the products, the Company typically experiences higher losses during the warmer weather months. The Company’s competitors are specialty companies and large multi-line insurance carriers. Although industry figures are not available, based on the Company’s analysis of this market, the Company believes that it is one of the largest participants in the specialty personal lines market. The Company has been the market share leader for personal watercraft insurance since 2002, and has been the market share leader for the motorcycle product since 1998.

The Personal Lines business is generated either by an agent or broker, or written directly by the Company. The Agency channel includes business written by the Company’s network of more than 30,000 independent insurance agencies located throughout the United States, insurance brokers in several states and through strategic alliance business relationships. The independent insurance agents have the authority to bind the Company to specified insurance coverages within prescribed underwriting guidelines, subject to compliance with certain Company-mandated procedures. These guidelines prescribe the kinds and amounts of coverage that may be written and the premium rates that may be charged for specified categories of risk. The agencies and brokers do not have authority on behalf of the Company to settle or adjust claims, establish underwriting guidelines, develop rates or enter into other transactions or commitments. The Agency channel also writes business through alliances with other insurance companies, financial institutions, employers and national brokerage agencies. In 2003, the total net premiums written through the Agency channel represented 69% of the Personal Lines volume, compared to 70% in 2002 and 71% in 2001.

Direct business includes business written through 1-800-PROGRESSIVE, online at progressive.com and on behalf of affinity groups. Net premiums written in the Direct business were 31%, 30% and 29% of the Personal Lines volume in 2003, 2002 and 2001, respectively.

The Company currently operates 19 vehicle claim service centers, including 12 new sites which were added during 2003. These sites, which are designed to provide end-to-end resolution for auto physical damage losses, are expected to improve efficiency, increase accuracy, reduce rework, improve repair cycle time and provide greater brand distinction. The Company continues to evaluate the operating performance and cost parameters of these sites to validate their effectiveness.

Auto insurance differs greatly by community because regulations and legal decisions vary by state and because traffic, law enforcement, cultural attitudes, insurance agents, medical services and auto repair services vary by community. The Company’s organization enables it to meet varied local conditions under a cohesive set of policies and procedures designed to provide consistency and control. The Company’s business is organized into business areas: Agency, Direct, Claims, and Sales and Service. The Agency, Direct and Claims business areas are managed at a local level and divided into six regions. Each business has a Group President and a process team, with local managers at the state level. Sales and Service (which includes customer service calls, direct sales calls and claims loss reporting, among other services) is performed at six regional sites in Austin, Texas; Cleveland, Ohio; Colorado Springs, Colorado; Sacramento, California; Tampa, Florida; and Phoenix, Arizona.

The Company’s executive management team sets policy and makes key strategic decisions, and includes the Chief Executive Officer, Chief Financial Officer, Chief Legal Officer, Chief Investment Officer, Chief Information Officer and Chief Human Resource Officer, as well as the Company’s four Group Presidents (Agency, Direct, Claims, and Sales and Service). The Group Presidents are challenged to develop and manage product offerings and customer service processes tailored to the unique requirements of customers who select Progressive as their auto insurance carrier and buy policies through the distribution mode of their choice.

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Commercial Auto

The Commercial Auto business unit writes primary liability, physical damage and other auto-related insurance for automobiles and trucks owned by small businesses and represented 11% of the Company’s total net premiums written in both 2003 and 2002, compared to 9% in 2001. Although the Commercial Auto business differs from Personal Lines auto, both businesses require the same fundamental skills, including disciplined underwriting and pricing, as well as excellent claims service. The Company’s Commercial Auto business is primarily distributed through the independent agency channel. The Company competes for this business on a nationwide basis with approximately 200 other companies/groups (with net premiums written in excess of $5 million annually). The Company’s Commercial Auto Business ranked fourth in market share on a national basis in 2002, based on data reported by A.M. Best, and estimates that it moved into the third position for 2003.

Other Businesses

The Company’s other lines of business include the Professional Liability Group (PLG) and the Motor Carrier business unit. During 2003, the Company disbanded its Lender’s Collateral Protection Group (LCPG), since it ceased writing this business. These groups are organized by customer group, headquartered in Cleveland, Ohio and accounted for approximately 1% of total revenue in 2003. The choice of distribution channel is driven by each customer group’s buying preference and service needs. Distribution channels include independent agents, financial institutions, vehicle dealers and Company-employed sales forces. Distribution arrangements are individually negotiated between such intermediaries and the Company and are tailored to the specific needs of the customer group and the nature of the related financial or purchase transactions.

PLG’s principal products are liability insurance for directors and officers and financial institution bonds, the main product of which is employee dishonesty insurance. Its principal customers are community banks. Progressive shares the risk and premium on these coverages with a small mutual reinsurer controlled by its bank customers and various other reinsurance entities. The program is sponsored by the American Bankers Association. The risk on these coverages is also reinsured by various entities. PLG represented less than one-fifth of one percent of the Company’s total 2003 net premiums written.

The Motor Carrier business unit primarily processes business for Commercial Auto Insurance Procedures (CAIP), which are state supervised plans serving the involuntary markets. The Motor Carrier business unit processes CAIP business in 25 states. As a CAIP servicing carrier, this business unit processes over 49% of the premiums in the CAIP market, which is growing in size. The business is written directly by the Company, but reinsured 100% through the CAIP plan; the Company monitors the CAIP plan for solvency. To the extent the Company fails to comply with contractual service standards, the Company would be restricted from ceding business to the CAIP plan. The Company competes with two other providers nationwide.

The Company ceased writing LCPG products during 2003. LCPG primarily provided physical damage insurance and related tracking services to protect the commercial or retail lender’s interest in collateral which was not otherwise insured against these risks. The principal product offered was collateral protection insurance for automobile lenders, which was sold to financial institutions and/or their customers. Commercial banks and finance companies were LCPG’s largest customer group for these services. This business also served savings and loan institutions and credit unions. During 2002, the Company lost some key accounts for these products and this business was unable to meet its profitability target. Management believes that exiting this line of business does not materially affect the Company’s financial condition, results of operations or cash flows. LCPG represented less than one-fourth of one percent of the Company’s total 2003 net premiums written.

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Risk Factors

The Company’s business involves various risks and uncertainties, certain of which are discussed in this section. This information should be considered carefully together with the other information contained in this report and in the other reports and materials filed by the Company with the Securities and Exchange Commission (“SEC”), as well as news releases and other information publicly disseminated by the Company from time to time.

The risks and uncertainties described below are not the only ones facing the Company. Additional risks and uncertainties not presently known to the Company or that it currently believes to be immaterial may also adversely affect the Company’s business. If any of the following risks or uncertainties develop into actual events, this could have a materially adverse effect on the Company’s business, financial condition or results of operations. In that case, the trading price of the Company’s Common Shares could decline materially.

The Company competes in the automobile insurance and other property-casualty markets, which are highly competitive.

The Company faces vigorous competition from large, well-capitalized national companies and smaller regional insurers. Other large national and international insurance or financial services companies may also enter these markets in the future. Many of these companies may have greater financial, marketing and management resources than the Company. In addition, competitors may offer consumers combinations of auto policies and other insurance products or financial services which the Company does not offer. The Company could be adversely affected by a loss of business to competitors offering similar insurance products at lower prices or offering bundled products or services and by other competitor initiatives.

The Company from time to time undertakes strategic initiatives to maintain and improve its competitive position in auto insurance markets. Based on a culture that encourages innovation, these strategies at times involve significant departures from the Company’s and/or its competitors’ then-current or historical modes of doing business. As such, the Company’s innovations may entail a degree of risk and may not ultimately achieve anticipated business goals. In addition, these initiatives may be subject to challenge by regulators or private litigants and may disrupt the Company’s relationships with certain of its customers and business partners. If the Company is unable successfully to develop, plan and implement its strategic initiatives in these competitive, regulatory and legal environments, its business could be materially adversely affected.

Similarly, the Company undertakes distinctive advertising campaigns and other efforts to improve brand recognition and drive growth. If these campaigns or efforts are unsuccessful or are less effective than those of competitors, the Company’s business could be materially adversely affected.

The highly competitive nature of the markets in which the Company competes could also result in the failure of one or more major competitors. In the event of a failure of a major competitor, the Company could be adversely affected, as the Company and other insurance companies would be required under state-mandated plans to absorb the losses of the failed insurer, and as the Company would be faced with an unexpected surge in new business from the failed insurer’s former policyholders.

The ability of the Company to attract, develop and retain talented employees, managers and executives, and to maintain appropriate staffing levels, is critical to the Company’s success.

In a time of growth, the Company must hire and train new employees, and retain current employees, as necessary to handle the resulting increase in new inquiries, applications, policies, customers and claims. The failure of the Company to meet targeted employment goals could result in the Company having to slow growth in the business units or markets that are affected. In addition, the failure to staff appropriately in the Company’s claims organization could result in decreased quality of claims work, which could also lower the Company’s operating margins.

If growth slows or reverses, the Company would be required to forecast the changing business environments (for multiple business units and in various geographic markets across the country) with reasonable accuracy and adjust its hiring programs and/or employment levels accordingly. In some circumstances, a reduction in force in one or more businesses or markets could be required. If the Company failed to recognize such changing operating environments, or

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was unable to reduce employment levels at the appropriate time, over-staffing could result, which could materially adversely affect the Company’s financial results.

The Company’s success also depends on its ability to attract, develop and retain talented executives and other key managers. The Company’s loss of certain key officers and employees or the failure to attract and develop talented new executives and managers could have a materially adverse effect on the Company’s business.

The Company further believes that its success depends, in large part, on its ability to maintain and improve its staffing models and employee culture that have been developed over the years. The Company’s ability to do so may be impaired as a result of litigation against the Company, legislation or regulations at the state or federal level or other factors in the employment marketplace. In such events, the productivity of certain of the Company’s workers could be adversely affected, which could lead to an erosion of the Company’s operating performance and margins.

The Company and its insurance subsidiaries are subject to a variety of complex federal and state laws and regulations.

The Company’s insurance businesses operate in a highly regulated environment. The Company’s insurance subsidiaries are subject to regulation and supervision by state insurance departments in all 50 states and the District of Columbia, each of which has a unique and complex set of laws and regulations. In addition, certain federal laws impose additional requirements on insurers. The subsidiaries’ ability to comply with these laws and regulations, and to obtain necessary regulatory action in a timely manner, is and will continue to be critical to the Company’s success.

Certain states impose restrictions on or require prior regulatory approval of various actions by regulated insurers, which may adversely affect the insurance subsidiaries’ ability to operate, innovate and obtain necessary rate adjustments in a timely manner. The Company’s compliance efforts are further complicated by changes in laws or regulations applicable to insurance companies (such as, in recent years, legislative and regulatory initiatives concerning the use of nonpublic consumer information and related privacy issues, the use of credit scoring in underwriting and efforts to freeze, set or roll back insurance premium rates). As such, insurance laws and regulations may limit the insurance subsidiaries’ ability to underwrite and price risks accurately, prevent the subsidiaries from obtaining timely rate increases necessary to cover increased costs, and restrict the subsidiaries’ ability to discontinue unprofitable business or exit unprofitable markets. In addition, compliance with insurance-related laws and regulations often will result in increased administrative costs to the Company’s insurance subsidiaries. These results, in turn, may adversely affect the Company’s profitability or its ability or desire to grow its business in the applicable jurisdictions.

The failure to comply with these laws and regulations could also result in actions by regulators, fines and penalties, and in extreme cases, revocation of a subsidiary’s ability to do business in one or more jurisdictions. In addition, the Company and its subsidiaries can face individual and class action lawsuits by its insureds and other parties for alleged violations of certain of these laws or regulations.

Moreover, new legislation or regulations may be adopted in the future which could adversely affect the Company’s operations or its ability to write business profitably in one or more states. In addition, from time to time, the United States Congress and certain federal agencies investigate the current condition of the insurance industry to determine whether federal regulation is necessary. The Company is unable to predict whether any such laws will be enacted and how and to what extent such laws and regulations would affect the Company’s businesses.

State insurance regulation may create risk and uncertainties for the Company’s insurance subsidiaries in other ways as well. For further information on these risks and uncertainties, see the “Insurance Regulation” discussion beginning on page 11 of this report.

Lawsuits challenging business practices of the Company, its competitors and other companies are pending and more may be filed in the future.

The Progressive Corporation and/or its subsidiaries are named as defendants in a number of putative class action and other lawsuits challenging various aspects of the subsidiaries’ business operations. These lawsuits include cases alleging damages as a result of the use of after-market parts, total loss evaluation methodology, the use of alternative commissions, the use of credit in underwriting, the alleged “diminution in value” of vehicles which are involved in accidents, the methods used for evaluating and paying certain bodily injury, personal injury protection and medical

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payment claims, policy implementation and renewal procedures, the classification of employees under federal and state wage and hour laws, among other matters. Other litigation may be filed against the Company and/or its subsidiaries in the future concerning these or other business practices. In addition, lawsuits have been filed, and other lawsuits may be filed in the future, against the Company’s competitors and other businesses, and the results of those cases may create additional risks for, and/or impose additional costs and/or limitations on, the subsidiaries’ business operations.

Litigation is unpredictable, and the outcome of these cases is uncertain. Lawsuits against the Company routinely seek significant monetary damages from the Company. Moreover, as courts resolve individual or class action litigation in the insurance arena, a new layer of court-imposed regulation could result in material increases in the Company’s costs of doing business. Except to the extent the Company has established loss reserves with respect to particular cases that are currently pending, the Company is unable to predict the effect, if any, that these pending or future cases may have on the business, operations, profitability or financial condition of the Company. For further information on pending litigation, see Note 11, Litigation, beginning on page App.-B-21 of the Annual Report, which is included as Exhibit 13 to this Form 10-K.

The Company’s success depends on its ability to underwrite risks accurately and to charge adequate rates to policyholders.

The Company’s financial condition, cash flows and results of operations depend on the Company’s ability to underwrite and set rates accurately for a full spectrum of risks. Rate adequacy is necessary to generate sufficient premium to offset losses, loss adjustment expenses and underwriting expenses and to earn a profit.

In order to price accurately, the Company must collect and properly analyze a substantial volume of data; develop, test and apply appropriate rating formulae; closely monitor and timely recognize changes in trend; and project both severity and frequency of losses with reasonable accuracy. The Company’s ability to undertake these efforts successfully, and as a result price accurately, is subject to a number of risks and uncertainties, including, without limitation:

    availability of sufficient reliable data,
 
    incorrect or incomplete analysis of available data,
 
    uncertainties inherent in estimates and assumptions, generally,
 
    selection and application of appropriate rating formulae or other pricing methodologies,
 
    the Company’s ability to innovate with new pricing strategies, and the success of those innovations,
 
    the Company’s ability to predict retention (e.g., policy life expectancy) accurately,
 
    unanticipated court decisions, legislation or regulatory action,
 
    ongoing changes in the Company’s claim settlement practices,
 
    changing driving patterns,
 
    unexpected inflation in the medical sector of the economy, and
 
    unanticipated inflation in auto repair costs, auto parts prices and used car prices.

Such risks may result in the Company’s pricing being based on stale, inadequate or inaccurate data or inappropriate analyses, assumptions or methodologies, and may cause the Company to estimate incorrectly future changes in the frequency or severity of claims. As a result, the Company could underprice risks, which would negatively affect the Company’s margins, or it could overprice risks, which could reduce the Company’s volume and competitiveness. In either event, the Company’s operating results, financial condition and cash flow could be materially adversely affected.

The Company’s financial performance may also be materially adversely affected by severe weather conditions or other catastrophic losses.

The Company continues to be exposed to the risk of severe weather conditions and other catastrophes. Catastrophes can be caused by natural events, such as hurricanes, tornadoes, windstorms, earthquakes, hailstorms, severe winter weather and fires, and other events, such as explosions, terrorist attacks, riots, hazardous material releases, utility outages or interruptions of communications facilities. The extent of insured losses from a catastrophe is a function of both the Company’s total insured exposure in the area affected by the event and the nature and severity of the event. In addition, the Company’s business could be further impaired if a significant portion of its business or systems were shut down by, or if the Company was unable to gain access to certain of its facilities as a result of, such an event. Most of the Company’s past catastrophe-related claims have resulted from severe storms. The incidence and severity of

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catastrophes are inherently unpredictable. When they occur with enough severity, the Company’s financial performance, cash flows or results of operations could be materially adversely affected.

The Company’s success depends on its ability to establish accurate loss reserves and to adjust claims accurately.

The Company’s financial statements include loss reserves, which represent the Company’s best estimate of the amounts that the subsidiaries will ultimately pay on claims, and the related costs of adjusting those claims, as of the date of the financial statements. There is inherent uncertainty in the process of establishing property and casualty loss reserves, which arises from a number of factors, including:

    the lack of credible data,
 
    the difficulty in predicting the rate of inflation and the rate and direction of changes in trend in various markets,
 
    changes in medical and auto repair costs,
 
    changes in governing statutes and regulations,
 
    new or changing interpretations of insurance policy provisions by courts,
 
    inconsistent decisions in lawsuits regarding coverage and changing theories of liability,
 
    ongoing changes in the Company’s claim settlement practices,
 
    the accuracy of estimates by the Company of the number or severity of claims that have been incurred but not reported as of the date of the financial statement,
 
    the accuracy and adequacy of actuarial techniques and databases used in estimating loss reserves, and
 
    the accuracy of selected point estimates of total loss and loss adjustment expenses as determined by the Company’s employees for different categories of claims.

As a result of these and other risks and uncertainties, ultimate paid losses and loss adjustment expenses may deviate, perhaps substantially, from point-in-time estimates of such losses and expenses, as reflected in the loss reserves included in the Company’s financial statements. Consequently, ultimate losses paid could materially exceed loss reserves and have a materially adverse effect on the Company’s results of operations, liquidity or financial position. Further information on the Company’s loss reserves can be found in the “Liability for Property-Casualty Losses and Loss Adjustment Expenses” discussion beginning on page 14 of this report, as well as the Company’s Report on Loss Reserving Practices, which was filed with the SEC on Form 8-K on June 27, 2003.

Likewise, the Company must accurately evaluate and pay claims that are made under its policies. Many factors affect the Company’s ability to pay claims accurately, including the training and experience of the Company’s claims representatives, the claims organization’s culture and the effectiveness of its management, the Company’s ability to develop or select and implement appropriate procedures and systems to support its claims functions, and other factors. The Company’s failure to pay claims accurately could result in unanticipated losses to the Company, lead to material litigation, undermine customer goodwill and the Company’s reputation in the marketplace and impair the Company’s brand image and, as a result, materially adversely affect the Company’s financial results and liquidity.

The Company’s business depends on the uninterrupted operation of its facilities, systems and business functions, including its information technology and other business systems.

The Company’s business is highly dependent upon its employees’ ability to perform, in an efficient and uninterrupted fashion, necessary business functions, such as Internet support and 24-hour call centers, processing new and renewal business, and processing and paying claims. A shut-down of or inability to access one or more of the Company’s facilities, a power outage, or a failure of one or more of the Company’s information technology, telecommunications or other systems could significantly impair the Company’s ability to perform such functions on a timely basis. In addition, because the Company’s information technology and telecommunications systems interface with and depend on third party systems, the Company could experience service denials if demand for such service exceeds capacity or a third party system fails or experiences an interruption. If sustained or repeated, such a business interruption, systems failure or service denial could result in a deterioration of the Company’s ability to write and process new and renewal business, provide customer service, pay claims in a timely manner or perform other necessary corporate functions. This could result in a materially adverse effect on the Company’s business results and liquidity.

To help maintain functionality and reduce the risk of significant interruptions of its operations, the Company maintains back-up systems or facilities for certain of its principal systems and services; however, these measures may prove to be

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unsuccessful or inadequate against severe, multiple or prolonged service interruptions or against interruptions of systems where no back-up currently exists. In addition, the Company has established emergency management teams comprised of senior managers from various corporate functions who are responsible for responding to business disruptions and other risk events. The emergency management teams’ ability to respond successfully to certain of these events may be limited, depending on the nature of the event, the completeness and effectiveness of the Company’s plans to maintain business continuity upon the occurrence of such an event, and other factors which may be beyond the Company’s control. The Company maintains insurance on its real property and other physical assets, which includes coverage for losses due to business interruptions caused by covered property damage. However, this insurance will not compensate the Company for losses that may occur due to disruptions in service as a result of a computer, data processing or telecommunications systems failure that is unrelated to covered property damage; nor will such business interruption insurance necessarily compensate the Company for all losses resulting from covered events.

A security breach of the Company’s computer systems could also interrupt or damage its operations or harm its reputation. In addition, the Company could be subject to liability if confidential customer information is misappropriated from its computer systems. Despite the implementation of security measures, including hiring an independent firm to perform intrusion vulnerability testing of the Company’s computer systems, these systems may be vulnerable to physical break-ins, computer viruses, programming errors, attacks by third parties or similar disruptive problems. Any well-publicized compromise of security could deter people from entering into transactions that involve transmitting confidential information to the Company’s systems, which could have a material, adverse effect on the Company’s business.

The performance of the Company’s fixed-income and equity investment portfolios are subject to investment risks.

The Company’s fixed-income portfolio is subject to a number of risks, including:

    Interest rate risk – the risk of changes in the value of fixed-income securities as a result of movements in the underlying market rates of the securities held, which is the most significant risk to the fixed income portfolio,
 
    Credit risk – the risk that the value of instruments held would be impaired due to the deterioration in financial condition of one or more issuers of those instruments,
 
    Concentration risk – the risk that the portfolio could be too heavily concentrated in the securities of one or more issuers or sectors, resulting in a significant decrease in the value of the portfolio in the event of a deterioration of those issuers or their securities, and
 
    Prepayment risk (applicable to certain securities in the portfolio, such as residential mortgage-backed securities) – the risk that, as interests rates change, prepayment expectations of principal of such securities may change, adversely affecting the value of or income from such securities and the portfolio.

The common equity portfolio is managed to track the Russell 1000 index, and is generally subject to the risk of equity market volatility. A substantial decline in the value of the equities that make up the index would likely result in a substantial decline in the value of the Company’s equity portfolio.

In addition, both portfolios are subject to risks inherent in the nation’s and the world’s capital markets. The functioning of those markets, the values of the investments held by the Company and the Company’s ability to liquidate investments on short notice may be adversely affected if those markets are disrupted by national or international events including, without limitation, wars, terrorist attacks, recessions or depressions, a significant change in inflation expectations, a significant devaluation of governmental credit, currencies or financial markets, and other factors or events.

If the fixed-income or equity portfolios, or both, were to be impaired by market, sector or issuer-specific conditions to a substantial degree, the Company’s liquidity, financial position and financial results could be materially adversely affected. Under these circumstances, the Company’s income from these investments could be materially reduced, and write-downs of the value of certain securities could further reduce the Company’s reported earnings and capital levels. A decrease in value of the Company’s investment portfolio could also put the Company’s insurance subsidiaries at risk of failing to satisfy regulatory capital requirements. If the Company was not at that time able to supplement its subsidiaries’ capital from The Progressive Corporation’s other assets or by issuing debt or equity securities on acceptable terms, the Company’s business could be materially adversely affected.

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The Company’s insurance subsidiaries may be limited in the amount of dividends that they can pay to the Company, which in turn may limit the Company’s ability to pay dividends to shareholders, repay indebtedness or make capital contributions to subsidiaries or affiliates.

The Progressive Corporation is a holding company with no business operations of its own. Consequently, if the Company's subsidiaries are unable to pay dividends or make other distributions to The Progressive Corporation, or are able to pay only limited amounts, the holding company may be unable to pay dividends to shareholders, make payments on its indebtedness, meet its other obligations, or make capital contributions to or otherwise fund its subsidiaries or affiliates. Each subsidiary’s ability to pay dividends to the holding company may be limited by one or more of the following factors:

State insurance regulatory authorities require insurance companies to maintain specified minimum levels of statutory capital and surplus.
 
Competitive pressures require the Company’s insurance subsidiaries to maintain financial strength ratings.
 
In certain jurisdictions, prior approval must be obtained from state regulatory authorities for the insurance subsidiaries to pay dividends or make other distributions to affiliated entities, including the Company.

Further information on state insurance laws and regulations which may limit the ability of the Company’s insurance subsidiaries to pay dividends can be found in Item 5(c), “Subsidiary Dividends,” on page 18 of this report.

The Company does not manage analysts’ or investors’ earnings expectations, and the Company announces its financial results on a monthly basis, which may result in stock price volatility.

The Company believes that shareholder value will be increased in the long run if the Company meets or exceeds certain financial goals and policies established by the Company. The Company does not manage its business to maximize short-term stock performance. The Company does not provide earnings estimates to the market and does not comment on earnings estimates by analysts. As a result, the Company’s reported results for a particular period may vary, perhaps significantly, from investors’ expectations, which could result in significant volatility in the Company’s stock price.

The Company publicly announces its financial results on a monthly basis, in addition to the quarterly and annual public filings required by law. The Company believes that this level of reporting provides more timely disclosure to shareholders and potential investors, enabling them to enhance their understanding of the Company’s performance. Such reports, however, may disclose variation of results that investors might not see in quarterly reports. Consequently, investor reaction to such variation could result in significant volatility in the Company’s stock price.

Similarly, under applicable accounting rules, the Company may be required to record a significant loss or other adjustment to income in a specific monthly or quarterly reporting period in the event of a significant reserve adjustment, catastrophic loss, development(s) in litigation against the Company, other-than-temporary impairment write down of one or more investments, or other extraordinary events. In addition, the change in market value of certain derivative instruments the Company holds may also affect reported income. Such events may make the Company’s reported results appear volatile and could adversely affect the market for the Company’s stock.

Competitive Factors

The automobile insurance and other property-casualty markets in which the Company operates are highly competitive. Property-casualty insurers generally compete on the basis of price, consumer recognition, coverages offered, claims handling, financial stability, customer service and geographic coverage. Vigorous competition is provided by large, well-capitalized national companies, some of which have broad distribution networks of employed or captive agents, and by smaller regional insurers. The Company relies heavily on technology and extensive data gathering and analysis to segment markets and price according to risk potential. The Company has remained competitive by closely managing expenses and achieving operating efficiencies, and by refining its risk measurement and price segmentation skills. Superior customer service, claims adjusting and strong brand recognition are also important factors in the Company’s competitive strategy.

10


 

State Insurance Licenses

The Company’s insurance subsidiaries operate under licenses issued by various insurance authorities. These licenses may be of perpetual duration or renewable periodically, provided the holder continues to meet applicable regulatory requirements. The licenses govern the kinds of insurance coverages that may be written in the issuing state. Such licenses are normally issued only after the filing of an appropriate application and the satisfaction of prescribed criteria. All licenses that are material to the subsidiaries’ businesses are in good standing.

Insurance Regulation

The insurance subsidiaries are generally subject to regulation and supervision by insurance departments of the jurisdictions in which they are domiciled or licensed to transact business. At least one of the insurance subsidiaries is licensed and subject to regulation in each of the 50 states and the District of Columbia. The nature and extent of such regulation and supervision varies from jurisdiction to jurisdiction. Generally, an insurance company is subject to a higher degree of regulation and supervision in its state of domicile. The Company’s insurance subsidiaries and affiliates are domiciled in the states of Arizona, Colorado, Florida, Louisiana, Michigan, Mississippi, New York, Ohio, Pennsylvania, Texas, Washington and Wisconsin. State insurance departments have broad administrative power relating to licensing insurers and agents, regulating premium rates and policy forms, establishing reserve requirements, prescribing statutory accounting methods and the form and content of statutory financial reports, and regulating the type and amount of investments permitted. Rate regulation varies from “use and file” to prior approval to mandated rates.

Insurance departments are charged with the responsibility of ensuring that insurance companies maintain adequate capital and surplus and comply with a variety of operational standards. Insurance companies are generally required to file detailed annual and other reports with the insurance department of each jurisdiction in which they conduct business. Insurance departments are authorized to make periodic and other examinations of regulated insurers’ financial condition and operations to monitor financial stability of the insurers and to ensure adherence to statutory accounting principles and compliance with state insurance laws and regulations.

Insurance holding company laws enacted in many jurisdictions grant to insurance authorities the power to regulate acquisitions of insurers and certain other transactions and to require periodic disclosure of certain information. These laws impose prior approval requirements for certain transactions between regulated insurers and their affiliates and generally regulate dividend and other distributions, including loans and cash advances, between regulated insurers and their affiliates. See the “Subsidiary Dividends” discussion in Item 5(c) for further information on these dividend limitations.

Under state insolvency and guaranty laws, regulated insurers can be assessed or required to contribute to state guaranty funds to cover policyholder losses resulting from the insolvency of other insurers. Insurers are also required by many states, as a condition of doing business in the state, to provide coverage to certain risks which are not insurable in the voluntary market. These “assigned risk” plans generally specify the types of insurance and the level of coverage which must be offered to such involuntary risks, as well as the allowable premium. Many states also have involuntary market plans which hire a limited number of servicing carriers to provide insurance to involuntary risks. These plans, through assessments, pass underwriting and administrative expenses on to insurers that write voluntary coverages in those states.

Insurance companies are generally required by insurance regulators to maintain sufficient surplus to support their writings. Although the ratio of writings to surplus that the regulators will allow is a function of a number of factors, including the type of business being written, the adequacy of the insurer’s reserves, the quality of the insurer’s assets and the identity of the regulator, the annual net premiums that an insurer may write are generally limited in relation to the insurer’s total policyholders’ surplus. Thus, the amount of an insurer’s surplus may, in certain cases, limit its ability to grow its business. The Company intends to begin a process to slowly increase operating leverage through a higher rate of net premiums to surplus in its agency, direct and commercial insurance subsidiaries where permitted. The National Association of Insurance Commissioners also has developed a risk-based capital (RBC) program to enable regulators to take appropriate and timely regulatory actions relating to insurers that show signs of weak or

11


 

deteriorating financial condition. RBC is a series of dynamic surplus-related formulas which contain a variety of factors that are applied to financial balances based on a degree of certain risks, such as asset, credit and underwriting risks.

Many states have laws and regulations that limit an insurer’s ability to exit a market. For example, certain states limit an automobile insurer’s ability to cancel or non-renew policies. Furthermore, certain states prohibit an insurer from withdrawing one or more lines of business from the state, except pursuant to a plan that is approved by the state insurance department. The state insurance department may disapprove a plan that may lead to market disruption. Laws and regulations that limit the cancellation or non-renewal of policies and that subject program withdrawals to prior approval requirements may restrict an insurer’s ability to exit unprofitable markets.

Regulation of insurance constantly changes as real or perceived issues and developments arise. Some changes may be due to economic developments, such as changes in investment laws made to recognize new investment vehicles; other changes result from such general pressures as consumer resistance to price increases and concerns relating to insurer solvency. In recent years, legislation and voter initiatives have been introduced, and in some cases adopted, which deal with use of non-public consumer information, use of financial responsibility and credit information in underwriting, insurance rate development, rate determination and the ability of insurers to cancel or non-renew insurance policies, reflecting concerns about consumer privacy, coverage, availability, prices and alleged discriminatory pricing. In addition, from time to time, the United States Congress and certain federal agencies investigate the current condition of the insurance industry to determine whether federal regulation is necessary.

In a number of states, the Company’s insurance subsidiaries use financial responsibility or credit information (credit) as part of the underwriting or rating process. This practice is expressly authorized by the federal Fair Credit Reporting Act (FCRA) and the Company’s data demonstrates that credit is an effective predictor of insurance risk. The use of credit in underwriting and rating is the subject of significant regulatory and legislative activity. Regulators and legislators have expressed a number of concerns related to the use of credit, including: questions regarding the accuracy of credit reports, perceptions that credit may have a disparate impact on the poor and certain minority groups, the perceived lack of a demonstrated causal relationship between credit and insurance risk, the treatment of persons with limited or no credit, the impact of extraordinary life events (i.e., catastrophic injury or death of a spouse), and concerns about the credit attributes applied in the credit scoring models used by insurers. A number of state insurance departments have issued bulletins, directives or regulations to regulate the use of credit by insurers. In addition, a number of states are considering or have passed legislation to regulate insurers’ use of credit. Also, Congress recently mandated that the federal government conduct a disparate impact study of the use of credit. It is possible that Congress may enact further legislation affecting the use of credit in underwriting and rating following completion of that study.

In some states, the automobile insurance industry has been under pressure in past years from regulators, legislators or special interest groups to reduce, freeze or set rates to or at levels that are not necessarily related to underlying costs, including initiatives to roll back automobile and other personal lines rates. This kind of activity has adversely affected, and may in the future adversely affect, the profitability and growth of the subsidiaries’ automobile insurance business in those jurisdictions, and may limit the subsidiaries’ ability to increase rates to compensate for increases in costs. Adverse legislative and regulatory activity limiting the subsidiaries’ ability to price automobile insurance adequately, or affecting the subsidiaries’ insurance operations adversely in other ways, may occur in the future. The impact of these regulatory changes on the subsidiaries’ businesses cannot be predicted.

12


 

Statutory Accounting Principles

The Company’s results are reported in accordance with generally accepted accounting principles (GAAP), which differ from amounts reported under statutory accounting principles (SAP) prescribed by insurance regulatory authorities. Primarily, under GAAP:

1.   Commissions, premium taxes and other variable costs incurred in connection with writing new and renewal business are capitalized and amortized on a pro rata basis over the period in which the related premiums are earned, rather than expensed as incurred, as required by SAP.
 
2.   Certain assets are included in the consolidated balance sheets, but are charged directly against statutory surplus under SAP. These assets consist primarily of premium receivables that are outstanding over 90 days, federal deferred tax assets in excess of statutory limitations, furniture, equipment, application computer software, leasehold improvements and prepaid expenses.
 
3.   Amounts related to ceded reinsurance, such as prepaid reinsurance premiums and reinsurance recoverables, are shown gross, rather than netted against unearned premium reserves and loss and loss adjustment expense reserves, respectively, as required by SAP.
 
4.   Fixed maturities securities, which are classified as available-for-sale, are reported at current market values, rather than at amortized cost, or the lower of amortized cost or market, depending on the specific type of security, as required by SAP. Equity securities are reported at quoted market values, which may differ from the NAIC market values as required by SAP.
 
5.   The differing treatment of income and expense items results in a corresponding difference in federal income tax expense. Both current and deferred taxes are recognized in the income statement for GAAP, while deferred taxes are posted directly to surplus for SAP.

Investments

The Company employs a conservative approach to investment and capital management intended to ensure that there is sufficient capital to support all of the insurance premium that can be profitably written. The Company’s portfolio is invested primarily in short-term and intermediate-term, investment-grade fixed-income securities. The Company’s investment portfolio, at market value, was $12.5 billion at December 31, 2003, compared to $10.3 billion at December 31, 2002. Investment income is affected by shifts in the type and quality of investments in the portfolio, changes in interest rates and other factors. Investment income, including net realized gains/losses on securities, before expenses and taxes, was $478.0 million in 2003, compared to $376.6 million in 2002 and $301.7 million in 2001. See Management’s Discussion and Analysis of Financial Condition and Results of Operations, beginning on page App.-B-24 of the Annual Report, which is included as Exhibit 13 to this Form 10-K.

Employees

The number of employees, excluding temporary employees, at December 31, 2003, was 25,834.

13


 

Liability for Property-Casualty Losses and Loss Adjustment Expenses

The consolidated financial statements include the estimated liability for unpaid losses and loss adjustment expenses (LAE) of the Company’s insurance subsidiaries. The Company’s objective is to ensure that total reserves (i.e. case and incurred but not reported reserves-IBNR) are adequate to cover all loss costs, while sustaining minimal variation from the time reserves are initially established until losses are fully developed. The liabilities for losses and LAE are determined using actuarial and statistical procedures and represent undiscounted estimates of the ultimate net cost of all unpaid losses and LAE incurred through December 31 of each year. These estimates are subject to the effect of future trends on claim settlement. These estimates are continually reviewed and adjusted as experience develops and new information becomes known. Such adjustments, if any, are reflected in the current results of operations.

The accompanying tables present an analysis of property-casualty losses and LAE. The following table provides a reconciliation of beginning and ending estimated liability balances for 2003, 2002 and 2001 on a GAAP basis.

RECONCILIATION OF NET RESERVES FOR LOSSES AND LOSS ADJUSTMENT EXPENSES

                               
(millions)   2003   2002   2001

 
 
 
Balance at January 1
  $ 3,813.0     $ 3,238.0     $ 2,986.4  
 
Less reinsurance recoverables on unpaid losses
    180.9       168.3       201.1  
 
   
     
     
 
Net balance at January 1
    3,632.1       3,069.7       2,785.3  
 
   
     
     
 
Incurred related to:
                       
   
Current year
    7,696.5       6,295.6       5,363.1  
   
Prior years
    (56.1 )     3.5       (99.0 )
 
   
     
     
 
     
Total incurred
    7,640.4       6,299.1       5,264.1  
 
   
     
     
 
Paid related to:
                       
   
Current year
    5,065.4       4,135.0       3,570.4  
   
Prior years
    1,860.7       1,601.7       1,409.3  
 
   
     
     
 
     
Total paid
    6,926.1       5,736.7       4,979.7  
 
   
     
     
 
Net balance at December 31
    4,346.4       3,632.1       3,069.7  
Plus reinsurance recoverable on unpaid losses
    229.9       180.9       168.3  
 
   
     
     
 
Balance at December 31
  $ 4,576.3     $ 3,813.0     $ 3,238.0  
 
   
     
     
 

During 2003 and 2001, the Company experienced $56.1 million and $99.0 million, respectively, of favorable loss reserve development, compared to $3.5 million of unfavorable development in 2002. In addition to the favorable claims settlement during 2003, the Company benefited from a change in its estimate of the Company’s future operating losses due to business assigned from the New York Automobile Insurance Plan. During 2002, the Company made no significant change to the estimate of loss reserves recorded in prior years. The favorable development in 2001 is primarily attributable to the settlement of claims at less than amounts reserved and primarily relates to the 2000 accident year. The Company conducts extensive reviews each month on portions of its business to help ensure that the Company is meeting its objective of having reserves that are adequate, with minimal variation.

The anticipated effect of inflation is explicitly considered when estimating liabilities for losses and LAE. In addition, the Company takes into account the projected increase in average severities of claims, which is caused by a number of factors that vary with the individual type of policy written. Future average severities are projected based on historical trends adjusted for anticipated changes in underwriting standards, inflation, policy provisions and general economic trends. These anticipated trends are monitored based on actual development and are modified if necessary.

The Company has not entered into any loss reserve transfers or similar transactions having a material effect on earnings or reserves.

14


 

ANALYSIS OF LOSS AND LOSS ADJUSTMENT EXPENSES DEVELOPMENT
(millions)

                                                   
YEAR ENDED   1993   19943   1995   1996   1997   1998

 
 
 
 
 
 
LIABILITY FOR UNPAID LOSSES AND LAE - GROSS
  $ 1,347.2     $ 1,432.9     $ 1,610.5     $ 1,800.6     $ 2,146.6     $ 2,188.6  
LESS: REINSURANCE RECOVERABLE ON UNPAID LOSSES
    334.8       334.2       296.1       267.7       279.1       242.8  
 
   
     
     
     
     
     
 
LIABILITY FOR UNPAID LOSSES AND LAE - NET1
  $ 1,012.4     $ 1,098.7     $ 1,314.4     $ 1,532.9     $ 1,867.5     $ 1,945.8  
PAID (CUMULATIVE) AS OF:
                                               
 
One year later
    417.0       525.3       593.0       743.6       922.0       1,082.8  
 
Two years later
    589.8       706.4       838.9       1,034.5       1,289.6       1,487.9  
 
Three years later
    664.1       810.6       960.1       1,266.1       1,474.9       1,680.6  
 
Four years later
    709.9       857.1       1,057.1       1,351.1       1,554.1       1,785.7  
 
Five years later
    729.8       892.7       1,092.5       1,384.0       1,596.7       1,836.4  
 
Six years later
    742.2       909.7       1,106.3       1,399.9       1,618.2        
 
Seven years later
    752.8       917.1       1,112.3       1,408.9              
 
Eight years later
    757.4       919.7       1,117.6                    
 
Nine years later
    759.1       922.6                          
 
Ten years later
    761.0                                
LIABILITY RE-ESTIMATED AS OF:
                                               
 
One year later
    869.9       1,042.1       1,208.6       1,429.6       1,683.3       1,916.0  
 
Two years later
    837.8       991.7       1,149.5       1,364.5       1,668.5       1,910.6  
 
Three years later
    811.3       961.2       1,118.6       1,432.3       1,673.1       1,917.3  
 
Four years later
    794.6       940.6       1,137.7       1,451.0       1,669.2       1,908.2  
 
Five years later
    782.9       945.5       1,153.3       1,445.1       1,664.7       1,919.0  
 
Six years later
    780.1       952.7       1,150.1       1,442.0       1,674.5        
 
Seven years later
    788.6       952.6       1,146.2       1,445.6              
 
Eight years later
    787.5       949.7       1,147.4                    
 
Nine years later
    787.0       950.9                          
 
Ten years later
    787.7                                
CUMULATIVE DEVELOPMENT:
                                               
CONSERVATIVE/(DEFICIENT)
  $ 224.7     $ 147.8     $ 167.0     $ 87.3     $ 193.0     $ 26.8  
PERCENTAGE2
    22.2       13.5       12.7       5.7       10.3       1.4  
RE-ESTIMATED LIABILITY FOR UNPAID LOSSES AND LAE - GROSS
  $ 1,036.4     $ 1,200.4     $ 1,394.0     $ 1,714.6     $ 1,932.9     $ 2,147.7  
LESS: RE-ESTIMATED REINSURANCE RECOVERABLE ON UNPAID LOSSES
    248.7       249.5       246.6       269.0       258.4       228.7  
 
   
     
     
     
     
     
 
RE-ESTIMATED LIABILITY FOR UNPAID LOSSES AND LAE1 - NET
  $ 787.7     $ 950.9     $ 1,147.4     $ 1,445.6     $ 1,674.5     $ 1,919.0  
GROSS CUMULATIVE DEVELOPMENT:
                                               
CONSERVATIVE/(DEFICIENT)
  $ 310.8     $ 232.5     $ 216.5     $ 86.0     $ 213.7     $ 40.9  

[Additional columns below]

[Continued from above table, first column(s) repeated]

                                           
YEAR ENDED   1999   2000   2001   2002   2003

 
 
 
 
 
LIABILITY FOR UNPAID LOSSES AND LAE - GROSS
  $ 2,416.2     $ 2,986.4     $ 3,238.0     $ 3,813.0     $ 4,576.3  
LESS: REINSURANCE RECOVERABLE ON UNPAID LOSSES
    216.0       201.1       168.3       180.9       229.9  
 
   
     
     
     
     
 
LIABILITY FOR UNPAID LOSSES AND LAE - NET1
  $ 2,200.2     $ 2,785.3     $ 3,069.7     $ 3,632.1     $ 4,346.4  
PAID (CUMULATIVE) AS OF:
                                       
 
One year later
    1,246.5       1,409.3       1,601.7       1,860.7          
 
Two years later
    1,738.5       2,047.2       2,290.7                
 
Three years later
    2,001.4       2,355.0                      
 
Four years later
    2,126.4                            
 
Five years later
                               
 
Six years later
                               
 
Seven years later
                               
 
Eight years later
                               
 
Nine years later
                               
 
Ten years later
                               
LIABILITY RE-ESTIMATED AS OF:
                                       
 
One year later
    2,276.0       2,686.3       3,073.2       3,576.0          
 
Two years later
    2,285.4       2,708.3       3,024.2                  
 
Three years later
    2,277.7       2,671.2                      
 
Four years later
    2,272.3                            
 
Five years later
                               
 
Six years later
                               
 
Seven years later
                               
 
Eight years later
                               
 
Nine years later
                               
 
Ten years later
                               
CUMULATIVE DEVELOPMENT:
                                       
CONSERVATIVE/(DEFICIENT)
  $ (72.1 )   $ 114.1     $ 45.5     $ 56.1          
PERCENTAGE2
    (3.3 )     4.1       1.5       1.5          
RE-ESTIMATED LIABILITY FOR UNPAID LOSSES AND LAE - GROSS
  $ 2,482.6     $ 2,859.6     $ 3,190.1     $ 3,779.6          
LESS: RE-ESTIMATED REINSURANCE RECOVERABLE ON UNPAID LOSSES
    210.3       188.4       165.9       203.6          
 
   
     
     
     
         
RE-ESTIMATED LIABILITY FOR UNPAID LOSSES AND LAE1 - NET
  $ 2,272.3     $ 2,671.2     $ 3,024.2     $ 3,576.0          
GROSS CUMULATIVE DEVELOPMENT:
                                       
CONSERVATIVE/(DEFICIENT)
  $ (66.4 )   $ 126.8     $ 47.9     $ 33.4          

1 Represents loss and LAE reserves net of reinsurance recoverables on unpaid losses at the balance sheet date.

2 Cumulative development ÷ liability for unpaid losses and LAE - Net.

3 In 1994, based on a review of its total loss reserves, the Company eliminated its $71.0 million “supplemental reserve.”

15


 

The above table presents the development of balance sheet liabilities for 1993 through 2002. The top line of the table shows the estimated liability for unpaid losses and LAE recorded at the balance sheet date for each of the indicated years for the property-casualty insurance subsidiaries only. This liability represents the estimated amount of losses and LAE for claims that are unpaid at the balance sheet date, including losses that had been incurred but not reported. The table also presents the re-estimated liability for unpaid losses and LAE on a gross basis, with separate disclosure of the re-estimated reinsurance recoverables on unpaid losses.

The upper section of the table shows the cumulative amount paid with respect to the previously recorded liability as of the end of each succeeding year. The lower portion of the table shows the re-estimated amount of the previously recorded liability based on experience as of the end of each succeeding year. The estimate is increased or decreased, as more information about the claims becomes known for individual years. For example, as of December 31, 2003, the companies had paid $922.6 million of the currently estimated $950.9 million of losses and LAE that had been incurred through the end of 1994; thus an estimated $28.3 million of losses incurred through 1994 remain unpaid as of the current financial statement date.

The cumulative development represents the aggregate change in the estimates over all prior years. For example, the 1993 liability has developed conservatively by $224.7 million over ten years. That amount has been reflected in income over the ten years and did not have a significant effect on the income of any one year. The effects on income during the past three years due to changes in estimates of the liabilities for losses and LAE are shown in the reconciliation table on page 14 as the “prior years” contribution to incurred losses and LAE.

In evaluating this information, note that each cumulative development amount includes the effects of all changes in amounts during the current year for prior periods. For example, the amount of the development related to losses settled in 1996, but incurred in 1993, will be included in the cumulative development amount for years 1993, 1994 and 1995. Conditions and trends that have affected development of the liability in the past may not necessarily occur in the future. Accordingly, it generally is not appropriate to extrapolate future development based on this table.

The Company experienced continually favorable reserve development through 1998 primarily due to the decreasing bodily injury severity. From the fourth quarter 1993 continuously through the third quarter 1998, the Company’s bodily injury severity decreased each quarter when compared to the same quarter the prior year. This period of decreasing severity for the Company was not only longer than that experienced by the industry but also longer than any time in Progressive’s history. The adverse development in 2000, primarily for the 1999 accident year, reflects the Company’s inability to fully recognize the increasing loss trends that were emerging. The reserves established as of the end of each year assumed the current accident year’s severity to increase over the prior accident year’s estimate. As the experience continued to be evaluated at later dates, the realization of the decreased severity resulted in favorable reserve development.

During 1994, based on a review of the adequacy of its total loss reserves, the Company eliminated its $71.0 million “supplemental reserve.” Prior to 1994, the Company established case and IBNR reserves by product with the objective of being accurate to within plus or minus two percent. Pricing had been based on these estimates of reserves by product. Because the Company desired a very high degree of comfort that aggregate reserves were adequate, aggregate reserves were established near the upper end of the reasonable range of reserves, and the difference between such aggregate reserves and the midpoint of the reasonable range of case and IBNR reserves was called the “supplemental reserve.” The Company concluded, after examining its historical aggregate reserves, that the practice of setting aggregate reserves at the upper end of the range of reasonable reserves provided an unnecessarily high level of comfort. Even without the high level of comfort provided by the “supplemental reserve,” the Company’s reserves had generally been adequate. The Company believes that this change in the carried level of its reserves placed the Company more in line with the practices of other companies in the industry.

The Analysis of Loss and Loss Adjustment Expenses Development table on page 15 is constructed from Schedule P, Part-1, from the Consolidated Annual Statements, as filed with the state insurance departments. This development table differs from the development displayed in Schedule P, Part-2 due to the fact Schedule P, Part-2 excludes adjusting costs and reflects the change in the method of accounting for salvage and subrogation for 1994 and 1993.

16


 

          (d) Financial Information about geographic areas.

The Company operates throughout the United States. The Company ceased writing new business in Canada in 1999.

          (e) Available information.

The Company’s Web site is progressive.com. As soon as reasonably practicable, the Company makes all documents filed or furnished with the SEC, including its reports on Form 10-K, Form 10-Q and Form 8-K, and any amendement to these reports, available free of charge via its Web site at progressive.com/investors.

ITEM 2. PROPERTIES

The Company’s corporate headquarters office complex is located on a 42-acre parcel in Mayfield Village, Ohio. The Company also owns a 72-acre corporate office complex near the headquarters. Buildings on these two sites, which are owned by a subsidiary of the Company, contain approximately 1.4 million square feet in total.

The Company also owns seven other buildings in suburbs near the corporate office complexes, six buildings in Tampa, Florida, and a building in each of the following cities: Tempe, Arizona; Ft. Lauderdale, Florida; Albany, New York; Tigard, Oregon; Plymouth Meeting, Pennsylvania; and Austin, Texas. Three of these buildings are partially leased to non-affiliates. In total, these buildings contain approximately 1.6 million square feet of office, warehouse and training facility space and are owned by subsidiaries of the Company. These facilities are occupied by the Company’s business units or other operations and are not segregated by industry segment.

The Company leases approximately 1.1 million square feet of office and warehouse space at various locations throughout the United States for its other business units and staff functions. In addition, the Company leases approximately 450 claims offices, consisting of approximately 2.9 million square feet, at various locations throughout the United States. These leases are generally short-term to medium-term leases of standard commercial office space.

As the Company continues to grow, it expects that it will need additional space and is actively engaged in seeking out additional locations to meet its current and anticipated needs. The Company is currently constructing call centers in Colorado Springs, Colorado and Tampa, Florida and an office building in Mayfield Village, Ohio. These three projects are expected to be completed in 2004 at an aggregate estimated total project cost of $128 million. Further, during January 2004, the Company began leasing a call center in Phoenix, Arizona.

ITEM 3. LEGAL PROCEEDINGS

Incorporated by reference from Note 11, Litigation, beginning on page App.-B-21 of the Annual Report, which is included as Exhibit 13 to this Form 10-K.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

There were no matters submitted to a vote of security holders during the fourth quarter of 2003.

EXECUTIVE OFFICERS OF THE REGISTRANT

Incorporated by reference from information with respect to executive officers of The Progressive Corporation and its subsidiaries set forth in Item 10 in Part III of this Form 10-K.

17


 

PART II

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

          (a) Market Information and Dividends

The Company’s Common Shares, $1.00 par value, are traded on the New York Stock Exchange under the symbol PGR. The high and low prices set forth below are as reported on the consolidated transaction reporting system.

                                         
                                    Dividends
Year   Quarter   High   Low   Close   Per Share

 
 
 
 
 
2003
    1     $ 60.41     $ 46.25     $ 59.31     $ .025  
 
    2       76.38       59.66       73.10       .025  
 
    3       75.81       64.25       69.11       .025  
 
    4       84.68       69.11       83.59       .025  
 
           
     
     
     
 
 
          $ 84.68     $ 46.25     $ 83.59     $ .100  
 
           
     
     
     
 
2002
    1     $ 55.80     $ 46.75     $ 55.54     $ .023  
 
    2       60.49       54.64       57.85       .023  
 
    3       57.77       44.75       50.63       .025  
 
    4       58.30       48.79       49.63       .025  
 
           
     
     
     
 
 
          $ 60.49     $ 44.75     $ 49.63     $ .096  
 
           
     
     
     
 

The closing price of the Company’s Common Shares on January 31, 2004 was $82.65.

On March 19, 2002, the Board of Directors of The Progressive Corporation approved a 3-for-1 split of the Company’s Common Shares which was effected in the form of a stock dividend. In connection with the transaction, two additional Common Shares were issued on April 22, 2002, for each Common Share held by shareholders of record as of the close of business on April 1, 2002. The purpose of the stock split was to increase the supply of the Company’s Common Shares and to improve the liquidity of the stock. All of the information presented above has been adjusted for the stock split.

          (b) Holders

There were 4,101 shareholders of record on January 31, 2004.

          (c) Subsidiary Dividends

Statutory policyholders’ surplus was $4.5 billion and $3.4 billion at December 31, 2003 and 2002, respectively. At December 31, 2003, $492.7 million of consolidated statutory policyholders’ surplus represented net admitted assets of the Company’s insurance subsidiaries and affiliates that are required to meet minimum statutory surplus requirements in such entities’ states of domicile. The companies may be licensed in states other than their states of domicile, which may have higher minimum statutory surplus requirements. Generally, the net admitted assets of insurance companies that, subject to other applicable insurance laws and regulations, are available for transfer to the parent company cannot include the net admitted assets required to meet the minimum statutory surplus requirements of the states where the companies are licensed. Based on the dividend laws currently in effect, the insurance subsidiaries may pay aggregate dividends of $967.2 million in 2004 without prior approval from regulatory authorities.

18


 

          (d) Securities authorized for issuance under equity compensation plans.

     The following information is set forth with respect to the equity compensation plan information at December 31, 2003.

EQUITY COMPENSATION PLAN INFORMATION

                                       
                                  Number of Securities
          Number of Securities   Weighted-Average   Number of   Remaining Available
          to be Issued upon   Exercise Price of   Securities   for Future Issuance
          Exercise of   Outstanding   Awarded as   Under Equity
Plan Category   Outstanding Options   Options   Restricted Stock   Compensation Plans

 
 
 
 
Equity compensation plans approved by security holders:
                               
 
Employee Plans:
                               
   
2003 Incentive Plan
                362,997       4,637,003  
 
   
     
     
     
 
   
1995 Incentive Plan
    6,936,145     $ 33.70       190,293       7,188,900  
 
   
     
     
     
 
   
1989 Incentive Plan
    1,788,892       17.79              
 
   
     
     
     
 
 
Director Plans:
                               
   
2003 Directors Equity Incentive Plan
                16,102       333,898  
 
   
     
     
     
 
   
1998 Directors’ Stock Option Plan
    191,061       36.35             406,956  
 
   
     
     
     
 
   
1990 Directors’ Stock Option Plan
    120,000       17.21              
 
   
     
     
     
 
Equity compensation plans not approved by security holders:
                               
     
None
                       
 
   
     
     
     
 

          (e) Share Repurchases

ISSUER PURCHASES OF EQUITY SECURITIES

                                 
                    Total Number of Shares Purchased   Maximum Number of Shares That
    Total Number of   Average Price Paid per   as Part of Publicly Announced Plans   May Yet Be Purchased Under the
2003   Shares Purchased   Share   or Programs   Plans or Programs

 
 
 
 
January
    400,000     $ 52.23       400,000       8,625,406  
February
    696,355       50.68       1,096,355       7,929,051  
March1
    735,500       58.82       1,831,855       7,193,551  
 
   
     
     
     
 
April1
    836,000       67.83       836,000       14,164,000  
May
    206,000       69.66       1,042,000       13,958,000  
June
    300,000       74.57       1,342,000       13,658,000  
July
    500,000       66.37       1,842,000       13,158,000  
August
    521,804       69.50       2,363,804       12,636,196  
September
    504,703       71.27       2,868,507       12,131,493  
October
    250,000       74.00       3,118,507       11,881,493  
November
                3,118,507       11,881,493  
December
                3,118,507       11,881,493  
 
   
     
                 
Total
    4,950,362     $ 64.00                  
 
   
     
                 

1In April 2003, the Board of Directors authorized the repurchase of up to 15,000,000 Common Shares, superceding the previous authorization set in April 1996. The Company may purchase its shares from time to time, in the open market or otherwise, when opportunities exist to buy at attractive prices or for purposes which are otherwise in the best interest of the Company.

19


 

ITEM 6. SELECTED FINANCIAL DATA

(millions - except per share amounts)

                                           
            For the years ended December 31,        
     
      2003   2002   2001   2000   1999
     
 
 
 
 
Total revenues
  $ 11,892.0     $ 9,294.4     $ 7,488.2     $ 6,771.0     $ 6,124.2  
Net income
    1,255.4       667.3       411.4       46.1       295.2  
Per share:1
                                       
 
Net income2
    5.69       2.99       1.83       .21       1.32  
 
Dividends
    .100       .096       .093       .090       .087  
Total assets
    16,281.5       13,564.4       11,122.4       10,051.6       9,704.7  
Debt outstanding
    1,489.8       1,489.0       1,095.7       748.8       1,048.6  

1All per share amounts were adjusted for the April 22, 2002, 3-for-1 stock split.

2Presented on a diluted basis.

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Incorporated by reference from Management’s Discussion and Analysis of Financial Condition and Results of Operations beginning on page App.-B-24 of the Annual Report, which is included as Exhibit 13 to this Form 10-K.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The quantitative and qualitative disclosures about market risk are incorporated by reference from the “Investments” section of Management’s Discussion and Analysis of Financial Condition and Results of Operations, as described in Item 7 above. Additional information is incorporated by reference from the “Quantitative Market Risk Disclosures” section beginning on page App.-B-46 of the Annual Report, which is included as Exhibit 13 to this Form 10-K.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

The Consolidated Financial Statements of the Company, along with the related notes, supplementary data and report of independent auditors, are incorporated by reference from the Annual Report, which is included as Exhibit 13 to this Form 10-K.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None

20


 

ITEM 9A. CONTROLS AND PROCEDURES

The Company, under the direction of the Chief Executive Officer and the Chief Financial Officer, has established disclosure controls and procedures that are designed to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. The disclosure controls and procedures are also intended to ensure that such information is accumulated and communicated to the Company’s management, including the Chief Executive Officer and the Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosures.

The Chief Executive Officer and the Chief Financial Officer reviewed and evaluated the Company’s disclosure controls and procedures as of the end of the period covered by this report. Based on that review and evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and procedures are effectively serving the stated purposes as of the end of the period covered by this report.

In addition, there has been no change in the Company’s internal control over financial reporting during the Company’s most recent fiscal year that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

21


 

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

Information relating to all of the directors, and the individuals who have been nominated for election as directors at the 2004 Annual Meeting of Shareholders of the Registrant, is incorporated herein by reference from the section entitled “Election of Directors” in the Proxy Statement.

Information relating to executive officers of the Registrant and its subsidiaries follows. Unless otherwise indicated, the executive officer has held the position(s) indicated for at least the last five years.

             
Name   Age   Offices Held and Last Five Years’ Business Experience

 
 
Glenn M. Renwick     48     President and Chief Executive Officer since January 2001; Chief Executive Officer - Insurance Operations of the Company during 2000; Chief Technology Officer prior to March 2000; President, Chairman of the Board and Chief Executive Officer of Progressive Casualty Insurance Company, the principal subsidiary of the Registrant, since March 2000
             
W. Thomas Forrester     55     Vice President since June 2001; Chief Financial Officer; Treasurer prior to July 2001
             
Charles E. Jarrett     46     Vice President since June 2001; Secretary since February 2001; Chief Legal Officer since November 2000; Partner at Baker & Hostetler LLP, which is the principal outside law firm of the Company, prior to November 2000
             
Jeffrey W. Basch     45     Vice President since December 1999; Chief Accounting Officer
             
Thomas A. King     44     Treasurer since April 2003; Investment Strategist from February 2001 to March 2003; Vice President since December 1999; Corporate Controller prior to February 2001
             
Alan R. Bauer     51     Group President of the Direct Business since January 2002; Internet Business Leader prior to December 2001
             
William M. Cody     41     Chief Investment Officer since February 2003; Portfolio Manager prior to February 2003
             
Susan Patricia Griffith     39     Chief Human Resource Officer since April 2002; Process Manager for Claims Central Services from January 2001 to April 2002; Regional Claims Consultant from December 1999 to December 2000; Regional Claims and Sales Manager for Pennsylvania prior to December 1999
             
Brian J. Passell     47     Group President of Claims since January 2002; Claims Business Leader prior to December 2001
             
Raymond M. Voelker     40     Chief Information Officer since April 2000; Information Technology Executive - Claims and Infrastructure Technologies from December 1999 to March 2000; Claims Technology Executive prior to December 1999

22


 

             
Name   Age   Offices Held and Last Five Years’ Business Experience

 
 
Richard H. Watts     49     Group President of Sales and Service since January 2002; Direct Business Leader from January 2000 to December 2001; General Manager of Northeast Ohio prior to January 2000
             
Robert T. Williams     47     Group President of the Agency Business since January 2002; Agency Business Leader from April 2000 to December 2001; Chief Pricing/Product Officer prior to April 2000

Section 16 (a) Beneficial Ownership Reporting Compliance. None

Audit Committee. Incorporated by reference from the “Audit Committee” section (which can be found in “Item 1- Election of Directors”) of the Proxy Statement.

Financial Expert. Incorporated by reference from the “Audit Committee Financial Expert “ section (which can be found in “Item 1- Election of Directors”) of the Proxy Statement

Code of Ethics. The Company’s Code of Ethics for the Chief Executive Officer, Chief Financial Officer and other senior financial officers is available at: progressive.com/governance, or may be requested in print by writing to: The Progressive Corporation, Investor Relations, 6300 Wilson Mills Road, Box W33, Mayfield Village, Ohio 44143. The Company intends to satisfy the disclosure requirements under Item 10 of Form 10-K regarding amendments to, and waivers from, the provisions of the foregoing Code of Ethics by posting such information on the Company’s Internet website at: progressive.com/governance.

Shareholder-Proposed Candidate Procedures. In January 2004, the Nominating and Governance Committee of the Board of Directors approved new procedures for shareholders to recommend candidates for nomination to the Board. The description of those new procedures are incorporated by reference from the “Shareholder-Proposed Candidate Procedures” (which can be found in “Item 1- Election of Directors”) of the Proxy Statement.

Disclosures required by the New York Stock Exchange. The Company’s Corporate Governance Guidelines and Board Committee Charters (including charters for the Audit Committee, Compensation Committee, Investment and Capital Committee, and the Nominating and Governance Committee) are available at: progressive.com/governance, or may be requested in print by writing to: The Progressive Corporation, Investor Relations, 6300 Wilson Mills Road, Box W33, Mayfield Village, Ohio 44143.

The Company’s Code of Business Conduct and Ethics for Directors, Officers and Employees is available at: progressive.com/governance, or may be requested in print by writing to: The Progressive Corporation, Investor Relations, 6300 Wilson Mills Road, Box W33, Mayfield Village, Ohio 44143.

ITEM 11. EXECUTIVE COMPENSATION

Incorporated by reference from the section of the Proxy Statement entitled “Executive Compensation.”

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Incorporated by reference from the section of the Proxy Statement entitled “Security Ownership of Certain Beneficial Owners and Management.”

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

Incorporated by reference from the section of the Proxy Statement entitled “Election of Directors - Certain Relationships and Related Transactions.”

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Incorporated by reference from the section of the Proxy Statement entitled “Other Independent Auditor Information.”

23


 

PART IV

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

  (a)(1)   Listing of Financial Statements

The following consolidated financial statements of the Registrant and its subsidiaries included in the Registrant’s 2003 Annual Report, which is included as Exhibit 13 to this Form 10-K, are incorporated by reference in Item 8:

      Report of Independent Auditors
 
      Consolidated Statements of Income - For the Years Ended December 31, 2003, 2002 and 2001
 
      Consolidated Balance Sheets - December 31, 2003 and 2002
 
      Consolidated Statements of Changes in Shareholders’ Equity - For the Years Ended December 31, 2003, 2002 and 2001
 
      Consolidated Statements of Cash Flows - For the Years Ended December 31, 2003, 2002 and 2001
 
      Notes to Consolidated Financial Statements
 
      Supplemental Information (Unaudited - Not covered by Report of Independent Auditors)

  (a)(2)   Listing of Financial Statement Schedules

The following financial statement schedules of the Registrant and its subsidiaries, Report of Independent Auditors and Consent of Independent Auditors are included in Item 15(d):
     
    Schedules
   
    Schedule I - Summary of Investments - Other than Investments in Related Parties
     
    Schedule II - Condensed Financial Information of Registrant
     
    Schedule III - Supplementary Insurance Information
     
    Schedule IV - Reinsurance
     
    Schedule VI - Supplemental Information Concerning Property-Casualty Insurance Operations
     
    Report of Independent Auditors
     
    Consent of Independent Accountants
     
    No other schedules are required to be filed herewith pursuant to Article 7 of Regulation S-X.

24


 

  (a)(3)   Listing of Exhibits
 
      See exhibit index contained herein at pages 39 to 46. Management contracts and compensatory plans and arrangements are identified in the Exhibit Index as Exhibit Nos. (10)(D) through (10)(BF).
 
  (b)   Reports on Form 8-K
 
      The following reports on Form 8-K were filed during the fourth quarter 2003:
 
      On October 22, 2003, the Company filed a Current Report on Form 8-K containing financial results of the Company for the three months and nine months ended September 30, 2003.
 
      On November 14, 2003, the Company filed a Current Report on Form 8-K containing financial results of the Company for the month of October 2003.
 
      On December 12, 2003, the Company filed a Current Report on Form 8-K containing financial results of the Company for the month of November 2003.
 
  (c)   Exhibits
 
      The exhibits in response to this portion of Item 15 are submitted concurrently with this report.
 
  (d)   Financial Statement Schedules

25


 

SCHEDULE I — SUMMARY OF INVESTMENTS — OTHER
THAN INVESTMENTS IN RELATED PARTIES

THE PROGRESSIVE CORPORATION AND SUBSIDIARIES
(millions)

                               
          December 31, 2003
         
                          Amount At Which
                          Shown In The
Type of Investment   Cost   Market Value   Balance Sheet

 
 
 
Fixed Maturities:
                       
Available-for-sale:
                       
   
United States Government and government agencies and authorities
  $ 1,307.9     $ 1,312.2     $ 1,312.2  
   
States, municipalities and political subdivisions
    2,841.7       2,930.2       2,930.2  
   
Asset-backed securities
    2,972.4       3,042.6       3,042.6  
   
Foreign government obligations
    13.9       14.6       14.6  
   
Corporate and other debt securities
    1,763.1       1,833.8       1,833.8  
 
   
     
     
 
Total fixed maturities
    8,899.0       9,133.4       9,133.4  
 
   
     
     
 
Equity securities:
                       
Common stocks:
                       
 
Public utilities
    126.8       154.8       154.8  
 
Banks, trusts and insurance companies
    366.0       451.5       451.5  
 
Industrial, miscellaneous and all other
    1,097.8       1,365.8       1,365.8  
Nonredeemable preferred stocks
    751.3       778.8       778.8  
 
   
     
     
 
Total equity securities
    2,341.9       2,750.9       2,750.9  
 
   
     
     
 
Short-term investments
    648.0       648.0       648.0  
 
   
     
     
 
Total investments
  $ 11,888.9     $ 12,532.3     $ 12,532.3  
 
   
     
     
 

The Company did not have any securities of one issuer with an aggregate cost or market value exceeding 10% of total shareholders’ equity at December 31, 2003.

26


 

SCHEDULE II — CONDENSED FINANCIAL INFORMATION OF REGISTRANT

CONDENSED STATEMENTS OF INCOME

THE PROGRESSIVE CORPORATION (PARENT COMPANY)
(millions)

                             
        Years Ended December 31,
       
        2003   2002   2001
       
 
 
Revenues
                       
   
Dividends from subsidiaries*
  $ 533.5     $ 47.3     $ 462.1  
   
Intercompany investment income*
    12.6       21.6       19.7  
   
Gain on sale of consolidated subsidiary
    1.7              
 
   
     
     
 
 
    547.8       68.9       481.8  
 
   
     
     
 
Expenses
                       
   
Interest expense
    98.9       76.2       52.9  
   
Other operating costs and expenses
    5.2       2.4       4.7  
 
   
     
     
 
 
    104.1       78.6       57.6  
 
   
     
     
 
 
Operating income (loss) and income (loss) before income taxes and other items below
    443.7       (9.7 )     424.2  
Income tax benefit
    (35.7 )     (21.5 )     (13.3 )
 
   
     
     
 
Income before equity in undistributed earnings of subsidiaries
    479.4       11.8       437.5  
Equity in undistributed net income (loss) of consolidated subsidiaries*
    776.0       655.5       (26.1 )
 
   
     
     
 
Net income
  $ 1,255.4     $ 667.3     $ 411.4  
 
   
     
     
 

*Eliminated in consolidation.

See notes to condensed financial statements.

27


 

SCHEDULE II — CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)

CONDENSED BALANCE SHEETS

THE PROGRESSIVE CORPORATION (PARENT COMPANY)
(millions)

                         
            December 31,
           
            2003   2002
           
 
ASSETS
               
 
Investment in non-consolidated affiliates
  $ .4     $ .4  
 
Investment in subsidiaries*
    5,301.2       4,138.1  
 
Receivable from subsidiary*
    1,162.4       1,112.4  
 
Intercompany receivable*
    168.3       116.3  
 
Other assets
    37.0       20.1  
 
   
     
 
       
TOTAL ASSETS
  $ 6,669.3     $ 5,387.3  
 
   
     
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
 
Accounts payable and accrued expenses
  $ 93.5     $ 60.7  
 
Income taxes payable
    61.4       75.6  
 
Debt
    1,483.8       1,483.0  
 
   
     
 
     
Total liabilities
    1,638.7       1,619.3  
 
   
     
 
 
Shareholders’ equity:
               
   
Common Shares, $1.00 par value (authorized 300.0 shares, issued 230.1, including treasury shares of 13.7 and 12.1)
    216.4       218.0  
   
Paid-in capital
    688.3       584.7  
   
Unamortized restricted stock
    (28.9 )      
   
Accumulated other comprehensive income (loss):
               
     
Net unrealized appreciation of investment in equity securities of consolidated subsidiaries
    418.2       162.4  
     
Hedges on forecasted transactions
    10.7       11.7  
     
Foreign currency translation adjustment
    (3.9 )     (4.8 )
   
Retained earnings
    3,729.8       2,796.0  
 
   
     
 
     
Total shareholders’ equity
    5,030.6       3,768.0  
 
   
     
 
       
TOTAL LIABILITIES AND SHAREHOLDERS’ EQUITY
  $ 6,669.3     $ 5,387.3  
 
   
     
 

*Eliminated in consolidation.

See notes to condensed financial statements.

28


 

SCHEDULE II — CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)

CONDENSED STATEMENTS OF CASH FLOWS

THE PROGRESSIVE CORPORATION (PARENT COMPANY)
(millions)

                                 
            Years Ended December 31,
           
            2003   2002   2001
           
 
 
CASH FLOWS FROM OPERATING ACTIVITIES:
                       
Net income
  $ 1,255.4     $ 667.3     $ 411.4  
Adjustments to reconcile net income to net cash used in operating activities:
                       
 
Equity in income of consolidated subsidiaries
    (1,309.5 )     (702.8 )     (436.0 )
 
Restricted stock amortization
    0.8              
 
Gain on sale of consolidated subsidiary
    (1.7 )            
 
Changes in:
                       
   
Intercompany receivable or payable
    (52.0 )     (48.3 )     (46.7 )
   
Accounts payable and accrued expenses
    20.2       13.6       5.0  
   
Income taxes
    (14.2 )     29.7       25.1  
   
Tax benefits from exercise of stock options
    44.0       19.3       24.4  
   
Other, net
    (18.6 )     (2.9 )     (1.1 )
 
   
     
     
 
       
Net cash used in operating activities
    (75.6 )     (24.1 )     (17.9 )
CASH FLOWS FROM INVESTING ACTIVITIES:
                       
Additional investments in equity securities of consolidated subsidiaries
    (110.3 )     (294.4 )     (24.4 )
Dividends received from consolidated subsidiaries
    516.2       47.3       462.1  
Proceeds from sale of consolidated subsidiary
    8.2              
 
   
     
     
 
       
Net cash provided by (used in) investing activities
    414.1       (247.1 )     437.7  
CASH FLOWS FROM FINANCING ACTIVITIES:
                       
Proceeds from exercise of stock options
    50.0       22.6       26.0  
Proceeds from debt
          393.5       347.0  
Receivable from subsidiary
    (50.0 )     90.5       (652.0 )
Dividends paid to shareholders
    (21.7 )     (21.1 )     (20.6 )
Acquisition of treasury shares
    (316.8 )     (214.3 )     (120.2 )
 
   
     
     
 
       
Net cash provided by (used in) financing activities
    (338.5 )     271.2       (419.8 )
 
   
     
     
 
Change in cash
                 
Cash, beginning of year
                 
 
   
     
     
 
Cash, end of year
  $     $     $  
 
   
     
     
 

See notes to condensed financial statements.

29


 

SCHEDULE II — CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)

NOTES TO CONDENSED FINANCIAL STATEMENTS

The accompanying condensed financial statements of The Progressive Corporation (the “Registrant”) should be read in conjunction with the consolidated financial statements and notes thereto of The Progressive Corporation and subsidiaries included in the Registrant’s 2003 Annual Report, which is included as Exhibit 13 to this Form 10-K.

STATEMENTS OF CASH FLOWS — For the purpose of the Statements of Cash Flows, cash includes only bank demand deposits. The Registrant paid income taxes of $579.0 million in 2003, and $392.0 million and $127.3 million in 2002 and 2001, respectively. Total interest paid was $98.9 million for 2003 and $64.2 million for 2002 and $51.3 million in 2001. Non-cash activity includes the liability for deferred restricted stock compensation, the contribution of restricted stock from the Registrant to its subsidiaries and a $17.3 million stock dividend received from a consolidated subsidiary.

On April 22, 2002, the Registrant effected a 3-for-1 split of its Common Shares, $1.00 par value, in the form of a dividend to shareholders. In connection with this transaction, the Registrant transferred $147.0 million from retained earnings to the Common Share account. All per share and share amounts and stock prices were adjusted to give effect to the split. Treasury shares were not split.

DEBT — Debt at December 31 consisted of:

                                 
    2003   2002
   
 
            Market           Market
    Cost   Value   Cost   Value
  (millions)  
 
 
 
6.60% Notes due 2004 (issued: $200.0, January 1994)
  $ 200.0     $ 200.3     $ 199.8     $ 208.1  
7.30% Notes due 2006 (issued: $100.0, May 1996)
    99.9       110.8       99.8       110.9  
6.375% Senior Notes due 2012 (issued: $350.0, December 2001)
    347.5       382.6       347.2       370.4  
7% Notes due 2013 (issued: $150.0, October 1993)
    148.8       171.0       148.7       165.5  
6 5/8% Senior Notes due 2029 (issued: $300.0, March 1999)
    294.0       312.5       294.0       295.8  
6.25% Senior Notes due 2032 (issued: $400.0, November 2002)
    393.6       408.8       393.5       432.2  
 
   
     
     
     
 
 
  $ 1,483.8     $ 1,586.0     $ 1,483.0     $ 1,582.9  
 
   
     
     
     
 

Debt includes amounts the Registrant has borrowed and contributed to the capital of its insurance subsidiaries or borrowed for other long-term purposes. Market values are obtained from publicly quoted sources. Interest on all debt is payable semiannually and all principal is due at maturity. There are no restrictive financial covenants.

The 6.25% Senior Notes, the 6.375% Senior Notes and the 6 5/8% Senior Notes (collectively, “Senior Notes”) may be redeemed in whole or in part at any time, at the option of the Registrant, subject to a “make whole” provision. All other debt is noncallable.

In May 1990, the Registrant entered into a revolving credit arrangement with National City Bank, which is reviewed by the bank annually. Under this agreement, the Registrant has the right to borrow up to $10.0 million. By selecting from available credit options, the Registrant may elect to pay interest at rates related to the London interbank offered rate (LIBOR), the bank’s base rate or at a money market rate. A commitment fee is payable on any unused portion of the committed amount at the rate of .125% per annum. The Registrant had no borrowings under this arrangement at December 31, 2003 or 2002. This credit line was replaced by a new credit facility with National City Bank on January 27, 2004. The material terms of the new credit facility are the same as those of the prior arrangement, except that the Registrant may elect to pay interest at the prime rate or rates related to the LIBOR.

Aggregate principal payments on debt outstanding at December 31, 2003 are $200.0 for 2004, $0 million for 2005, $100.0 for 2006, $0 million for 2007, $0 in 2008 and $1.2 billion thereafter.

30


 

SCHEDULE II — CONDENSED FINANCIAL INFORMATION OF REGISTRANT (Continued)

NOTES TO CONDENSED FINANCIAL STATEMENTS (Continued)

INCOME TAXES — The Registrant files a consolidated Federal income tax return with all subsidiaries. The Federal income taxes in the accompanying Condensed Balance Sheets represent amounts payable to the Internal Revenue Service by the Registrant as agent for the consolidated tax group. The Registrant and its subsidiaries have adopted, pursuant to a written agreement, a method of allocating consolidated Federal income taxes. Amounts allocated to the subsidiaries under the written agreement are included in Intercompany Receivable from Subsidiaries in the accompanying Condensed Balance Sheets.

INVESTMENTS IN CONSOLIDATED SUBSIDIARIES — The Registrant, through its investment in consolidated subsidiaries, recognizes the changes in unrealized gains (losses) on available-for-sale securities of the subsidiaries. These amounts were:

                           
(millions)   2003   2002   2001

 
 
 
Changes in unrealized gains (losses):
                       
Available-for-sale: fixed maturities
  $ (68.7 )   $ 227.1     $ 33.7  
 
equity securities
    462.2       (164.0 )     46.1  
Deferred income taxes
    (137.7 )     (22.2 )     (27.8 )
 
   
     
     
 
 
  $ 255.8     $ 40.9     $ 52.0  
 
   
     
     
 

OTHER MATTERS — The information relating to incentive compensation plans is incorporated by reference from Note 8, Employee Benefit Plans, “Incentive Compensation Plans” beginning on page App.-B-16 of the Annual Report, which is included as Exhibit 13 to this Form 10-K.

31


 

SCHEDULE III — SUPPLEMENTARY INSURANCE INFORMATION

THE PROGRESSIVE CORPORATION AND SUBSIDIARIES
(millions)

                                               
                  Future                        
                  policy           Other        
                  benefits,           policy        
          Deferred   losses,           claims        
          policy   claims and           and        
          acquisition   loss   Unearned   benefits   Premium
Segment   costs1   expenses1   premiums1   payable1   revenue

 
 
 
 
 
Year ended December 31, 2003:
                                       
 
Personal Lines
                                  $ 10,051.0  
 
Commercial Auto Business
                                    1,226.7  
 
Other businesses
                                    63.3  
 
                                   
 
     
Total
  $ 412.3     $ 4,576.3     $ 3,894.7     $     $ 11,341.0  
 
   
     
     
     
     
 
Year ended December 31, 2002:
                                       
 
Personal Lines
                                  $ 7,907.8  
 
Commercial Auto Business
                                    880.0  
 
Other businesses
                                    95.7  
 
                                   
 
     
Total
  $ 363.5     $ 3,813.0     $ 3,304.3     $     $ 8,883.5  
 
   
     
     
     
     
 
Year ended December 31, 2001:
                                       
 
Personal Lines
                                  $ 6,493.8  
 
Commercial Auto Business
                                    552.3  
 
Other businesses
                                    115.7  
 
                                   
 
     
Total
  $ 316.6     $ 3,238.0     $ 2,716.7     $     $ 7,161.8  
 
   
     
     
     
     
 

[Additional columns below]

[Continued from above table, first column(s) repeated]

                                               
                  Benefits,   Amortization                
                  claims,   of deferred                
                  losses and   policy   Other   Net
          Investment   settlement   acquisition   operating   premiums
Segment   Income1,2   expenses   costs   expenses   written

 
 
 
 
 
Year ended December 31, 2003:
                                       
 
Personal Lines
          $ 6,841.0     $ 1,098.3     $ 892.7     $ 10,502.8  
 
Commercial Auto Business
            768.9       140.7       102.9       1,357.7  
 
Other businesses
            30.5       10.1       14.5       52.9  
 
           
     
     
     
 
     
Total
  $ 465.3     $ 7,640.4     $ 1,249.1     $ 1,010.1     $ 11,913.4  
 
   
     
     
     
     
 
Year ended December 31, 2002:
                                       
 
Personal Lines
          $ 5,622.6     $ 903.5     $ 790.0     $ 8,362.5  
 
Commercial Auto Business
            622.2       100.7       77.1       1,002.9  
 
Other businesses
            54.3       27.4       7.1       86.6  
 
           
     
     
     
 
     
Total
  $ 455.2     $ 6,299.1     $ 1,031.6     $ 874.2     $ 9,452.0  
 
   
     
     
     
     
 
Year ended December 31, 2001:
                                       
 
Personal Lines
          $ 4,804.2     $ 774.3     $ 623.2     $ 6,476.4  
 
Commercial Auto Business
            389.8       64.9       51.9       665.7  
 
Other businesses
            70.1       25.7       11.8       118.0  
 
           
     
     
     
 
     
Total
  $ 413.6     $ 5,264.1     $ 864.9     $ 686.9     $ 7,260.1  
 
   
     
     
     
     
 

1The Company does not allocate assets, liabilities or investment income to operating segments.

2Excluding investment expenses of $11.5 million in 2003 and 2002 and $12.7 million in 2001.

32


 

SCHEDULE IV — REINSURANCE

THE PROGRESSIVE CORPORATION AND SUBSIDIARIES
(millions)

                                             
                        Assumed           Percentage
                Ceded to   From           of Amount
                Other   Other           Assumed
Year Ended:   Gross Amount   Companies   Companies   Net Amount   to Net

 
 
 
 
 
December 31, 2003
                                       
Premiums earned:
                                       
 
Property and liability
  $ 11,597.5     $ 256.5     $     $ 11,341.0        
 
   
     
     
     
     
 
December 31, 2002
                                       
Premiums earned:
                                       
   
Property and liability
  $ 9,078.1     $ 194.7     $ .1     $ 8,883.5        
 
   
     
     
     
     
 
December 31, 2001
                                       
Premiums earned:
                                       
   
Property and liability
  $ 7,299.0     $ 137.3     $ .1     $ 7,161.8        
 
   
     
     
     
     
 

33


 

SCHEDULE VI -SUPPLEMENTAL INFORMATION CONCERNING PROPERTY — CASUALTY INSURANCE OPERATIONS

THE PROGRESSIVE CORPORATION AND SUBSIDIARIES
(millions)

                         
    Losses and Loss Adjustment   Paid Losses and
    Expenses Incurred Related to   Loss Adjustment Expenses
   
 
Year Ended   Current Year   Prior Years        

 
 
       
December 31, 2003
  $ 7,696.5     $ (56.1 )   $ 6,926.1  
 
   
     
     
 
December 31, 2002
  $ 6,295.6     $ 3.5     $ 5,736.7  
 
   
     
     
 
December 31, 2001
  $ 5,363.1     $ (99.0 )   $ 4,979.7  
 
   
     
     
 

Pursuant to Rule 12-18 of Regulation S-X. See Schedule III, page 32, for the additional information required in Schedule VI.

34


 

REPORT OF INDEPENDENT AUDITORS ON
FINANCIAL STATEMENT SCHEDULES

To the Board of Directors and Shareholders,
The Progressive Corporation:

Our audits of the consolidated financial statements referred to in our report dated January 21, 2004, in the Annual Report to Shareholders, which is included as an Appendix to The Progressive Corporation’s 2004 Proxy Statement (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the financial statement schedules listed in Item 15(a)(2) of this Form 10-K. In our opinion, these financial statement schedules present fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.

/s/ PRICEWATERHOUSECOOPERS LLP

Cleveland, Ohio
January 21, 2004

35


 

CONSENT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Shareholders,
The Progressive Corporation:

We hereby consent to the incorporation by reference in the Registration Statements on:

         
Form   Filing No.   Filing Date

 
 
S-8   333-104646   April 21, 2003
S-8   333-104653   April 21, 2003
S-3   333-100674   October 22, 2002
S-8   333-41238   July 12, 2000
S-8   333-51613   May 1, 1998
S-8   333-25197   April 15, 1997
S-8   33-57121   December 29, 1994
S-8   33-64210   June 10, 1993
S-8   33-51034   August 20, 1992
S-8   33-38793   February 4, 1991
S-8   33-37707   November 9, 1990
S-8   33-33240   January 31, 1990
S-8   33-16509   August 14, 1987

of The Progressive Corporation of our report dated January 21, 2004 relating to the financial statements, which appears in the Annual Report to Shareholders, which is included as an Appendix to The Progressive Corporation’s 2004 Proxy Statement, which is incorporated in this Annual Report on Form 10-K. We also consent to the incorporation by reference of our report dated January 21, 2004 relating to the financial statement schedules, which appears in this Form 10-K.

/s/ PRICEWATERHOUSECOOPERS LLP

Cleveland, Ohio
March 1, 2004

36


 

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

         
  THE PROGRESSIVE CORPORATION
         
March 4, 2004   BY:   /s/ Glenn M. Renwick
       
        Glenn M. Renwick
Director, President and Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant in the capacities and on the dates indicated.

         
*
Peter B. Lewis
  Director, Chairman of the Board   March 4, 2004
         
/s/ Glenn M. Renwick
Glenn M. Renwick
  Director, President and Chief Executive Officer   March 4, 2004
         
/s/ W. Thomas Forrester
W. Thomas Forrester
  Vice President and Chief Financial Officer   March 4, 2004
         
/s/ Jeffrey W. Basch
Jeffrey W. Basch
  Vice President and Chief Accounting Officer   March 4, 2004
         
*
Milton N. Allen
  Director   March 4, 2004
         
*
B. Charles Ames
  Director   March 4, 2004
         
*
Charles A. Davis
  Director   March 4, 2004
         
*
Stephen R. Hardis
  Director   March 4, 2004

37


 

         
*
Bernadine P. Healy, M.D.
  Director   March 4, 2004
         
*
Jeffrey D. Kelly
  Director   March 4, 2004
         
*
Philip A. Laskawy
  Director   March 4, 2004
         
*
Norman S. Matthews
  Director   March 4, 2004
         
*
Donald B. Shackelford
  Director   March 4, 2004
         
*
Bradley T. Sheares, Ph.D.
  Director   March 4, 2004

*   Charles E. Jarrett, by signing his name hereto, does sign this document on behalf of the persons indicated above pursuant to a power of attorney duly executed by such persons.
         
By   /s/ Charles E. Jarrett   March 4, 2004
   
   
    Charles E. Jarrett    
    Attorney-in-fact    

38


 

EXHIBIT INDEX

             
Exhibit No.   Form        
Under   10-K        
Reg. S-K,   Exhibit       If Incorporated by Reference, Documents with
Item 601   No.   Description of Exhibit   Which Exhibit was Previously Filed with SEC

 
 
 
(3)(i)   3(A)   Amended Articles of Incorporation, as amended, of The Progressive Corporation (“Progressive”)   Registration Statement No. 333-104646 (filed with SEC on April 21, 2003; Exhibit 4(d) therein)
             
(3)(ii)   3(B)   Code of Regulations of Progressive   Registration Statement No. 333-104646 (filed with SEC on April 21, 2003; Exhibit 4(e) therein)
             
(4)   4(A)   $10,000,000 Unsecured Line of Credit with National City Bank (dated May 23, 1990; renewed May 20, 1992; amended February 1, 1994 and May 1, 1997)   Annual Report on Form 10-K (filed with SEC on March 14, 2003; Exhibit 4(A) therein)
             
(4)   4(B)   $10,000,000 Commercial Note: Revolving Credit with National City Bank (dated January 27, 2004)   Filed herewith
             
(4)   4(C)   Indenture dated as of September 15, 1993 between Progressive and State Street Bank and Trust Company (successor in interest to The First National Bank of Boston), as Trustee (“1993 Senior Indenture”) (including table of contents and cross-reference sheet)   Registration Statement No. 333-48935 (filed with SEC on March 31, 1998; Exhibit 4.1 therein)
             
(4)   4(D)   Form of 7% Notes due 2013 issued in the aggregate principal amount of $150,000,000 under the 1993 Senior Indenture   Annual Report on Form 10-K (filed with SEC on March 27, 1999; Exhibit 4(H) therein)
             
(4)   4(E)   Form of 6.60% Notes due 2004 issued in the aggregate principal amount of $200,000,000 under the 1993 Senior Indenture   Annual Report on Form 10-K (filed with SEC on March 30, 2000; Exhibit 4(H) therein)
             
(4)   4(F)   First Supplemental Indenture dated March 15, 1996 between Progressive and State Street Bank and Trust Company, evidencing the designation of State Street Bank and Trust Company as successor Trustee under the 1993 Senior Indenture   Registration Statement No. 333-01745 (filed with SEC on March 15, 1996; Exhibit 4.2 therein)
             
(4)   4(G)   Form of 7.30% Notes due 2006, issued in the aggregate principal amount of $100,000,000 under the 1993 Senior Indenture, as amended and supplemented   Annual Report on Form 10-K (filed with SEC on March 29, 2001; Exhibit 4(J) therein)

39


 

EXHIBIT INDEX

             
Exhibit No.   Form        
Under   10-K        
Reg. S-K,   Exhibit       If Incorporated by Reference, Documents with
Item 601   No.   Description of Exhibit   Which Exhibit was Previously Filed with SEC

 
 
 
(4)   4(H)   Second Supplemental Indenture dated February 26, 1999 between Progressive and State Street Bank and Trust Company, as Trustee, supplementing and amending the 1993 Senior Indenture   Filed herewith
             
(4)   4(I)   Form of 6 5/8% Senior Notes due 2029, issued in the aggregate principal amount of $300,000,000 under the 1993 Senior Indenture, as amended and supplemented   Filed herewith
             
(4)   4(J)   Third Supplemental Indenture dated December 7, 2001 between Progressive and State Street Bank and Trust Company, as Trustee   Current Report on Form 8-K (filed with SEC on December 10, 2001; Exhibit 4.5 therein)
             
(4)   4(K)   Form of 6.375% Senior Notes due 2012, issued in the aggregate principal amount of $350,000,000 under the 1993 Senior Indenture, as amended and supplemented   Current Report on Form 8-K (filed with SEC on December 10, 2001; Exhibit 4.6 therein)
             
(4)   4(L)   Fourth Supplemental Indenture dated November 21, 2002 between Progressive and State Street Bank and Trust Company, as Trustee   Current Report on Form 8-K (filed with SEC on November 21, 2002; Exhibit 4.6 therein)
             
(4)   4(M)   Form of 6.25% Senior Notes due 2032, issued in the aggregate principal amount of $400,000,000 under the 1993 Senior Indenture, as amended and supplemented   Current Report on Form 8-K (filed with SEC on November 21, 2002; Exhibit 4.7 therein)
             
(10)(ii)   10(A)   Aircraft Management Agreement dated April 23, 1999, between Village Transport Corp. and ACME Operating Corporation   Annual Report on Form 10-K (filed with SEC on March 30, 2000; Exhibit 10(E) therein)
             
(10)(ii)   10(B)   Hangar Sharing Agreement dated as of June 1, 2002 between Progressive Casualty Insurance Company and ACME Operating Corporation   Annual Report on Form 10-K (filed with SEC on March 14, 2003; Exhibit 10(B) therein)
             
(10)(ii)   10(C)   Reimbursement Agreement dated December 23, 2002 between Village Transport Corp. and ACME Operating Corporation   Annual Report on Form 10-K (filed with SEC on March 14, 2003; Exhibit 10(C) therein)

40


 

EXHIBIT INDEX

             
Exhibit No.   Form        
Under   10-K        
Reg. S-K,   Exhibit       If Incorporated by Reference, Documents with
Item 601   No.   Description of Exhibit   Which Exhibit was Previously Filed with SEC

 
 
 
(10)(iii)   10(D)   The Progressive Corporation 2002
Gainsharing Plan
  Annual Report on Form 10-K (filed with SEC on March 28, 2002; Exhibit 10(G) therein)
             
(10)(iii)   10(E)   The Progressive Corporation 2003
Gainsharing Plan
  Annual Report on Form 10-K (filed with SEC on March 14, 2003; Exhibit 10(F) therein)
             
(10)(iii)   10(F)   The Progressive Corporation 2004
Gainsharing Plan
  Filed herewith
             
(10)(iii)   10(G)   2003 Progressive Capital
Management Bonus Plan
  Annual Report on Form 10-K (filed with SEC on March 14, 2003; Exhibit 10(G) therein)
             
(10)(iii)   10(H)   2004 Progressive Capital
Management Bonus Plan
  Filed herewith
             
(10)(iii)   10(I)   The Progressive Corporation 1999 Executive Bonus Plan (as amended on January 31, 2003)   Annual Report on Form 10-K (filed with SEC on March 14, 2003; Exhibit 10(H) therein)
             
(10)(iii)   10(J)   The Progressive Corporation 2004
Executive Bonus Plan
  Filed herewith
             
(10)(iii)   10(K)   The Progressive Corporation 2004
Information Technology Incentive
Plan
  Filed herewith
             
(10)(iii)   10(L)   The Progressive Corporation 1989 Incentive Plan (amended and restated as of April 24, 1992, as further amended on July 1, 1992 and February 5, 1993)   Annual Report on Form 10-K (filed with SEC on March 27, 1999; Exhibit 10(H) therein)
             
(10)(iii)   10(M)   Form of Non-Qualified Stock Option Agreement under The Progressive Corporation 1989 Incentive Plan (single award)   Annual Report on Form 10-K (filed with SEC on March 29, 2001; Exhibit 10(R) therein)
             
(10)(iii)   10(N)   Form of Non-Qualified Stock Option Agreement under The Progressive Corporation 1989 Incentive Plan (multiple awards)   Annual Report on Form 10-K (filed with SEC on March 29, 2001; Exhibit 10(S) therein)
             
(10)(iii)   10(O)   The Progressive Corporation 1995
Incentive Plan
  Annual Report on Form 10-K (filed with SEC on March 30, 2000; Exhibit 10(P) therein)

41


 

EXHIBIT INDEX

             
Exhibit No.   Form        
Under   10-K        
Reg. S-K,   Exhibit       If Incorporated by Reference, Documents with
Item 601   No.   Description of Exhibit   Which Exhibit was Previously Filed with SEC

 
 
 
(10)(iii)   10(P)   Form of Non-Qualified Stock Option Agreement under The Progressive Corporation 1995 Incentive Plan   Annual Report on Form 10-K (filed with SEC on March 14, 2003; Exhibit 10(M) therein)
             
(10)(iii)   10(Q)   Form of Objective-Based (now known as Performance-Based) Non-Qualified Stock Option Agreement under The Progressive Corporation 1995 Incentive Plan   Annual Report on Form 10-K (filed with SEC on March 29, 2001; Exhibit 10(T) therein)
             
(10)(iii)   10(R)   The Progressive Corporation 2003
Incentive Plan
  Registration Statement No. 333-104646 (filed with SEC on April 21, 2003; Exhibit 4(a) therein)
             
(10)(iii)   10(S)   Form of The Progressive Corporation 2003 Incentive Plan Restricted Stock Award Agreement (Time-Based Award)   Registration Statement No. 333-104646 (filed with SEC on April 21, 2003; Exhibit 4(b) therein)
             
(10)(iii)   10(T)   Form of The Progressive Corporation 2003 Incentive Plan Restricted Stock Award Agreement (Performance-Based Award)   Registration Statement No. 333-104646 (filed with SEC on April 21, 2003; Exhibit 4(c) therein)
             
(10)(iii)   10(U)   The Progressive Corporation 2003
Directors Equity Incentive Plan
  Registration Statement No. 333-104653 (filed with SEC on April 21, 2003; Exhibit 4(a) therein)
             
(10)(iii)   10(V)   Amendment No. 1 to The Progressive Corporation 2003 Directors Equity Incentive Plan   Filed herewith
             
(10)(iii)   10(W)   Form of The Progressive Corporation 2003 Directors Equity Incentive Plan Restricted Stock Award Agreement   Registration Statement No. 333-104653 (filed with SEC on April 21, 2003; Exhibit 4(b) therein)
             
(10)(iii)   10(X)   The Progressive Corporation Executive Deferred Compensation Plan (2003 Amendment and Restatement)   Quarterly Report on Form 10-Q (filed with SEC on May 12, 2003; Exhibit 10(A) therein)
             
(10)(iii)   10(Y)   First Amendment to The Progressive Corporation Executive Deferred Compensation Plan (2003 Amendment and Restatement)   Filed herewith
             
(10)(iii)   10(Z)   Second Amendment to The Progressive Corporation Executive Deferred Compensation Plan (2003 Amendment and Restatement)   Filed herewith

42


 

EXHIBIT INDEX

             
Exhibit No.   Form        
Under   10-K        
Reg. S-K,   Exhibit       If Incorporated by Reference, Documents with
Item 601   No.   Description of Exhibit   Which Exhibit was Previously Filed with SEC

 
 
 
(10)(iii)   10(AA)   The Progressive Corporation Executive Deferred Compensation Plan Deferral Agreement   Filed herewith
             
(10)(iii)   10(AB)   The Progressive Corporation Executive Deferred Compensation Plan Performance-Based Restricted Stock Deferral Agreement (for 2003)   Quarterly Report on Form 10-Q (filed with SEC on May 12, 2003; Exhibit (10(B) therein)
             
(10)(iii)   10(AC)   The Progressive Corporation Executive Deferred Compensation Plan Performance-Based Restricted Stock Deferral Agreement   Filed herewith
             
(10)(iii)   10(AD)   The Progressive Corporation Executive Deferred Compensation Plan Time-Based Restricted Stock Deferral Agreement (for 2003)   Quarterly Report on Form 10-Q (filed with SEC on May 12, 2003; Exhibit 10(C) therein)
             
(10)(iii)   10(AE)   The Progressive Corporation Executive Deferred Compensation Plan Time-Based Restricted Stock Deferral Agreement   Filed herewith
             
(10)(iii)   10(AF)   The Progressive Corporation Executive Deferred Compensation Trust (December 1, 1998 Amendment and Restatement)   Annual Report on Form 10-K (filed with SEC on March 27, 1999; Exhibit 10(P) therein)
             
(10)(iii)   10(AG)   The Progressive Corporation Directors Deferral Plan (Amendment and Restatement), as further amended on October 25, 1996   Annual Report on Form 10-K (filed with SEC on March 29, 2001; Exhibit 10(I) therein)
             
(10)(iii)   10(AH)   The Progressive Corporation Directors Restricted Stock Deferral Plan   Filed herewith
             
(10)(iii)   10(AI)   The Progressive Corporation Directors Restricted Stock Deferral Plan Deferral Agreement   Filed herewith
             
(10)(iii)   10(AJ)   The Progressive Corporation 1990 Directors’ Stock Option Plan (Amended and Restated as of April 24, 1992 and as further amended on July 1, 1992)   Annual Report on From 10-K (filed with SEC on March 14, 2003; Exhibit 10(T) therein)
             
(10)(iii)   10(AK)   The Progressive Corporation 1998 Directors’ Stock Option Plan   Annual Report on Form 10-K (filed with SEC on March 14, 2003; Exhibit 10(U) therein)

43


 

EXHIBIT INDEX

             
Exhibit No.   Form        
Under   10-K        
Reg. S-K,   Exhibit       If Incorporated by Reference, Documents with
Item 601   No.   Description of Exhibit   Which Exhibit was Previously Filed with SEC

 
 
 
(10)(iii)   10(AL)   The Progressive Corporation
Executive Separation Allowance
Plan
  Quarterly Report on Form 10-Q (filed with SEC on November 5, 2001; Exhibit 10(I) therein)
             
(10)(iii)   10(AM)   Separation Agreement and General Release dated February 23, 2001 between Progressive Casualty Insurance Company and Charles B. Chokel   Annual Report on Form 10-K (filed with SEC on March 29, 2001; Exhibit 10(M) therein)
             
(10)(iii)   10(AN)   Agreement dated May 16, 2001 between The Progressive Corporation and Glenn Renwick   Quarterly Report on Form 10-Q (filed with SEC on August 13, 2001; Exhibit 10(A) therein)
             
(10)(iii)   10(AO)   Employment Agreement dated August 24, 2001 between The Progressive Corporation and W. Thomas Forrester   Quarterly Report on Form 10-Q (filed with SEC on November 5, 2001; Exhibit 10(A) therein)
             
(10)(iii)   10(AP)   Amendment to Employment Agreement between The Progressive Corporation and W. Thomas Forrester   Quarterly Report on Form 10-Q (filed with SEC on August 14, 2003; Exhibit 10(A) therein)
             
(10)(iii)   10(AQ)   Employment Agreement dated August 24, 2001 between The Progressive Corporation and Brian J. Passell   Quarterly Report on Form 10-Q (filed with SEC on November 5, 2001; Exhibit 10(B) therein)
             
(10)(iii)   10(AR)   Amendment to Employment Agreement between the Progressive Corporation and Brian J. Passell   Quarterly Report on Form 10-Q (filed with SEC on August 14, 2003; Exhibit 10(B)
             
(10)(iii)   10(AS)   Employment Agreement dated August 24, 2001 between The Progressive Corporation and Charles E. Jarrett   Quarterly Report on Form 10-Q (filed with SEC on November 5, 2001; Exhibit 10(C) therein)
             
(10)(iii)   10(AT)   Amendment to Employment Agreement between The Progressive Corporation and Charles E. Jarrett   Quarterly Report on form 10-Q (filed with SEC on August 14, 2003; Exhibit 10(C) therein)
             
(10)(iii)   10(AU)   Employment Agreement dated August 24, 2001 between The Progressive Corporation and Glenn M. Renwick   Quarterly Report on Form 10-Q (filed with SEC on November 5, 2001; Exhibit 10(D) therein)
             
(10)(iii)   10(AV)   Amendment to Employment Agreement between The Progressive Corporation and Glenn M. Renwick   Quarterly Report on form 10-Q (filed with SEC on August 14, 2003; Exhibit 10(D) therein)

44


 

EXHIBIT INDEX

             
Exhibit No.   Form        
Under   10-K        
Reg. S-K,   Exhibit       If Incorporated by Reference, Documents with
Item 601   No.   Description of Exhibit   Which Exhibit was Previously Filed with SEC

 
 
 
(10)(iii)   10(AW)   Employment Agreement dated August 24, 2001 between The Progressive Corporation and Richard H. Watts   Quarterly Report on Form 10-Q (filed with SEC on November 5, 2001; Exhibit 10(E) therein)
             
(10)(iii)   10(AX)   Amendment to Employment Agreement between The Progressive Corporation and Richard H. Watts   Quarterly Report on form 10-Q (filed with SEC on August
14, 2003, Exhibit 10(E) therein)
             
(10)(iii)   10(AY)   Employment Agreement dated August 24, 2001 between The Progressive Corporation and Raymond M. Voelker   Quarterly Report on Form 10-Q (filed with SEC on November 5, 2001; Exhibit 10(F) therein)
             
(10)(iii)   10(AZ)   Amendment to Employment Agreement between The Progressive Corporation and Raymond M. Voelker   Quarterly Report on Form 10-Q (filed with SEC on August 14, 2003; Exhibit 10(F) therein)
             
(10)(iii)   10(BA)   Employment Agreement dated August 24, 2001 between The Progressive Corporation and Robert T. Williams   Quarterly Report on Form 10-Q (filed with SEC on November 5, 2001; Exhibit 10(G) therein)
             
(10)(iii)   10(BB)   Amendment to Employment Agreement between The Progressive Corporation and Robert T. Williams   Quarterly Report on Form 10-Q (filed with SEC on August 14, 2003, Exhibit 10(G) therein)
             
(10)(iii)   10(BC)   Employment Agreement dated August 24, 2001 between The Progressive Corporation and Alan R. Bauer   Quarterly Report on Form 10-Q (filed with SEC on November 5, 2001; Exhibit 10(H) therein)
             
(10)(iii)   10(BD)   Amendment to Employment Agreement between The Progressive Corporation and Alan R. Bauer   Quarterly Report on Form 10-Q (filed with SEC on August 14, 2003; Exhibit 10(H) therein)
             
(10)(iii)   10(BE)   Employment Agreement dated April 21, 2003 between the Progressive Corporation and S. Patricia Griffith   Quarterly Report on Form 10-Q (filed with SEC on May 12, 2003; Exhibit 10(I) therein)
             
(10)(iii)   10(BF)   Employment Agreement dated April 21, 2003 between the Progressive Corporation and William M. Cody   Quarterly Report on Form 10-Q (filed with SEC on May 12, 2003; Exhibit 10(J) therein)
             
(11)   11   Computation of Earnings Per Share   Filed herewith
             
(12)   12   Computation of Ratio of Earnings to Fixed Charges   Filed herewith

45


 

EXHIBIT INDEX

             
Exhibit No.   Form        
Under   10-K        
Reg. S-K,   Exhibit       If Incorporated by Reference, Documents with
Item 601   No.   Description of Exhibit   Which Exhibit was Previously Filed with SEC

 
 
 
(13)   13   The Progressive Corporation 2003 Annual Report to Shareholders   Filed herewith
             
(21)   21   Subsidiaries of The Progressive Corporation   Filed herewith
             
(23)   23   Consent of Independent Accountants   Incorporated herein by reference to page 36 of this Annual Report on Form 10-K
             
(24)   24   Powers of Attorney   Filed herewith
             
(31)   31(A)   Certification of the Principal Executive Officer, Glenn M. Renwick, of The Progressive Corporation, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002   Filed herewith
             
(31)   31(B)   Certification of the Principal Financial Officer, W. Thomas Forrester, of The Progressive Corporation, pursuant to Section 302 of the Sarbanes-Oxley Act of 2002   Filed herewith
           
             
(32)   32(A)   Certification of the Principal Executive Officer, Glenn M. Renwick, of The Progressive Corporation, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002   Filed herewith
             
(32)   32(B)   Certification of the Principal Financial Officer, W. Thomas Forrester, of The Progressive Corporation, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002   Filed herewith

No other exhibits are required to be filed herewith pursuant to Item 601 of Regulation S-K.

46

<PAGE>
                                                                               .
                                                                               .
                                                                               .

Exhibit No. 4(B)

COMMERCIAL NOTE: REVOLVING CREDIT (Ohio)
One Month LIBOR Daily Indexed - Corporate Flex


<TABLE>
<CAPTION>
Amount                    City                    Date                      FOR BANK USE ONLY
--------------------------------------------------------------------------------------------------
<S>                       <C>                     <C>                       <C>
$10,000,000.00            CLEVELAND, OHIO         JANUARY 27, 2004          Obligor # 7119497976
--------------------------------------------------------------------------------------------------
                                                                            Tax I. D. # 34-0963169
--------------------------------------------------------------------------------------------------
                                                                            Obligation #
--------------------------------------------------------------------------------------------------
                                                                            Office CORP. BANKING
--------------------------------------------------------------------------------------------------
</TABLE>


FOR VALUE RECEIVED, THE PROGRESSIVE CORPORATION ("BORROWER"), AN OHIO
CORPORATION, whose mailing address is 6300 WILSON MILLS ROAD, MAYFIELD VILLAGE,
OH 44143, hereby promises to pay to the order of National City Bank ("BANK"), a
national banking association having a banking office at 1900 EAST 9TH STREET,
CLEVELAND, OH 44114, Attention: Commercial Loan Division at the address
specified on the bills received by Borrower from Bank (or at such other place as
Bank may from time to time designate by written notice) in lawful money of the
United States of America, the principal sum of TEN MILLION AND 00/100 DOLLARS or
such lesser amount as may appear on this Note, or as may be entered in a loan
account on Bank's books and records, or both, together with interest, all as
provided below.

1. COMMITMENT. This Note evidences an arrangement (the "SUBJECT COMMITMENT")
whereby Borrower may, on the date of this Note and thereafter until (but not
including) January 26, 2005
 (the "EXPIRATION DATE") or such earlier date upon
which the Subject Commitment is terminated or reduced to zero, obtain from Bank,
subject to the terms and conditions of this Note, such loans (each a "SUBJECT
LOAN") as Borrower may from time to time properly request. The amount of the
Subject Commitment shall be equal to the face amount of this Note, provided,
that Borrower shall have the right, at any time and from time to time, to
permanently reduce the amount of the Subject Commitment to any amount that is an
integral multiple of ONE THOUSAND AND 00/100 DOLLARS ($1,000.00) (the "MINIMUM
BORROWING AMOUNT") by giving Bank not less than one (1) Banking Day's prior
notice (which shall be irrevocable) of the effective date of the reduction,
provided, that no reduction in the amount of the Subject Commitment shall be
effective if, after giving effect to that reduction, the aggregate unpaid
principal balance of the Subject Loans would exceed the amount of the Subject
Commitment as so reduced. Regardless of any fee or other consideration received
by Bank, the Subject Commitment may be terminated pursuant to section 10.

2. FEES. Borrower shall pay Bank a commitment fee (a) in arrears on APRIL 1,
2004 and quarterly thereafter and upon the termination of the Subject Commitment
or the reduction thereof to zero, (b) based on the average daily difference
between the amount of the Subject Commitment and the aggregate unpaid principal
balance of the Subject Loans during the period from the due date of the last
such fee (or, if none, the date of this Note) to the due date of the fee in
question, and (c) computed at the rate of 0.125% per annum.

                                        1


<PAGE>

3. LOAN REQUESTS; DISBURSEMENT. A Subject Loan is properly requested if
requested orally or in writing not later than 2:00 p. m., Banking-Office Time,
of the Banking Day upon which that Subject Loan is to be made. Each request for
a Subject Loan shall of itself constitute, both when made and when honored, a
representation and warranty by Borrower to Bank that Borrower is entitled to
obtain the requested Subject Loan. Bank is hereby irrevocably authorized to make
an appropriate entry on this Note, in a loan account on Bank's books and
records, or both, whenever Borrower obtains a Subject Loan. Each such entry
shall be prima facie evidence of the data entered, but the making of such an
entry shall not be a condition to Borrower's obligation to pay. Bank is hereby
directed, absent notice from Borrower to the contrary, to disburse the proceeds
of each Subject Loan to Borrower's general checking account with Bank. Bank
shall have no duty to follow, nor any liability for, the application of any
proceeds of any Subject Loan.

4. CONDITIONS: SUBJECT LOANS. Each Subject Loan shall be in an amount that is an
integral multiple of the Minimum Borrowing Amount. Borrower shall not be
entitled to obtain any Subject Loan (a) on or after the termination of the
Subject Commitment or the reduction thereof to zero, (b) if either at the time
of Borrower's request for that loan or when that request is honored there shall
exist or would occur any Event of Default, (c) if any representation, warranty,
or other statement (other than any expressly made as of a single date) made by
any Person (other than Bank) in any Related Writing would, if made either as of
the time of Borrower's request for that Subject Loan or as of the time when that
request is honored, be untrue or incomplete in any respect, or (d) if after
giving effect to that Subject Loan and all others for which requests are then
pending, the aggregate unpaid principal balance of the Subject Loans would
exceed the then amount of the Subject Commitment.

5. INTEREST. The unpaid principal balance of each Subject Loan shall at all
times bear interest at the Contract Rate, provided, that so long as (a) any
principal of any Subject Loan remains unpaid after Bank shall have given
Borrower notice of demand for any such principal in accordance with the terms of
this Note or after the commencement of any Proceeding with respect to Borrower,
or (b) any accrued interest on any Subject Loan remains unpaid after the due
date of that interest, then, and in each such case, all unpaid principal of this
Note and all overdue interest on that principal shall bear interest at a
fluctuating rate equal to two percent (2%) per annum above the Prime Rate;
provided further, that in no event shall any principal of or interest on any
Subject Loan bear interest at any time after the giving of any such notice or
the commencement of any such Proceeding, whichever shall first occur, at a
lesser rate than the rate applicable thereto immediately after the giving of
that notice or the commencement of that Proceeding, as the case may be. The
"CONTRACT RATE" shall be a fluctuating rate EQUAL to the PRIME RATE provided,
that Borrower shall have the right from time to time to irrevocably elect a
fluctuating rate equal to 0.375% per annum plus One Month LIBOR, provided, that
in the event One Month LIBOR is unavailable as a result of Bank's good faith
determination of the occurrence of one of the events specified in section 6, the
"CONTRACT RATE" shall be a fluctuating rate EQUAL to the PRIME RATE. Interest on
each Subject Loan shall be payable in arrears on April 1, 2004, and on the first
(1st) day of each QUARTER thereafter, at Maturity and on demand thereafter. The
One

                                        2


<PAGE>

Month LIBOR rate shall be adjusted by Bank, as necessary, at the end of each
Banking Day during the term hereof. Bank shall not be required to notify
Borrower of any adjustment in the One Month LIBOR rate; however, Borrower may
request a quote of the prevailing Contract Rate on any Banking Day.

6. LIBOR UNAVAILABLE. Notwithstanding any provision or inference to the
contrary, the Contract Rate shall not be based on One Month LIBOR if Bank shall
determine in good faith that (a) any governmental authority has asserted that it
is unlawful for Bank to fund, make, or maintain loans bearing interest based on
One Month LIBOR, or (b) circumstances affecting the market selected by Bank for
the purpose of funding the Subject Loans make it impracticable for Bank to
determine One Month LIBOR. Bank's books and records shall be conclusive (absent
obvious error) as to whether Bank shall have determined that the Contract Rate
is prohibited from being based on One Month LIBOR. If the Contract Rate is
prohibited from being based on One Month LIBOR as a result of the occurrence of
one of the events referenced in this section 6, then, and in each such case,
notwithstanding any provision or inference to the contrary, the then outstanding
principal balance of this Note shall, upon Bank giving Borrower notice of Bank's
determination of the occurrence of such an event, bear interest at a Contract
Rate based on the Prime Rate as contemplated in section 5.

7. REPAYMENT. Subject to section 10, each Subject Loan shall be due and payable
in full on the Expiration Date. Borrower shall have the right to prepay the
principal of the Subject Loans in whole or in part, provided, that each such
prepayment shall be in an amount that is an integral multiple of the Minimum
Borrowing Amount. Each prepayment of a Subject Loan may be made without premium
or penalty. If any payment is required to be made on a day which is not a
Banking Day, such payment shall be due on the next immediately following Banking
Day and interest shall continue to accrue at the applicable rate.

8. DEFINITIONS. As used in this Note, except where the context clearly requires
otherwise, "AFFILIATE" means, when used with reference to any Person (the
"subject"), a Person that is in control of, under the control of, or under
common control with, the subject, the term "control" meaning the possession,
directly or indirectly, of the power to direct the management or policies of a
Person, whether through the ownership of voting securities, by contract, or
otherwise; "BANK DEBT" means, collectively, all Debt to Bank, whether incurred
directly to Bank or acquired by it by purchase, pledge, or otherwise, and
whether participated to or from Bank in whole or in part; "BANKING DAY" means
any day (other than any Saturday, Sunday or legal holiday) on which Bank's
banking office is open to the public for carrying on substantially all of its
banking functions; "BANKING-OFFICE TIME" means, when used with reference to any
time, that time determined at the location of Bank's banking office; "DEBT"
means, collectively, all obligations of the Person or Persons in question,
including, without limitation, every such obligation whether owing by one such
Person alone or with one or more other Persons in a joint, several, or joint and
several capacity, whether now owing or hereafter arising, whether owing
absolutely or contingently, whether created by lease, loan, overdraft, guaranty
of payment, or other contract, or by quasi-contract, tort, statute,

                                       3


<PAGE>

other operation of law, or otherwise; "MATURITY" means, when used with reference
to any Subject Loan, the date (whether occurring by lapse of time, acceleration,
or otherwise) upon which that Subject Loan is due; "NOTE" means this promissory
note (including, without limitation, each addendum, allonge, or amendment, if
any, hereto); "OBLIGOR" means any Person who, or any of whose property, shall at
the time in question be obligated in respect of all or any part of the Bank Debt
of Borrower and (in addition to Borrower) includes, without limitation,
co-makers, indorsers, guarantors, pledgors, hypothecators, mortgagors, and any
other Person who agrees, conditionally or otherwise, to assure such other
Obligor's creditors or any of them against loss; "ONE MONTH LIBOR" means, with
respect to a loan, the rate per annum (rounded upwards, if necessary, to the
next higher 1/16 of 1%) determined by Bank and equal to the average rate per
annum at which deposits (denominated in United States dollars) in an amount
similar to the principal amount of that loan and with a maturity one month after
the date of reference are offered at 11:00 A.M. London time (or as soon
thereafter as practicable) on the date of reference by banking institutions in
the London, United Kingdom market, as such interest rate is referenced and
reported by the British Bankers Association in the Bridge Financial Telerate
system "Page 3750" report or, if the same is unavailable, any other generally
accepted authoritative source of such interest rate as Bank may reference from
time to time;"PERSON" means an individual or entity of any kind, including,
without limitation, any association, company, cooperative, corporation,
partnership, trust, governmental body, or any other form or kind of entity;
"PRIME RATE" means the fluctuating rate per annum which is publicly announced
from time to time by Bank as being its so-called "prime rate" or "base rate"
thereafter in effect, with each change in the Prime Rate automatically,
immediately, and without notice changing the Prime Rate thereafter applicable
hereunder, it being acknowledged that the Prime Rate is not necessarily the
lowest rate of interest then available from Bank on fluctuating-rate loans;
"PROCEEDING" means any assignment for the benefit of creditors, any case in
bankruptcy, any marshalling of any Obligor's assets for the benefit of
creditors, any moratorium on the payment of debts, or any proceeding under any
law relating to conservatorship, insolvency, liquidation, receivership,
trusteeship, or any similar event, condition, or other thing; "RELATED WRITING"
means this Note and any indenture, note, guaranty, assignment, mortgage,
security agreement, subordination agreement, notice, financial statement, legal
opinion, certificate, or other writing of any kind pursuant to which all or any
part of the Bank Debt of Borrower is issued, which evidences or secures all or
any part of the Bank Debt of Borrower, which governs the relative rights and
priorities of Bank and one or more other Persons to payments made by, or the
property of, any Obligor, which is delivered to Bank pursuant to another such
writing, or which is otherwise delivered to Bank by or on behalf of any Person
(or any employee, officer, auditor, counsel, or agent of any Person) in respect
of or in connection with all or any part of the Bank Debt of Borrower;
"REPORTING PERSON" means each Obligor and each member of any "Reporting Group"
as defined in any addendum to this Note; and the foregoing definitions shall be
applicable to the respective plurals of the foregoing defined terms.

                                        4


<PAGE>

9. EVENTS OF DEFAULT. It shall be an "EVENT OF DEFAULT" if (a) all or any part
of the Bank Debt of any Obligor shall not be paid in full promptly when due
(whether by lapse of time, acceleration, or otherwise); (b) any representation,
warranty, or other statement made by any Person (other than Bank) in any Related
Writing shall be untrue or materially incomplete in any respect when made; (c)
any Person (other than Bank) shall repudiate or shall fail or omit to perform or
observe any agreement contained in this Note or in any other Related Writing
that is on that Person's part to be complied with; (d) any indebtedness (other
than any evidenced by this Note) of Borrower shall not be paid when due, or
there shall occur any event, condition, or other thing which gives (or which
with the lapse of any applicable grace period, the giving of notice, or both
would give) any creditor the right to accelerate or which automatically
accelerates the maturity of any such indebtedness; (e) Bank shall not receive
(in addition to any information described in any addendum to this Note) without
expense to Bank, (i) forthwith upon each request of Bank made upon Borrower
therefor, (A) such information in writing regarding each Reporting Person's
financial condition, properties, business operations, if any, prepared, in the
case of financial information, in accordance with generally accepted accounting
principles consistently applied and otherwise in form and detail satisfactory to
Bank or (B) written permission, in form and substance satisfactory to Bank, from
each Reporting Person to inspect (or to have inspected by one or more Persons
selected by Bank) the properties and records of that Reporting Person or (ii)
prompt written notice whenever Borrower (or any director, employee, officer, or
agent of Borrower) knows or has reason to know that any Event of Default has
occurred; (f) any final unpaid judgment which is not subject to further appeal
by any Obligor and is not paid within one hundred twenty (120) days after the
date of such judgment shall have been entered against any Obligor in any
judicial or administrative tribunal or before any arbitrator or mediator and the
aggregate amount of all such final unpaid judgments against such Obligor would
have a material adverse effect on the financial condition of such Obligor; (g)
any Obligor shall fail or omit to comply with any applicable law, rule,
regulation, or order in any material respect; (h) any proceeds of any Subject
Loan shall be used for any purpose that is not in the ordinary course of
Borrower's business; (i) Borrower's senior unsecured debt shall have a rating of
less than A3 by Moody's Investors Service or A- by Standard & Poor's
Corporation; (j) Borrower shall at any time or over any period of time sell,
lease, or otherwise dispose of all or any material part of Borrower's assets,
except for inventory sold in the ordinary course of business and other assets
sold, leased, or otherwise disposed of with the consent of Bank; (k) Borrower
shall cease to exist or shall be dissolved, become legally incapacitated, or
die; (l) any Proceeding shall be commenced with respect to Borrower; (m) there
shall occur or commence to exist any event, condition, or other thing that
constitutes an "Event of Default" as defined in any addendum to this Note; (n)
there shall occur any event, condition, or other thing that has, or, in Bank's
judgment, is likely to have, a material adverse effect on the financial
condition, properties, or business operations of Borrower or on Bank's ability
to enforce or exercise any agreement or right arising under, out of, or in
connection with any Related Writing; or (o) the holder of this Note shall, in
good faith, believe that the prospect of payment or performance of any
obligation evidenced by this Note is impaired.

                                        5


<PAGE>

10. EFFECTS OF DEFAULT. If any Event of Default (other than the commencement of
any Proceeding with respect to Borrower) shall occur, then, and in each such
case, notwithstanding any provision or inference to the contrary, Bank shall
have the right in its discretion, by giving written notice to Borrower, to (a)
immediately terminate the Subject Commitment (if not already terminated or
reduced to zero) and (b) declare each Subject Loan (if not already due) to be
due, whereupon each Subject Loan shall immediately become due and payable in
full. If any Proceeding shall be commenced with respect to Borrower, then,
notwithstanding any provision or inference to the contrary, automatically,
without presentment, protest, or notice of dishonor, all of which are waived by
all makers and all indorsers of this Note, now or hereafter existing, (i) the
Subject Commitment shall immediately terminate (if not already terminated or
reduced to zero) and (ii) each Subject Loan (if not already due) shall
immediately become due and payable in full.

11. LATE CHARGES. If any principal of or interest on any Subject Loan is not
paid within ten (10) days after its due date, then, and in each such case, Bank
shall have the right to assess a late charge, payable by Borrower on demand, in
an amount equal to the greater of twenty dollars ($20.00) or five percent (5%)
of the amount not timely paid.

12. NO SETOFF. Borrower hereby waives any and all now existing or hereafter
arising rights to recoup or offset any obligation of Borrower under or in
connection with this Note or any Related Writing against any claim or right of
Borrower against Bank.

13. INDEMNITY: GOVERNMENTAL COSTS. If (a) there shall be enacted any law
(including, without limitation, any change in any law or in its interpretation
or administration and any request by any governmental authority) relating to any
interest rate or any assessment, reserve, or special deposit requirement (except
if and to the extent utilized in computation of the Reserve Percentage) against
assets held by, deposits in, or loans by Bank or to any tax (other than any tax
on Bank's overall net income) and (b) in Bank's sole opinion any such event
increases the cost of funding or maintaining any LIBOR Unit or reduces the
amount of any payment to be made to Bank in respect thereof, then, and in each
such case, upon written notice from Bank to Borrower, Borrower shall pay Bank an
amount equal to each such cost increase or reduced payment, as the case may be.
In determining any such amount, Bank may use reasonable averaging and
attribution methods.

14. INDEMNITY: CAPITAL ADEQUACY. If (a) at any time any governmental authority
shall require National City Corporation, a Delaware corporation, its successors
or assigns, or Bank, whether or not the requirement has the force of law, to
maintain, as support for the Subject Commitment, capital in a specified minimum
amount that either is not required or is greater than that required at the date
of this Note, whether the requirement is implemented pursuant to the "risk-based
capital guidelines" (published at 12 CFR 3 in respect of "national banking
associations", 12 CFR 208 in respect of "state member banks", and 12 CFR 225 in
respect of "bank holding companies") or otherwise, and (b) as a result thereof
the rate of return on capital of National City Corporation, its successors or

                                        6


<PAGE>

assigns, or Bank or both (taking into account their then policies as to capital
adequacy and assuming full utilization of their capital) shall be directly or
indirectly reduced by reason of any new or added capital thereby attributable to
the Subject Commitment; then, and in each such case, Borrower shall, on Bank's
demand, pay Bank as an additional fee such amounts as will in Bank's reasonable
opinion reimburse National City Corporation, its successors and assigns, and
Bank for any such reduced rate of return; provided, that Borrower shall not be
required to pay such additional fee if, within twenty (20) days after receipt of
Bank's demand for such additional fee, Borrower terminates the Subject
Commitment and pays all amounts owing under this Note in full. In determining
the amount of any such fee, Bank may use reasonable averaging and attribution
methods. Each determination by Bank shall be conclusive absent obvious error.

15. INDEMNITY: ADMINISTRATION AND ENFORCEMENT. Borrower will reimburse Bank, on
Bank's demand from time to time, for any and all fees, costs, and expenses
(including, without limitation, the fees and disbursements of legal counsel)
incurred by Bank in protecting, enforcing, or attempting to protect or enforce
its rights under this Note. If any amount (other than any principal of any
Subject Loan and any interest and late charges) owing under this Note is not
paid when due, then, and in each such case, Borrower shall pay, on Bank's
demand, interest on that amount from the due date thereof until paid in full at
a fluctuating rate equal to two percent (2%) per annum plus the Prime Rate.

16. WAIVERS; REMEDIES; APPLICATION OF PAYMENTS. Bank may from time to time in
its discretion grant waivers and consents in respect of this Note or any other
Related Writing or assent to amendments thereof, but no such waiver, consent, or
amendment shall be binding upon Bank unless set forth in a writing (which
writing shall be narrowly construed) signed by Bank. No course of dealing in
respect of, nor any omission or delay in the exercise of, any right, power, or
privilege by Bank shall operate as a waiver thereof, nor shall any single or
partial exercise thereof preclude any further or other exercise thereof or of
any other, as each such right, power, or privilege may be exercised either
independently or concurrently with others and as often and in such order as Bank
may deem expedient. Without limiting the generality of the foregoing, neither
Bank's acceptance of one or more late payments or charges nor Bank's acceptance
of interest on overdue amounts at the respective rates applicable thereto shall
constitute a waiver of any right of Bank. Each right, power, or privilege
specified or referred to in this Note is in addition to and not in limitation of
any other rights, powers, and privileges that Bank may otherwise have or acquire
by operation of law, by other contract, or otherwise. Bank shall have the right
to apply payments in respect of the indebtedness evidenced by this Note with
such allocation to the respective parts thereof as Bank in its sole discretion
may from time to time deem advisable.

17. OTHER PROVISIONS. The provisions of this Note shall bind Borrower and
Borrower's successors and assigns and benefit Bank and its successors and
assigns, including each subsequent holder, if any, of this Note, provided, that
no Person other than Borrower may obtain Subject Loans; provided further, that
neither any such holder of this Note nor any

                                        7


<PAGE>

assignee of any Subject Loan, whether in whole or in part, shall thereby become
obligated to grant Borrower any Subject Loan. Except for Borrower and Bank and
their respective successors and assigns, there are no intended beneficiaries of
this Note or the Subject Commitment. The provisions of sections 11 through 21,
both inclusive, shall survive the payment in full of the principal of and
interest on this Note. The captions to the sections and subsections of this Note
are inserted for convenience only and shall be ignored in interpreting the
provisions thereof. Each reference to a section includes a reference to all
subsections thereof (i.e., those having the same character or characters to the
left of the decimal point) except where the context clearly does not so permit.
If any provision in this Note shall be or become illegal or unenforceable in any
case, then that provision shall be deemed modified in that case so as to be
legal and enforceable to the maximum extent permitted by law while most nearly
preserving its original intent, and in any case the illegality or
unenforceability of that provision shall affect neither that provision in any
other case nor any other provision. All fees, interest, and premiums for any
given period shall accrue on the first day thereof but not on the last day
thereof (unless the last day is the first day) and in each case shall be
computed on the basis of a 360-day year and the actual number of days in the
period. In no event shall interest accrue at a higher rate than the maximum
rate, if any, permitted by law. Bank shall have the right to furnish to its
Affiliates information concerning the business, financial condition, and
property of Borrower, the amount of the Bank Debt of Borrower, and the terms,
conditions, and other provisions applicable to the respective parts thereof.
This Note shall be governed by the law (excluding conflict of laws rules) of the
State of Ohio.

18. INTEGRATION. This Note and, to the extent consistent with this Note, the
other Related Writings, set forth the entire agreement of Borrower and Bank as
to the subject matter of this Note, and may not be contradicted by evidence of
any agreement or statement unless made in a writing (which writing shall be
narrowly construed) signed by Bank contemporaneously with or after the execution
and delivery of this Note. Without limiting the generality of the foregoing,
Borrower hereby acknowledges that Bank has not based, conditioned, or offered to
base or condition the credit hereby evidenced or any charges, fees, interest
rates, or premiums applicable thereto upon Borrower's agreement to obtain any
other credit, property, or service other than any loan, discount, deposit, or
trust service from Bank. In the event and to the extent of any conflict between
the terms hereof and the terms of any exhibit, schedule, addendum, allonge,
modification, or amendment hereto, the terms of such exhibit, schedule,
addendum, allonge, modification or amendment shall control.

19. NOTICES AND OTHER COMMUNICATIONS. Each notice, demand, or other
communication, whether or not received, shall be deemed to have been given to
Borrower on the fourth (4th) Banking Day after Bank shall have mailed a writing
to that effect by certified or registered mail to Borrower at Borrower's mailing
address (or any other address of which Borrower shall have given Bank notice
after the execution and delivery of this Note); however, no other method of
giving actual notice to Borrower is hereby precluded. Borrower hereby
irrevocably accepts Borrower's appointment as each Obligor's agent for the
purpose of receiving any notice, demand, or other communication to be given by

                                        8


<PAGE>

Bank to each such Obligor pursuant to any Related Writing. Each communication to
be given to Bank shall be in writing unless this Note expressly permits that
communication to be made orally, and in any case shall be given to Bank at
Bank's banking office (or any other address of which Bank shall have given
notice to Borrower after the execution and delivery this Note). Borrower hereby
assumes all risk arising out of or in connection with each oral communication
given by Borrower and each communication given or attempted by Borrower in
contravention of this section. Bank shall be entitled to rely on each
communication believed in good faith by Bank to be genuine.

20. JURISDICTION AND VENUE; WAIVER OF JURY TRIAL. Any action, claim,
counterclaim, crossclaim, proceeding, or suit, whether at law or in equity,
whether sounding in tort, contract, or otherwise at any time arising under or in
connection with this Note or any other Related Writing, the administration,
enforcement, or negotiation of this Note or any other Related Writing, or the
performance of any obligation in respect of this Note or any other Related
Writing (each such action, claim, counterclaim, crossclaim, proceeding, or suit,
an "ACTION") may be brought in any federal or state court located in
northeastern Ohio. Borrower hereby unconditionally submits to the jurisdiction
of any such court with respect to each such Action and hereby waives any
objection Borrower may now or hereafter have to the venue of any such Action
brought in any such court. BORROWER HEREBY, AND EACH HOLDER OF THIS NOTE, BY
TAKING POSSESSION THEREOF, KNOWINGLY AND VOLUNTARILY WAIVES JURY TRIAL IN
RESPECT OF ANY ACTION.

Borrower:
THE PROGRESSIVE CORPORATION
By: /s/ Glenn M. Renwick
    ----------------------------------------
Printed Name: Glenn M. Renwick
Title: President and Chief Executive Officer

                                       9


<PAGE>
Exhibit No. 4(H)


              SECOND SUPPLEMENTAL INDENTURE DATED FEBRUARY 26, 1999
                       between The Progressive Corporation
               AND STATE STREET BANK AND TRUST COMPANY, AS TRUSTEE

--------------------------------------------------------------------------------

                           THE PROGRESSIVE CORPORATION
                                       and
                     STATE STREET BANK AND TRUST COMPANY, AS
                                SUCCESSOR TRUSTEE
                          SECOND SUPPLEMENTAL INDENTURE
                          6-5/8% Senior Notes due 2029

THIS SECOND SUPPLEMENTAL INDENTURE, dated as of February 26, 1999, between THE
PROGRESSIVE CORPORATION, an Ohio corporation (the "ISSUER") and STATE STREET
BANK AND TRUST COMPANY, a Massachusetts trust company ("SSB"), in its capacity
as Successor Trustee.

                              W I T N E S S E T H:

WHEREAS, the Issuer entered into an Indenture, dated as of September 15, 1993
(as supplemented by the First Supplemental Indenture, dated as of March 15,
1996, the "INDENTURE"), with the First National Bank of Boston, in its capacity
as Trustee, pursuant to which the Issuer may from time to time issue its
unsecured debentures, notes and other evidences of indebtedness in one or more
series; and 

WHEREAS, the Issuer entered into a Supplemental Indenture, dated as of March 15,
1996, confirming the succession of SSB as trustee under the Indenture; and

WHEREAS, Article Eight of the Indenture provides for various matters with
respect to any series of Securities
 issued under the Indenture to be established
in an indenture supplemental to the Indenture; and

WHEREAS, Section 8.1(c) of the Indenture provides that the Issuer, when
authorized by its Board of Directors, and the Trustee may from time to time and
at any time enter into an indenture supplemental to the Indenture to add on to
the covenants of the Issuer certain further covenants, restrictions, conditions
or provisions.

                                       1

<PAGE>



                                 NOW THEREFORE:

In consideration of the premises and other good and valuable consideration, the
parties hereto mutually covenant and agree as follows:

                                    ARTICLE 1
                       RELATION TO INDENTURE; DEFINITIONS

SECTION 1.01. Integral Part. This Second Supplemental Indenture constitutes an
integral part of the Indenture. 

SECTION 1.02. General Definitions. For all purposes of this Second Supplemental
Indenture:

(a) capitalized terms used herein without definition shall have the meanings
specified in the Indenture;

(b) all references herein to Articles and Sections, unless otherwise specified,
refer to the corresponding Articles and Sections of this Second Supplemental
Indenture; and

(c) the terms "HEREIN", "HEREOF", "HEREUNDER" and other words of similar import
refer to this Second Supplemental Indenture.

SECTION 1.03. Definitions. The following definitions shall apply to this Second
Supplemental Indenture:

"CONSOLIDATED TANGIBLE NET WORTH" means, at any date, the total assets appearing
on the consolidated balance sheet of the Issuer and its consolidated
subsidiaries as of the end of the then most recent fiscal quarter of the Issuer,
prepared in accordance with generally accepted accounting principles, less the
sum of (a) the total liabilities appearing on such balance sheet and (b)
intangible assets. "INTANGIBLE ASSETS" means, for the purposes of this
definition, the value, as shown on or reflected in such balance sheet, of (i)
all trade names, trademarks, licenses, patents, copyrights and goodwill, (ii)
organizational costs and (iii) unamortized debt discount and expense, less
unamortized premium.

"DESIGNATED SECURITIES" means the series of Securities designated by the Issuer
as its "6-5/8% Senior Notes due 2029".

"DESIGNATED SUBSIDIARY" means (i) Progressive Casualty Insurance Company, an
Ohio corporation, so long as it remains a subsidiary of the Issuer, (ii) any
other consolidated subsidiary of the Issuer the assets of which constitute 10%
or more of the Total Assets, and (iii) any subsidiary which is a successor to
all or substantially all of the business or properties of any such subsidiary.

"TOTAL ASSETS" means, at any date, the total assets appearing on the
consolidated balance sheet of the Issuer and its consolidated subsidiaries as of
the end of the then most recent fiscal quarter of the Issuer, prepared in
accordance with generally accepted accounting principles.


                                       2


<PAGE>

                                    ARTICLE 2
                              ADDITIONAL COVENANTS

SECTION 2.01. Limitation on Liens. The Issuer will not, nor will it permit any
Designated Subsidiary to, incur, issue, assume or guarantee any indebtedness for
money borrowed if (i) that indebtedness is secured by a pledge, mortgage, deed
of trust or other lien on any shares of stock or indebtedness of any Designated
Subsidiary (a "LIEN"), and (ii) the aggregate amount of the indebtedness so
secured exceeds an amount equal to 15% of the Issuer's Consolidated Tangible Net
Worth, unless the Designated Securities are also secured equally and ratably
with such other indebtedness. For purposes of this restriction, a "LIEN" will
not include the pledge to, or deposit with, any state or provincial insurance
regulatory authorities of any investment securities by the Issuer or any of its
subsidiaries.

The foregoing restriction shall not apply to indebtedness secured by:

(a) Liens on any shares of stock or indebtedness of or acquired from a
corporation merged or consolidated with or into, or otherwise acquired by, the
Issuer or a Designated Subsidiary;

(b) Liens to secure indebtedness of a Designated Subsidiary to the Issuer or to
another Designated Subsidiary, but only as long as such indebtedness is owned or
held by the Issuer or a Designated Subsidiary; and

(c) Any extension, renewal or replacement (or successive extensions, renewals or
replacements), in whole or in part, of any lien referred to in (a) and (b).

SECTION 2.02. Consolidation, Merger, Sale, Conveyance and Lease. The Issuer will
not consolidate or merge with or into any other Person or Persons, or sell,
convey or lease all or substantially all of its property to any other Person,
unless:

(a) the Person formed by such consolidation, or into which the Issuer is merged
or which acquires or leases all or substantially all of the property of the
Issuer, is a corporation or other entity organized under the laws of the United
States, any state thereof or the District of Columbia, and such Person expressly
assumes the Issuer's obligations under the Designated Securities and the
Indenture; and 

(b) immediately after giving effect to the transaction, no Event of Default
exists.

This restriction shall not apply if the Issuer is the Person that survives any
such transaction.

In the event of a conflict between any provision in this Section and any
provision in Article 9 of the Indenture, Article 9 of the Indenture shall
govern.


                                       3

<PAGE>


                                    ARTICLE 3
                            MISCELLANEOUS PROVISIONS

SECTION 3.01. Applicability of this Second Supplemental Indenture. The
provisions of this Second Supplemental Indenture will be applicable solely to
the Designated Securities.

SECTION 3.02. Adoption, Ratification and Confirmation. The Indenture, as
supplemented by this Second Supplemental Indenture, is in all respects hereby
adopted, ratified and confirmed.

SECTION 3.03. Counterparts. This Second Supplemental Indenture may be executed
in any number of counterparts, each of which when so executed shall be deemed an
original; and all such counterparts shall together constitute but one and the
same instrument.

SECTION 3.04. GOVERNING LAW. THIS SECOND SUPPLEMENTAL INDENTURE SHALL BE
GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK.

IN WITNESS WHEREOF, the parties hereto have caused this Second Supplemental
Indenture to be duly executed and their respective corporate seals to be
hereunto fixed and attested as of the day and year first written above.

                           THE PROGRESSIVE CORPORATION

By: 

W. Thomas Forrester 
Treasurer

ATTEST:

By: 

David M. Schneider
Secretary

                           STATE STREET BANK AND TRUST
                          COMPANY, AS SUCCESSOR TRUSTEE
By: 

Name:
Title:

ATTEST:

By: 

Name:
Title:



                                       4

<PAGE>

STATE OF OHIO
COUNTY OF CUYAHOGA

On this __th day of February, 1999, before me personally came W. Thomas
Forrester, to me personally known, who, being by me duly sworn, did depose and
say that he is a resident of Cuyahoga County, Ohio; that he is an officer of THE
PROGRESSIVE CORPORATION, one of the corporations described in and which executed
the above instrument; that he knows the corporate seal of said corporation; that
the seal affixed to said instrument is such corporate seal; that it was so
affixed by authority of the Board of Directors of said corporation, and that he
signed his name thereto by like authority.

Notary Public 
My commission expires:

[Notarial Seal]

STATE OF MASSACHUSETTS

COUNTY OF SUFFOLK

On this __th day of February, 1999, before me personally came
__________________, to me personally known, who, being by me duly sworn, did
depose and say that he is a resident of Bristol County, Massachusetts; that he
is an authorized officer of STATE STREET BANK AND TRUST COMPANY, one of the
corporations described in and which executed the above instrument; that he knows
the corporate seal of said corporation; that the seal affixed to said
instruments is such corporate seal; that it was so affixed by authority of the
Board of Directors of said corporation, and that he signed her name thereto by
like authority.

Notary Public 
My commission expires:

[Notary Seal]



                                       5


<PAGE>

Exhibit No. 4(I)

                      FORM OF 6-5/8% SENIOR NOTES DUE 2029
                               (FACE OF SECURITY)

Unless this certificate is presented by an authorized representative of The
Depository Trust Company, a New York corporation ("DTC") to the Issuer or its
agent for registration of transfer, exchange or payment, and such certificate is
registered in the name of Cede & Co., or in such other name as requested by an
authorized representative of DTC, ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR
VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL, inasmuch as the registered
owner hereof, Cede & Co., has an interest herein.

REGISTERED                                                         REGISTERED
NO. R-___                                                          $___________


                              CUSIP No. 743315 AJ 2

                           THE PROGRESSIVE CORPORATION
                           6-5/8% SENIOR NOTE DUE 2029

THE PROGRESSIVE CORPORATION, an Ohio corporation (the "Issuer"), for value
received, hereby promises to pay to CEDE & Co., c/o The Depository Trust
Company, 55 Water Street, New York, New York 10041 or registered assigns, at the
office or agency of the Issuer at the office of the Trustee in Boston,
Massachusetts, the principal sum of _________________________
($________________) on March 1, 2029, in such coin or currency of the United
States of America as at the time of payment shall be legal tender for the
payment of public and private debts, and to pay interest semiannually on March 1
and September 1
 of each year, commencing on September 1, 1999, on said principal
sum at said office or agency, in like coin or currency, at the rate per annum
specified in the title of this Note, from the March 1 or the September 1, as the
case may be, next preceding the date of this Note to which interest has been
paid, unless the date hereof is a date to which interest has been paid, in which
case from the date of this Note, or unless no interest has been paid on the
Notes, in which case from March 1, 1999, until payment of said principal sum has
been made or duly provided for; provided, that payment of interest may be made
at the option of the Issuer by check mailed to the address of the person
entitled thereto as such address shall appear on the Security Register.
Notwithstanding the foregoing, if the date hereof is after the fifteenth day of
March or September, as the case may be, and before the following March 1 or
September 1, this Note shall bear interest from such March 1 or September 1;
provided, that if the Issuer shall default in the payment of interest due on
such March 1 or September 1, then this Note shall bear interest from the next
preceding March 1 or September 1, to which interest has been paid or, if no
interest has been paid on this Note, from March 1, 1999. The interest so payable
on any March 1 or September 1 will, subject to certain exceptions provided in
the Indenture referred to on the reverse hereof, be paid to the person in whose
name this Note is registered at the close of business on February 15 or August
15, as the case may be, next preceding such March 1 or September 1.

Reference is made to the further provisions of this Note set forth on the
reverse hereof. Such further provisions shall for all purposes have the same
effect as though fully set forth at this place. 


                                       1

<PAGE>


This Note shall not be valid or become obligatory for any purpose until the
certificate of authentication hereon shall have been signed by the Trustee under
the Indenture referred to on the reverse hereof.

IN WITNESS WHEREOF, The Progressive Corporation has caused this instrument to be
signed by its duly authorized officers and has caused its corporate seal to be
affixed hereto or imprinted hereon.


                           THE PROGRESSIVE CORPORATION

        [CORPORATE SEAL]                    By:_________________________________
                                               W. Thomas Forrester
                                               Treasurer

        Attest:_____________________________
               David M. Schneider
               Secretary


Dated: _____________________


                     TRUSTEE'S CERTIFICATE OF AUTHENTICATION

This is one of the Securities, of the series designated herein, referred to in
the within-mentioned Indenture.

                       STATE STREET BANK AND TRUST COMPANY
                                   AS TRUSTEE

                      By:_________________________________
                              Authorized Signatory


                                       2

<PAGE>




                               (BACK OF SECURITY)
                           THE PROGRESSIVE CORPORATION
                           6-5/8% SENIOR NOTE DUE 2029

This Note is one of a duly authorized issue of debentures, notes, bonds or other
evidences of indebtedness of the Issuer (hereinafter called the "Securities") of
the series hereinafter specified, all issued or to be issued under and pursuant
to an indenture dated as of September 15, 1993, as heretofore supplemented and
amended (herein called the "Indenture"), between the Issuer and State Street
Bank and Trust Company, as Trustee (herein called the "Trustee"), to which
Indenture and all indentures supplemental thereto reference is hereby made for a
description of the rights, limitations of rights, obligations, duties and
immunities thereunder of the Trustee, the Issuer and the Holders of the
Securities. The Securities may be issued in one or more series, which different
series may be issued in various aggregate principal amounts, may mature at
different times, may bear interest (if any) at different rates, may be subject
to different redemption provisions (if any), may be subject to different
sinking, purchase or analogous funds (if any) and may otherwise vary as in the
Indenture provided. This Note is one of a series designated as the 6-5/8% Senior
Notes Due 2029 of the Issuer, limited in aggregate principal amount to
$300,000,000. 

In case an Event of Default, as defined in the Indenture, with respect to the
6-5/8% Senior Notes Due 2029 shall have occurred and be continuing, the
principal hereof may be declared, and upon such declaration shall become, due
and payable, in the manner, with the effect and subject to the conditions
provided in the Indenture.

The Indenture contains provisions permitting the Issuer and the Trustee, with
the consent of the Holders of not less than 66-2/3% in aggregate principal
amount of the Securities at the time Outstanding (as defined in the Indenture)
of all series to be affected (voting as one class), evidenced as in the
Indenture provided, to execute supplemental indentures adding any provisions to
or changing in any manner or eliminating any of the provisions of the Indenture
or of any supplemental indenture or modifying in any manner the rights of the
Holders of the Securities of each such series; provided, however, that no such
supplemental indenture shall (i) extend the final maturity of any Security, or
reduce the principal amount thereof, or reduce the rate or extend the time of
payment of any interest thereon, or impair or affect the rights of any Holder to
institute suit for the payment thereof, without the consent of the Holder of
each Security so affected or (ii) reduce the aforesaid percentage of Securities,
the Holders of which are required to consent to any such supplemental indenture,
without the consent of the Holder of each Security so affected. It is also
provided in the Indenture that, with respect to certain defaults or Events of
Default regarding the Securities of any series, prior to any declaration
accelerating the maturity of such Securities, the Holders of a majority in
aggregate principal amount Outstanding of the Securities of such series may on
behalf of the Holders of all the Securities of such series waive any such past
default or Event of Default and its consequences. The preceding sentence shall
not, however, apply to a default in the payment of the principal of or premium,
if any, or interest on any of the Securities. Any such consent or waiver by the
Holder of this Note (unless revoked as provided in the Indenture) shall be
conclusive and binding upon such Holder and upon all future Holders and owners
of this Note and any Note which may be issued in exchange or substitution
herefor, irrespective of whether or not any notation thereof is made upon this
Note or such other Note.


                                       3

<PAGE>

No reference herein to the Indenture and no provision of this Note or of the
Indenture shall alter or impair the obligation of the Issuer, which is absolute
and unconditional, to pay the principal of and interest on this Note in the
manner, at the respective times, at the rate and in the coin or currency herein
prescribed. 

The Notes are issuable in registered form without coupons in denominations of
$1,000 and any integral multiple of $1,000 at the office or agency of the Issuer
at the office of the Trustee in Boston, Massachusetts, and in the manner and
subject to the limitations provided in the Indenture, but without the payment of
any service charge. Notes may be exchanged for a like aggregate principal amount
of Notes of other authorized denominations.

The Notes of the series designated as the 6-5/8% Senior Notes due 2029 are
subject to redemption upon not more than 60 or less than 30 days' notice by
mail, at any time or from time to time, in whole or in part, at the option of
the Issuer on any date (a "Redemption Date"), at a redemption price equal to the
greater of (i) 100% of the principal amount of the Notes to be redeemed or (ii)
a "Make Whole Amount," calculated as described below, plus, in either case,
accrued and unpaid interest on the principal amount being redeemed to such
Redemption Date; provided that installments of interest on Notes which are due
and payable on an interest payment date falling on or prior to the relevant
Redemption Date shall be payable to the Holders of such Notes, registered as
such at the close of business on the relevant record date, according to the
terms and the provisions of the Indenture.

The "Make Whole Amount" means an amount equal to the sum of the present values
of the Remaining Scheduled Payments discounted to such Redemption Date on a
semiannual basis (assuming a 360-day year consisting of twelve 30-day months) at
a rate equal to the Treasury Rate plus 25 basis points.

"Remaining Scheduled Payments" means the remaining scheduled payments of the
principal and interest that would be due on the Note being redeemed after the
relevant Redemption Date; provided, however, that if the redemption date is not
a scheduled interest payment date, the amount of the next succeeding scheduled
interest payment on such Note will be reduced by the amount of interest accrued
on such Note to such Redemption Date.

"Treasury Rate" means, with respect to any Redemption Date for the Notes, the
rate per annum equal to the semiannual equivalent yield to maturity of the
Comparable Treasury Issue, calculated using a price for the Comparable Treasury
Issue (expressed as a percentage of its principal amount) equal to the
Comparable Treasury Price for such Redemption Date. The Treasury Rate shall be
calculated on the third Business Day immediately preceding the Redemption Date.

"Comparable Treasury Issue" means the United States Treasury security selected
by the Independent Investment Banker as having a maturity comparable to the
remaining term of the Notes to be redeemed that would be utilized, at the time
of selection and in accordance with customary financial practice, in pricing new
issues of corporate debt securities of comparable maturity to the remaining term
of the Notes.

"Independent Investment Banker" means Donaldson, Lufkin & Jenrette Securities
Corporation or, if such firm is unwilling or unable to select the Comparable
Treasury Issue, an independent 


                                       4

<PAGE>

investment banking institution of national standing appointed by the Trustee
after consultation with the Issuer.

"Comparable Treasury Price" means with respect to any Redemption Date for the
Notes the average of three Reference Treasury Dealer Quotations obtained by the
Trustee for such Redemption Date. 

"Reference Treasury Dealer" means: (i)
Donaldson, Lufkin & Jenrette Securities Corporation and its successor; provided,
however, that if the foregoing shall cease to be a primary U.S. Government
securities dealer in New York City (a "Primary Treasury Dealer"), the Issuer
will substitute therefore another nationally-recognized investment banking firm
that is a Primary Treasury Dealer, and (ii) any other two Primary Treasury
Dealers selected by the Issuer. 

"Reference Treasury Dealer Quotations" means, with respect to each Reference
Treasury Dealer and any Redemption Date, the average, as determined by the
Trustee, of the bid and asked prices for the Comparable Treasury Issue
(expressed in each case as a percentage of its principal amount) quoted in
writing to the Trustee by such Reference Treasury Dealer at 3:30 p.m. New York
City time, on the third Business Day preceding such Redemption Date.

In the event of redemption of this Note in part only, a new Note or Notes of
this series and of like tenor for the unredeemed portion hereof will be issued
in the name of the Holder hereof upon the cancellation hereof.

Upon due presentment for registration of transfer of this Note at the office or
agency of the Issuer at the office of the Trustee in Boston, Massachusetts, a
new Note or Notes of authorized denominations for an equal aggregate principal
amount will be issued to the transferee in exchange therefor, subject to the
limitations provided in the Indenture, without charge except for any tax or
other governmental charge imposed in connection therewith. 

The Issuer, the Trustee and any authorized agent of the Issuer or the Trustee
may deem and treat the registered Holder hereof as the absolute owner of this
Note (whether or not this Note shall be overdue and notwithstanding any notation
of ownership or other writing hereon), for the purpose of receiving payment of,
or on account of, the principal hereof and, subject to the provisions on the
face hereof, interest hereon, and for all other purposes, and neither the Issuer
nor the Trustee nor any authorized agent of the Issuer or the Trustee shall be
affected by notice to the contrary.

No recourse under or upon any obligation, covenant or agreement of the Issuer in
the Indenture or any indenture supplemental thereto or in any Note, or because
of the creation of any indebtedness represented thereby, shall be had against
any incorporator, shareholder, officer or director, as such, of the Issuer or of
any successor corporation, either directly or through the Issuer or any
successor corporation, under any rule of law, statute or constitutional
provision or by the enforcement of any assessment or by any legal or equitable
proceeding or otherwise, all such liability being expressly waived and released
by the acceptance hereof and as part of the consideration for the issue hereof.

Terms used herein which are defined in the Indenture shall have the respective
meanings assigned thereto in the Indenture.


                                       5

<PAGE>


FOR VALUE RECEIVED, the undersigned hereby sell(s), assign(s) and transfer(s)
unto

                     PLEASE INSERT SOCIAL SECURITY OR OTHER
                         IDENTIFYING NUMBER OF ASSIGNEE 

(PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS
INCLUDING POSTAL ZIP CODE OF ASSIGNEE)

the within Note and all rights thereunder, hereby irrevocably constituting and
appointing attorney to transfer said Note on the books of the Issuer, with full
power of substitution in the premises.

Dated
     ------------------------        ------------------------------------

                                     NOTICE: The signature to this assignment
                                     must correspond with the name as written
                                     upon the face of the within instrument in
                                     every particular, without alteration or
                                     enlargement or any change whatever.



                                       6


<PAGE>

Exhibit No. 10(F)

                           THE PROGRESSIVE CORPORATION
                              2004 GAINSHARING PLAN

1.       The Progressive Corporation and its subsidiaries (collectively
         "Progressive" or the "Company") have adopted The Progressive
         Corporation 2004 Gainsharing Plan (the "Plan") as part of their overall
         compensation program. The Plan is performance-based and is administered
         under the direction of the Compensation Committee of the Board of
         Directors of The Progressive Corporation (the "Committee").

2.       Plan participants for each Plan year shall be selected by the Committee
         from those officers and regular employees of Progressive who are
         assigned primarily to the Core Business (as defined below), another
         operating business unit or a corporate support function. The
         gainsharing opportunity, if any, for those executive officers who
         participate in The Progressive Corporation 2004 Executive Bonus Plan
         ("Executive Plan") will be provided by and be a component of that plan,
         although participants in the Executive Plan may also participate in
         this Plan if and to the extent determined by the Committee. Plan years
         will coincide with Progressive's fiscal years.

3.       Annual Gainsharing Payments under the Plan will be determined by
         application of the
 following formula:

        Annual Gainsharing Payment = Paid Earnings x Target Percentage x
                               Performance Factor

4.       Paid Earnings for any Plan year means the following items paid to a
         participant during the Plan year: (a) regular, used Earned Time
         Benefit, sick, holiday, funeral and overtime pay, and (b) retroactive
         payments of any of the foregoing items relating to the same Plan year.

         For purposes of the Plan, Paid Earnings shall not include any
         short-term or long-term disability payments made to the participant,
         the earnings replacement component of any worker's compensation award,
         any lump sum merit award, payments from the merit cash pool or any
         other bonus or incentive compensation awards and unused Earned Time
         Benefit.

                                        1


<PAGE>

         Notwithstanding the foregoing, if the sum of the regular, used Earned
         Time Benefit, sick, holiday and funeral pay received by a participant
         for a Plan year exceeds his/her salary range maximum for the Plan year
         (determined on an individual pay period basis as of the end of the 24th
         pay period), then his/her Paid Earnings for that Plan year shall equal
         his/her salary range maximum, plus any of the following items received
         by such participant for that Plan year: (a) overtime pay, and (b)
         retroactive payments of regular, used Earned Time Benefit, sick,
         holiday, overtime and funeral pay relating to that Plan year.

5.       Target Percentages vary by position. Target Percentages for Plan
         participants typically are as follows:


<TABLE>
<CAPTION>
                         POSITION                                       TARGET %
-------------------------------------------------------------------------------
<S>                                                                     <C>
Senior Executives, Executive Level Managers and Business Leaders         60-135%
-------------------------------------------------------------------------------
Directors of Large Functional Areas                                       45-60%
-------------------------------------------------------------------------------
Senior Managers                                                           35-45%
-------------------------------------------------------------------------------
Middle Managers                                                           15-35%
-------------------------------------------------------------------------------
Senior Professionals and Entry Level Managers                              9-15%
-------------------------------------------------------------------------------
Administrative Support and Entry Level Professionals                        0-8%
-------------------------------------------------------------------------------
</TABLE>


         Target Percentages will be established within the above ranges by, and
         may be changed with the approval of the following officers of The
         Progressive Corporation (collectively, the "Designated Executives"):
         (a) the Chief Executive Officer, and (b) either the Chief Human
         Resource Officer or the Chief Financial Officer. Target Percentages
         also may be changed from year to year by the Designated Executives.

6.       The Performance Factor

         A.       General

                                        2


<PAGE>

                  The Performance Factor shall consist of one or more
                  Profitability and Growth Components, as described below
                  ("Performance Components"). The Performance Components may be
                  weighted to reflect the nature of the individual participant's
                  assigned responsibilities. The weighting factors may differ
                  among participants and will be determined, and may be changed
                  from year to year, by or under the direction of the Committee.

         B.       Profitability and Growth Components

                  The Profitability and Growth Components measure the overall
                  operating performance of Progressive's Core Business
                  (including the Agency Business Segment, the Direct Business
                  Segment and the Commercial Auto Business Segment, but
                  excluding Midland Financial Group, Inc.), or a designated
                  Business Segment or Sub-Unit thereof, for the Plan year for
                  which an Annual Gainsharing Payment is to be made. For
                  purposes of computing a Performance Score for these
                  Components, operating performance results are measured by one
                  or more Performance Matrices, as established by or under the
                  direction of the Committee for the Plan year, which assign a
                  Performance Score to various combinations of profitability and
                  growth outcomes. Except as provided below, under the
                  Performance Matrices, profitability is measured by the GAAP
                  Combined Ratio and growth is based on the year-to-year change
                  in Net Earned Premiums.

                  For 2004, and for each Plan year thereafter until otherwise
                  determined by the Committee, separate Performance Scores will
                  be determined, and separate Gainsharing Matrices will be used,
                  for the Agency Business Segment, the Direct Business Segment
                  and the Commercial Auto Business Segment. For purposes hereof,
                  the Agency Business Segment includes Agency Auto (including
                  Strategic Alliances Agency Auto) and Agency Special Lines. The
                  Direct Business Segment includes Auto Pro (including Strategic
                  Alliances Direct Auto), Internet and Direct Special Lines. For
                  purposes of this Plan, the Midland Financial Group, Inc.'s
                  results are excluded from the Agency, Direct and Commercial
                  Auto Business Segments and, thus, from Core Business results.
                  Net operating gains/losses from other Core products, if any,
                  will be apportioned among the Agency, Direct and Commercial
                  Auto Business Segments in accordance with the respective
                  amount(s) of Net Earned Premiums generated by such products in
                  each such Business Segment and the apportioned gains/losses
                  will be included in the calculation of the Combined Ratio.

                                        3


<PAGE>

                  The GAAP Combined Ratio will be separately determined for each
                  of the Agency Business Segment, the Direct Business Segment
                  and the Commercial Auto Business Segment, and for any
                  designated Sub-Unit thereof (e.g., in the Agency Business
                  Segment, performance may also be separately measured for each
                  geographic region). The GAAP Combined Ratio of each such
                  Business Segment or Sub-Unit will then be matched with growth
                  in Net Earned Premiums for such Business Segment or Sub-Unit,
                  using the applicable Gainsharing Matrix, to determine a
                  Performance Score ("Standard Performance Computation").

                  For 2004 and for each Plan year thereafter until otherwise
                  determined by the Committee, a portion of the Annual
                  Gainsharing Payment earned by members of the Direct Business
                  Leadership Group (as defined below) will be determined by
                  measuring operating results achieved by the Direct Business
                  Segment in terms of certain modified profitability and growth
                  criteria (as described below) and by comparing the results
                  against pre-established targets that are set forth in a
                  performance matrix approved by the Committee ("Modified
                  Performance Computation"). The Modified Performance
                  Computation will apply only to members of the Direct Business
                  Leadership Group and only as and to the extent set forth
                  below.

                  The Direct Business Leadership Group includes the Direct
                  Business Leader, the IT Director for the Direct Business
                  Segment and all other employees assigned primarily to the
                  Direct Business Segment who are eligible to participate in the
                  Company's equity incentive plans.

                  For purposes of the Modified Performance Computation:

                  (a) profitability is measured by the variance between (i) the
                      GAAP Combined Ratio for premium earned during the Plan
                      year with respect to new private passenger auto policies
                      written by the Direct Business Segment, and (ii) a target
                      Combined Ratio, which is adjusted quarterly to reflect the
                      then current pricing targets established and business mix
                      (i.e. the percentage of new business earned in each risk
                      tier) for that product; and

                  (b) growth is measured by the year-to-year change in Lifetime
                      Earned Premium (as defined below) for private passenger
                      auto business written by the Direct Business Segment.
                      Lifetime Earned Premium is the amount of earned premium
                      that the

                                        4


<PAGE>

                      Company expects to generate over time with respect to
                      policies written during a given Plan year or the previous
                      calendar year, as applicable (including any subsequent
                      renewals thereof), which is determined by a combination of
                      historical experience and statistical analysis.

         C.       Component Weighting

                  For most participants, the Performance Factor will be
                  determined solely by the performance results for the Core
                  Business, consisting of the Agency, Direct and Commercial Auto
                  Business Segments. The Performance Score for each such
                  Business Segment will be separately determined, as described
                  above, by application of the Standard Performance Computation
                  and the appropriate Gainsharing Matrix. The resulting
                  Performance Scores for each of the Agency, Direct and
                  Commercial Auto Business Segments will then be multiplied by a
                  weighting factor (based on the percentage of Net Earned
                  Premiums generated by each such Business Segment during the
                  Plan year), the weighted Performance Scores will be combined
                  and the sum of the weighted Performance Scores will be the
                  Performance Score for the Core Business.

                  As noted above, for most participants, the Performance Factor
                  will be the Performance Score for the Core Business. For
                  certain employees designated by or under the direction of the
                  Committee, however, the Performance Factor will be based on
                  the Performance Scores for both the Core Business, as a whole,
                  and their assigned Business Segment. Generally, for these
                  employees, the Performance Factor will be based 50% on the
                  Core Business Performance Score and 50% on their assigned
                  Business Segment's Performance Score. However, for those
                  employees assigned principally to the Agency Business Segment
                  who are designated by or under the direction of the Committee,
                  the Performance Factor will be based 50% on the Core Business
                  Performance Score, 25% on the Agency Business Segment
                  Performance Score and 25% on the Performance Score for his or
                  her assigned Sub-Unit of the Agency Business Segment. With
                  respect to each of the IT Business Leaders selected by the
                  Designated Executives, the Performance Factor will be based on
                  both the Core Business Performance Score and the Business
                  Segment Performance Score of his or her assigned Business
                  Segment, in such ratio or otherwise weighted as shall be
                  determined by or under the direction of the Committee.

                                        5


<PAGE>

                  Except as otherwise determined by the Committee, for members
                  of the Direct Business Leadership Group, the Performance
                  Factor will be based 50% on the Core Business Performance
                  Score, 25% on the Direct Business Performance Score (Standard
                  Performance Computation) and 25% on the Direct Business
                  Performance Score (Modified Performance Computation).

                  The Performance Score for each Performance Component will be
                  multiplied by the assigned weighting factor to produce a
                  Weighted Performance Score. The sum of the Weighted
                  Performance Scores equals the Performance Factor. The final
                  Performance Factor can vary from 0 to 2.0, based on actual
                  performance versus the pre-established objectives. The
                  Performance Factor cannot exceed 2.0, regardless of results.

7.       Subject to Paragraph 8 below, no later than December 31 of each Plan
         year, each participant will receive an initial payment in respect of
         his or her Annual Gainsharing Payment for that Plan year equal to 75%
         of an amount calculated on the basis of Paid Earnings for the first 24
         pay periods of the Plan year, estimated earnings for the remainder of
         the Plan year, performance data through the first 11 months of the Plan
         year (estimated, if necessary) and forecasted operating results for the
         remainder of the Plan year. No later than February 15 of the following
         year, each participant will receive the balance of his or her Annual
         Gainsharing Payment, if any, for such Plan year, based on his or her
         Paid Earnings and performance data for the entire Plan year.

         Any Plan participant who is then eligible to participate in The
         Progressive Corporation Executive Deferred Compensation Plan ("Deferral
         Plan") may elect to defer all or a portion of the Annual Gainsharing
         Payment otherwise payable to him/her under this Plan, subject to and in
         accordance with the terms of the Deferral Plan.

8.       Unless otherwise determined by the Committee, and except as expressly
         provided herein, in order to be entitled to receive an Annual
         Gainsharing Payment for any Plan year, the participant must be assigned
         to the Core Business or a participating business unit or support
         function, and be an active employee of the Company, on November 30 of
         the Plan year ("Qualification Date"). Individuals who are hired on or
         after December 1 of any Plan year are not entitled to an Annual
         Gainsharing Payment for that Plan year.

                                        6


<PAGE>

         Any participant who is on a leave of absence covered by the Family and
         Medical Leave Act of 1993, personal leave of absence with the approval
         of the Company, military leave or short or long-term disability on the
         Qualification Date with respect to any Plan year will be entitled to
         receive an Annual Gainsharing Payment for such Plan year, calculated as
         provided in Paragraphs 3 through 6 above and based on the amount of
         Paid Earnings received by such participant during the Plan year.

         Annual Gainsharing will be net of any legally required deductions for
         federal, state and local taxes and other items.

9.       The right to any Annual Gainsharing Payment hereunder may not be sold,
         transferred, assigned or encumbered by any participant. Nothing herein
         shall prevent any participant's interest hereunder from being subject
         to involuntary attachment, levy or other legal process.

10.      The Plan shall be administered by or under the direction of the
         Committee. The Committee shall have the authority to adopt, amend,
         revise and repeal such rules, guidelines, procedures and practices
         governing the Plan as it shall, from time to time, in its sole
         discretion, deem advisable.

         The Committee shall have full authority to determine the manner in
         which the Plan will operate, to interpret the provisions of the Plan
         and to make all determinations hereunder. All such interpretations and
         determinations shall be final and binding on Progressive, all Plan
         participants and all other parties. No such interpretation or
         determination shall be relied on as a precedent for any similar action
         or decision.

         Unless otherwise determined by the Committee, all of the authority of
         the Committee hereunder (including, without limitation, the authority
         to administer the Plan, select the persons entitled to participate
         herein, interpret the provisions thereof, waive any of the requirements
         specified herein and make determinations hereunder and to select,
         establish, change or modify Performance Components and their respective
         weighting factors, performance targets and Target Percentages) may be
         exercised by the Designated Executives. In the event of a dispute or
         conflict, the determination of the Committee will govern.

11.      The Plan may be terminated, amended or revised, in whole or in part, at
         any time and from time to time by the Committee, in its sole
         discretion.

                                        7


<PAGE>

12.      The Plan will be unfunded and all payments due under the Plan shall be
         made from Progressive's general assets.

13.      Nothing in the Plan shall be construed as conferring upon any person
         the right to remain a participant in the Plan or to remain employed by
         Progressive, nor shall the Plan limit Progressive's right to discipline
         or discharge any of its officers or employees or change any of their
         job titles, duties or compensation.

14.      Progressive shall have the unrestricted right to set off against or
         recover out of any Annual Gainsharing Payment or other sums owed to any
         participant under the Plan any amounts owed by such participant to
         Progressive.

15.      This Plan supersedes all prior plans, agreements, understandings and
         arrangements regarding bonuses or other cash incentive compensation
         payable to participants by or due from Progressive. Without limiting
         the generality of the foregoing, this Plan supersedes and replaces The
         Progressive Corporation 2003 Gainsharing Plan (the "Prior Plan"), which
         is and shall be deemed to be terminated as of December 27, 2003 (the
         "Termination Date"); provided, that any bonuses or other sums earned
         and payable under the Prior Plan with respect to any Plan year ended on
         or prior to the Termination Date shall be unaffected by such
         termination and shall be paid to the appropriate participants when and
         as provided thereunder.

16.      This Plan is adopted, and is to be effective, as of December 28, 2003,
         which is the commencement of Progressive's 2004 Plan year. This Plan
         shall be effective for the 2004 Plan year (which coincides with
         Progressive's 2004 fiscal year) and for each Plan year thereafter
         unless and until terminated by the Committee.

17.      This Plan shall be interpreted and construed in accordance with the
         laws of the State of Ohio.

                                        8


<PAGE>

Exhibit No. 10(H)

                       2004 PROGRESSIVE CAPITAL MANAGEMENT
                                   BONUS PLAN

1.       The Progressive Corporation and its subsidiaries (collectively
         "Progressive" or "Company") have adopted the 2004 Progressive Capital
         Management Bonus Plan ("Plan") as part of their compensation program
         for investment professionals. The Plan is performance-based and is
         administered under the direction of the Compensation Committee of the
         Board of Directors of The Progressive Corporation ("Committee").

2.       Progressive employees who are assigned primarily to the Company's
         capital management function are eligible to be selected for
         participation in the Plan. Eligible employees may be selected by the
         Chief Executive Officer ("CEO") to participate in the Plan for one or
         more Plan years. Participants may also participate in other
         gainsharing, bonus or incentive compensation plans maintained by
         Progressive, if so determined in the discretion of the CEO. Plan years
         shall coincide with Progressive's fiscal years. For 2004, and each Plan
         year thereafter until otherwise determined by the CEO, the following
         individuals will be entitled to participate in the Plan: William Cody,
         Steve Anderson, Evelyn Erb, David Benson, Anthony Grandolfo, Eleanora

         Crosby, Nhu Nguyen, Dominic Visco and Sandy Richards. Other eligible
         employees of the Company may be selected for participation in the Plan
         for or at any time during a Plan year by the CEO.

3.       The Plan offers participants the opportunity to earn bonus compensation
         through two (2) separate components: the Portfolio Performance
         Component and the Discretionary Bonus Pool Component, as described in
         Sections 4 and 5 below ("Bonus Components"). The term "Annual Bonus,"
         as used herein, shall mean the aggregate of all bonuses earned by or
         awarded to a participant under the two (2) Bonus Components.

4.       The Portfolio Performance Component

         A.       The amount of the Portfolio Performance Bonus earned by any
                  participant under the Plan for any Plan year will be 
                  determined by application of the following formula:

                  Portfolio Performance Bonus = Paid Earnings x Target
                  Percentage x Portfolio Performance Factor

         B.       For purposes of the Plan, "Paid Earnings" shall include (a)
                  regular, used Earned Time Benefit, sick, holiday and funeral
                  pay received by the participant during the Plan year for work
                  or services performed

                                        1


<PAGE>

                  by the participant as an officer or employee of Progressive,
                  and (b) retroactive payments of any of the foregoing relating
                  to the same Plan year.

                                        2


<PAGE>

                  For purposes of the Plan, Paid Earnings shall not include any
                  (a) short-term or long-term disability payments, (b) lump sum
                  merit awards, (c) payments from the merit cash pool, (d)
                  discretionary or other bonus or incentive payments, (e) the
                  earnings replacement component of any worker's compensation
                  award or (f) any unused Earned Time Benefit. If additional
                  participants are added during the course of a given Plan year,
                  their Portfolio Performance Bonus will be based on the portion
                  of their salary earned during the part of the Plan year during
                  which they participated in the Plan.

         C.       The Target Percentages for participants in the Plan shall be
                  determined by the Committee, but will not exceed 125% for any
                  participant. Target Percentages may vary among Plan
                  participants and may be changed from year to year by the
                  Committee. For 2004, and each Plan year thereafter until
                  otherwise determined by the Committee, the Target Percentages
                  for the Plan participants shall be as follows:


<TABLE>
<CAPTION>
     Name                             Target Percentages
     ----                             ------------------
<S>                                   <C>
William Cody                                 100%
Steve Anderson                               100%
Evelyn Erb                                   100%
David Benson                                 100%
Anthony Grandolfo                            100%
Eleanora Crosby                            18.75%
Nhu Nguyen                                 11.25%
Dominic Visco                              11.25%
Sandy Richards                               6.0%
</TABLE>


         D.       Portfolio Performance Factor

                  The Portfolio Performance Factor is determined by comparing
                  the actual performance of designated segments of Progressive's
                  investment portfolio ("Portfolio Segments") against specified
                  external benchmarks, which shall be risk-adjusted as provided
                  herein ("Investment Benchmarks").

                  The applicable Portfolio Segments, the weighting of the
                  applicable Portfolio Segments for any participant, the related
                  Investment Benchmarks and the funds, collection of funds or
                  indexes which comprise the Investment Benchmarks will be
                  designated, and may be changed from year to year, by the
                  Committee.

                                        3


<PAGE>

                  The Portfolio Performance Factor is based on Plan year
                  performance of each designated Portfolio Segment of
                  Progressive's investment portfolio. Investment results are
                  marked to market in order to calculate total return, which is
                  then compared against the designated risk-adjusted Investment
                  Benchmark to produce a Performance Score for the applicable
                  Portfolio Segment.

                  For 2004, and for each Plan year thereafter until otherwise
                  determined by the Committee, for purposes of the Plan,
                  performance shall be measured on the basis of a single
                  Portfolio Segment: the fixed income portfolio ("Fixed Income
                  Portfolio").

                  Fixed Income Portfolio. At the conclusion of a Plan year, the
                  investment funds which comprise the selected Investment
                  Benchmark for the Fixed Income Portfolio will be risk-adjusted
                  through application of the Modigliani formula for measuring
                  risk-adjusted performance ("Modigliani Formula") in accordance
                  with the provisions of Exhibit I hereto, and ranked according
                  to their respective risk-adjusted returns for the Plan year.
                  In applying the Modigliani Formula to the Investment Benchmark
                  for the Fixed Income Portfolio, risk-adjusted returns are
                  calculated using the standard deviation of three years of
                  quarterly returns (i.e. 12 data points). The investment
                  performance achieved by the Fixed Income Portfolio for the
                  Plan year will then be compared against the risk-adjusted
                  performance of the several investments which comprise the
                  applicable Investment Benchmark to determine the decile in
                  which such Portfolio's performance falls ("Decile Ranking").
                  The Performance Score of the Fixed Income Portfolio is
                  determined by its Decile Ranking for the Plan year, as
                  follows:


<TABLE>
<CAPTION>
DECILE              PERFORMANCE
RANKING                SCORE
-------------------------------
<S>                 <C>
  1st                  2.00
-------------------------------
  2nd                  1.78
-------------------------------
  3rd                  1.56
-------------------------------
  4th                  1.33
-------------------------------
  5th                  1.11
-------------------------------
  6th                   .89
-------------------------------
  7th                   .67
</TABLE>


                                        4


<PAGE>


<TABLE>
<S>                     <C>
-------------------------------
  8th                   .44
-------------------------------
  9th                   .22
-------------------------------
  10th                    0
-------------------------------
</TABLE>


                  Performance of the Fixed Income Portfolio shall be measured by
                  any one, or a combination of any two or more, of the following
                  benchmarks, or such other benchmark or benchmarks, as shall be
                  designated by the Committee, which will be risk-adjusted as
                  described above:

                           Rogers Casey Intermediate Fixed Income Funds

                           Rogers Casey Limited Duration Fixed Income Funds

                           Lehman Intermediate Corp./Gov. Index

                  The applicable Investment Benchmark(s), or combination
                  thereof, will be selected, and may be changed on an annual or
                  quarterly basis, by or with the approval of the Committee. For
                  2004, and for all subsequent Plan years until otherwise
                  determined by the Committee, the performance of the Fixed
                  Income Portfolio will be measured by the Rogers Casey
                  Intermediate Fixed Income Funds benchmark. In the event that
                  different Investment Benchmarks are applicable to different
                  quarterly periods within a given Plan year, the quarterly
                  performance results will be combined and the arithmetic mean
                  of such results will equal the Performance Score for the Plan
                  year.

                  The Portfolio Performance Factor for any participant can vary
                  from 0 to 2.0, based on actual performance versus the
                  pre-established Benchmarks.

5.       Discretionary Bonus Pool Component

         A.       A pool of bonus money will be objectively determined and made
                  available to the CEO to distribute among designated
                  participants at his or her sole discretion, subject to
                  approval by either the Chief Human Resource Officer or Chief
                  Financial Officer. The CEO shall designate the individuals, if
                  any, who are eligible to participate in the Discretionary
                  Bonus Pool Component for a given Plan year. For 2004, and each

                                        5


<PAGE>

                  Plan year thereafter until otherwise determined by the CEO,
                  the eligible participants for the Discretionary Bonus Pool
                  Component are Steve Anderson, Evelyn Erb, David Benson and
                  Anthony Grandolfo. The CEO is not obligated to disburse all of
                  the funds in the bonus pool, and may not disburse more than
                  the value of the pool. Undisbursed funds will not be carried
                  over to future years.

         B.       The Discretionary Bonus Pool is based on the Fixed Income
                  Portfolio performance and is calculated by adding the product
                  of each participant's Paid Earnings multiplied by the target
                  percentage designated by the CEO for the purpose of
                  determining the amount of the Discretionary Bonus Pool (not to
                  exceed 20%), multiplied by the performance score of the Fixed
                  Income Portfolio, which can range from 0 to 2. The
                  Discretionary Bonus Pool will be calculated using the amount
                  of salary actually paid to eligible participants during the
                  course of the Plan year.

6.       After the end of each Plan year, and after the investment results and
         Benchmark data for such Plan year have become available, the bonuses
         earned by each participant pursuant to the provisions of Sections 4 and
         5 of this Plan will be calculated and then aggregated to determine the
         Annual Bonus earned by each participant in the Plan. Subject to the
         following paragraph and Paragraph 7 below, the Annual Bonuses for a
         Plan year will be paid to Plan participants as soon as practicable
         after investment results and Benchmark data for such Plan year become
         available, but no later than March 15th of the following year.

         Any Plan participant who is eligible to participate in The Progressive
         Corporation Executive Deferred Compensation Plan ("Deferral Plan") may
         elect to defer all or any portion of his or her annual Portfolio
         Performance Bonus otherwise payable under this Plan, subject to and in
         accordance with the terms of the Deferral Plan. Bonuses based on the
         Discretionary Bonus Pool Component are not eligible for deferral under
         the Deferred Plan.

7.       Unless otherwise determined by the Committee, and except as otherwise
         provided herein, in order to be entitled to receive an Annual Bonus for
         any Plan year, the participant must be an active employee of
         Progressive on the last day of such Plan year ("Qualification Date").
         Any participant who is on a leave of absence covered by the Family and
         Medical Leave Act of 1993, personal leave approved by the Company,
         military leave or short or long-term disability on the Qualification
         Date relating to any Plan year will be entitled to receive an Annual
         Bonus for the Plan year based on the

                                        6


<PAGE>

         Paid Earnings received by the participant during the Plan year. Annual
         Bonus payments made to participants will be net of any legally required
         deductions for federal, state and local taxes and other items.

8.       The right to any Annual Bonuses hereunder may not be sold, transferred,
         assigned or encumbered by any participant. Nothing herein shall prevent
         any participant's interest hereunder from being subject to involuntary
         attachment, levy or other legal process.

9.       The Plan will be administered by or under the direction of the
         Committee. The Committee will have the authority to adopt, alter,
         amend, modify and repeal such rules, guidelines, procedures and
         practices governing the Plan as it, from time to time, in its sole
         discretion deems advisable.

         The Committee will have full authority to determine the manner in which
         the Plan will operate, to interpret the provisions of the Plan and to
         make all determinations thereunder. All such interpretations and
         determinations will be final and binding on Progressive, all Plan
         participants and all other parties. No such interpretation or
         determination may be relied on as a precedent for any similar action or
         decision.

         Unless otherwise determined by the Committee, all of the authority of
         the Committee hereunder (including, without limitation, the authority
         to administer the Plan, select the persons entitled to participate
         herein or with respect to the various Bonus Components provided for
         herein, interpret the provisions hereof, waive any of the requirements
         specified herein and make determinations hereunder and to establish,
         change or modify Bonus Components, Component weightings, Investment
         Benchmarks, Performance Targets and Target Percentages) may be
         exercised by the CEO and Chief Human Resource Officer, acting jointly.
         If either of said officers is unavailable or unable to participate, or
         if either of such positions are vacant, the Chief Financial Officer may
         act instead of such officer. In the event of a dispute or conflict, the
         determination of the Committee will govern.

10.      The Plan may be terminated, amended or revised, in whole or in part, at
         any time and from time to time by the Committee, in its sole
         discretion.

11.      The Plan will be unfunded and all payments due under the Plan will be
         made from Progressive's general assets.

                                        7


<PAGE>

12.      Nothing in the Plan shall be construed as conferring upon any person
         the right to remain a participant in the Plan or to remain employed by
         Progressive, nor shall the Plan limit Progressive's right to discipline
         or discharge any of its officers or employees or change any of their
         job titles, duties or compensation.

13.      Progressive shall have the unrestricted right to set off against or
         recover out of any bonuses or other sums owed to any participant under
         the Plan any amounts owed by such participant to Progressive.

14.      This Plan supersedes all prior plans, agreements, understandings and
         arrangements regarding bonuses or other cash incentive compensation
         payable or due to any participant from Progressive with respect to the
         performance of Progressive's investment portfolio. Without limiting the
         generality of the foregoing, this Plan supersedes and replaces the 2003
         Progressive Capital Management Bonus Plan (the "Prior Plan"), which is
         and shall be deemed to be terminated as of December 27, 2003 (the
         "Termination Date"); provided, that any bonuses or other sums earned
         and payable under the Prior Plan with respect to any Plan year ended on
         or prior to the Termination Date shall be unaffected by such
         termination and shall be paid to the appropriate participants when and
         as provided thereunder.

15.      This Plan is adopted and, is to be effective, as of December 28, 2003,
         which is the commencement of Progressive's 2004 fiscal year. This Plan
         shall be effective for the 2004 Plan year (which coincides with
         Progressive's 2004 fiscal year) and for each Plan year thereafter
         unless and until terminated by the Committee.

16.      This Plan shall be interpreted and construed in accordance with the
         laws of the State of Ohio.

                                        8


<PAGE>

 METHOD USED TO CALCULATE THE BONUS COMPENSATION FOR PCM FIXED INCOME PORTFOLIO

The performance factor that determines the bonus component of PCM compensation
depends on the decile ranking of the PCM Portfolio Segment's total return
compared to the risk-adjusted total return of its peers from the Rogers-Casey
survey of Intermediate Fixed Income fund managers. Because the R-C survey is
only conducted quarterly, we must use quarterly data for both returns standard
deviation. The annual returns are calculated from the 4 quarterly returns of the
year, but the standard deviation calculation is derived from the most recent 12
quarters (3 years) and converted to annual terms. A fund must have return data
for all 12 quarters to be included in the comparison sample.

To calculate the decile ranking of PCM returns relative to the returns from the
Rogers-Casey survey, we adjust the individual R-C fund managers' returns to
match the risk of the PCM Portfolio Segment by applying the Modigliani &
Modigliani (M2) formula. Thus, the raw PCM return and the risk-adjusted PCM
return will be identical, while the individual fund manager returns will be
adjusted according to how much risk each has relative to PCM. The formula and
definitions are given below.

RA Return (fund) = [STDpgr/STDfund] * [Raw Return (fund) - Rf] + Rf

         STDpgr = Sample Standard Deviation of Quarterly Returns (Annualized)
         for 3 Years (i.e., 12 data points)

         STDfund = Sample Standard Deviation of Quarterly Returns (Annualized)
         for 3 Years (i.e., 12 data points)

         Raw Return (fund) = Total Return of Individual R-C Fund Manager for 4
         Quarters (Annual return)

         Rf = "Risk-free rate" 90-day LIBOR Rate at Beginning of Each Quarter
         for 4 Quarters (Annual return)


<TABLE>
<CAPTION>
Example 1:                                             Example 2:
Fund had more risk than PCM                            Fund had less risk than PCM
<S>                                                    <C>
STDpgr = 15%                                           STDpgr = 15%
STDfund = 20%                                          STDfund = 10%
Raw Return (fund) = 8%                                 Raw Return (fund) = 8%
Rf = 4%                                                Rf = 4%

RA Return (fund) = [15% / 20%]*[8% - 4%] + 4%          RA Return (fund) = [15% / 10%]*[8% - 4%] + 4%
</TABLE>


                                        9


<PAGE>


<TABLE>
<S>                                                    <C>
RA Return (fund) = 7%                                  RA Return (fund) = 10%

Because the fund was riskier, its RA return is lower   Because the fund was less risky, its RA return is higher
</TABLE>


                                       10


<PAGE>

Exhibit No. 10(J)

                           THE PROGRESSIVE CORPORATION
                            2004 EXECUTIVE BONUS PLAN

1.       The Progressive Corporation and its subsidiaries ("Progressive") have
         designed an executive compensation program consisting of three
         components: salary, annual bonus and equity-based incentives. These
         components have been structured to reflect the market for executive
         compensation and to promote both the achievement of corporate goals and
         performance that is in the long-term interest of shareholders. The
         annual bonus component of this program is performance-based and focuses
         on current results.

2.       The 2004 Executive Bonus Plan (the "Plan") provides, in whole or in
         part, the annual bonus component of Progressive's executive
         compensation program for Plan participants. The Plan shall be
         administered by or under the direction of the Compensation Committee
         (the "Committee") of the Board of Directors of The Progressive
         Corporation. Executive officers of Progressive may be selected by the
         Committee to participate in the Plan for one or more Plan years. Plan
         participants may also be eligible to participate in other Progressive
         bonus or gainsharing plans, as determined by the Committee. Plan years
         shall coincide with Progressive's
 fiscal years.

3.       Subject to the following sentence, the amount of the annual bonus
         earned by any participant under the Plan for any Plan year ("Annual
         Bonus") will be determined by application of the following formula:

       Annual Bonus = Paid Salary x Target Percentage x Performance Factor

         The Annual Bonus payable to any participant with respect to any Plan
         year shall not exceed $5,000,000.00.

4.       The salary rate of each Plan participant for any Plan year shall be
         established by the Committee no later than ninety (90) days after
         commencement of such Plan year. For purposes of the Plan, "salary" and
         "Paid Salary" shall include regular, used Earned Time Benefit, sick,
         holiday and funeral pay received by the participant during the Plan
         year for work or services performed by the participant as an officer or
         employee of Progressive, but shall not include any (a) short-term or
         long-term disability payments, (b) lump sum merit adjustments, (c)
         discretionary or other bonus or incentive payments, (d) unused Earned
         Time Benefit, or (e) the earnings replacement component of any worker's
         compensation award.

5.       The Target Percentages for the participants in the Plan shall be
         determined by the Committee, but will not exceed 200% for any
         participant. Target Percentages may vary among Plan participants and
         may be changed from year to year by the Committee.

                                        1


<PAGE>

6.       The Performance Factor

         A.       General

                  The Performance Factor shall consist of one or more of the
                  following components: a Core Business Profitability and Growth
                  Component, one or more Business Segment Performance
                  Components, a Cost Structure Improvement Component and an
                  Investment Performance Component (the "Bonus Components" or
                  "Components"). An appropriate combination of Bonus Components
                  will be designated for each participant, and the designated
                  Bonus Components will be weighted, based on such participant's
                  assigned responsibilities, as determined by the Committee.

                  The relative weighting of the Bonus Components may vary among
                  Plan participants and may be changed from year to year by the
                  Committee.

                  For purposes of computing the amount of the Annual Bonus for
                  any Plan year, a Performance Score will be calculated for each
                  of the designated Bonus Components, based on the performance
                  of the business(es), product(s) or function(s) being measured
                  by that Component, as described below. The Performance Score
                  will equal 1.0 if specified performance goals are met, and can
                  vary from 0 to 2.0, based on actual performance versus the
                  pre-established objectives. The Performance Score achieved for
                  each of the designated Bonus Components will then be
                  multiplied by the applicable weighting factor to produce a
                  Weighted Performance Score for that Component. The sum of the
                  Weighted Performance Scores for the applicable Bonus
                  Components will equal the Performance Factor, which can
                  likewise vary from 0 to 2.0. The Performance Factor cannot
                  exceed 2.0, regardless of results.

                  Actual performance results achieved for any Plan year, which
                  will be used to calculate the Performance Score achieved for
                  each of the applicable Bonus Components, must be certified by
                  the Committee prior to payment of the Annual Bonus.

         B.       Core Business Profitability and Growth Component

                  The Core Business Profitability and Growth Component measures
                  the overall operating performance of Progressive's Core
                  Business for the Plan year for which an Annual Bonus payment
                  is to be made. The Core Business will consist of the Agency
                  Business Segment, the Direct Business Segment, the Commercial
                  Auto Business Segment and/or such other Business Segment(s)
                  (as defined below), if any, as shall be designated and defined
                  by the Committee for the Plan year. The Performance Score for
                  this Component is based on weighted operating performance
                  results for each of the Business Segments included in the Core
                  Business (the "Core Business Segments"). Each Plan year, a
                  separate

                                        2


<PAGE>

                  Performance Matrix for each Core Business Segment will be
                  established by or under the direction of the Committee. Each
                  such Performance Matrix will assign a Performance Score to
                  various combinations of profitability and growth outcomes for
                  the applicable Business Segment, based on the following
                  criteria:

                  -   profitability will be measured by one of the following, as
                      designated by the Committee: combined ratio, weighted
                      combined ratio, variation in combined ratio from a
                      targeted combined ratio, return on equity or return on
                      revenue; and

                  -   growth will be measured by changes in one of the
                      following, as designated by the Committee: net earned
                      premium, net written premium or lifetime earned premium
                      (i.e., the amount of earned premium expected to be
                      generated over time with respect to policies written
                      during a Plan year, including any subsequent renewals
                      thereof, as determined by a formula approved by the
                      Committee).

                  Profitability and growth will be separately determined for
                  each of the Core Business Segments, using the performance
                  criteria designated by the Committee for the Plan year, and
                  will then be matched using the applicable Performance Matrix,
                  to determine a Performance Score for each Core Business
                  Segment.

                  The resulting Performance Scores for each Core Business
                  Segment will then be multiplied by a weighting factor (based
                  on the percentage of net earned premiums generated by such
                  Core Business Segment during the Plan year or such other
                  factor(s) as shall be approved by the Committee), the weighted
                  Performance Scores will be combined and the sum of the
                  weighted Performance Scores will be the Performance Score for
                  the Core Business Profitability and Growth Component.

         C.       Business Segment Performance Component

                  The Business Segment Performance Component measures the
                  performance of one or more designated Business Segments (as
                  defined below) in terms of any one or more of the following
                  criteria selected by the Committee:

                  -   profitability -- measured by the combined ratio, weighted
                      combined ratio, variation in combined ratio from a
                      targeted combined ratio, return on equity or return on
                      revenue;

                  -   growth -- measured by changes in net written premium, net
                      earned premium or lifetime earned premium, as described
                      above; or

                  -   operating effectiveness -- measured by systems
                      availability or timeliness of response.

                  A Business Segment may consist of a distribution channel,
                  business unit, product, class or type of business (e.g.,
                  designated types of policies written in a distribution

                                        3


<PAGE>

                  channel or by a business unit), function, process or other
                  business category, such as new or renewal business.

                  The Committee may designate one or more Business Segment
                  Performance Components for an individual Plan participant for
                  any Plan year and, for each such Component, will determine the
                  applicable criteria by which performance will be measured, the
                  goals to be achieved and the Performance Scores that will
                  result from various levels of performance, and the relative
                  weighting thereof. The applicable performance criteria,
                  related goals and resulting Performance Scores may be set
                  forth in a Business Segment Performance Matrix or other format
                  approved by the Committee. Business Segment Performance
                  Components, performance criteria, goals, resulting Performance
                  Scores and relative weightings may vary among participants and
                  may be changed from year to year by the Committee.

         D.       Cost Structure Improvement Component

                  The Cost Structure Improvement Component measures success in
                  achieving cost structure improvement for the Core Business, as
                  a whole, or for an assigned Business Segment, if applicable.
                  Results are reflected in a Cost Structure Improvement Score.
                  For purposes of computing the Cost Structure Improvement
                  Score, cost structure improvement is measured by comparing the
                  sum of the GAAP Underwriting Expense Ratio ("Underwriting
                  Expense Ratio") and Loss Adjustment Expense Ratio ("LAE
                  Ratio") achieved for the Plan year (collectively, "Actual
                  Expense Ratio") against defined expense objectives for that
                  year, as established by or under the direction of the
                  Committee ("Target Expense Ratio"). The Target Expense Ratio,
                  including its individual components, may vary by Business
                  Segment and/or for the Core Business as a whole, and may be
                  changed from year to year by or under the direction of the
                  Committee.

                  The Cost Structure Improvement Score will be computed in
                  accordance with the following formula:

    Cost Structure Improvement = 1 + [Target Expense Ratio-Actual Expense Ratio]
                                      -----------------------------------------
                  Score                                   3

         E.       Investment Performance Component

                  The Investment Performance Component compares the investment
                  performance of individual segments of Progressive's investment
                  portfolio ("Portfolio Segments") against the performance of
                  selected groups of comparable investment funds, indexes or
                  other benchmarks ("Investment Benchmarks") over such period or
                  periods as shall be determined by the Committee. Such
                  Investment Benchmarks may be risk-adjusted in accordance with
                  such formula or other method as may be determined by the
                  Committee. Investment results are marked

                                        4


<PAGE>

                  to market in order to calculate total return, which is then
                  compared against the designated Investment Benchmarks to
                  produce a Performance Score, pursuant to a formula or other
                  criteria determined by the Committee, for each Portfolio
                  Segment.

                  The applicable Portfolio Segments will be identified, and the
                  related Investment Benchmarks will be determined, by the
                  Committee and may be changed from year to year by the
                  Committee.

                  In the event that any participant's Annual Bonus is to be
                  determined by the performance of two or more Portfolio
                  Segments, the Performance Scores for each of the Portfolio
                  Segments will be weighted, based on the average amounts
                  invested from time to time in each of such Portfolio Segments
                  during the Plan year, and the weighted Performance Scores for
                  the applicable Portfolio Segments will be then combined to
                  produce the Investment Performance Score. Investment expense
                  is not included in determining investment performance vs.
                  benchmark.

7.       The Annual Bonus for any Plan year will be paid to participants as soon
         as practicable after the Committee has certified performance results
         for the Plan year, but no later than March 15 of the immediately
         following year. The provisions of this Paragraph shall be subject to
         Paragraph 8 hereof.

         Any Plan participant who is eligible to participate in The Progressive
         Corporation Executive Deferred Compensation Plan ("Deferral Plan") may
         elect to defer all or a portion of the Annual Bonus otherwise payable
         under this Plan, subject to and in accordance with the terms of the
         Deferral Plan.

8.       Unless otherwise determined by the Committee, in order to be entitled
         to receive an Annual Bonus for any Plan year, the participant must be
         employed by Progressive on the date designated for payment thereof
         ("Qualification Date"); provided, however, that if any participant who
         is employed by Progressive on the last day of any Plan year shall die
         at any time between the end of such Plan year and the Qualification
         Date, his or her estate shall be entitled to receive the Annual Bonus
         that would have been payable to such deceased participant had he or she
         lived until and been employed by Progressive on the Qualification Date.

         Any participant who is on a leave of absence covered by the Family and
         Medical Leave Act of 1993, personal leave of absence with the approval
         of the Company, military leave or short or long-term disability on the
         Qualification Date with respect to any Plan year will be entitled to
         receive an Annual Bonus payment for such Plan year, calculated as
         provided in Paragraphs 3 through 6 above and based on the amount of
         Paid Earnings received by such participant during the Plan year.

         Annual Bonus payments made to participants will be net of any legally
         required deductions for federal, state and local taxes and other items.

                                        5


<PAGE>

9.       The right to any of the Annual Bonuses hereunder may not be
         transferred, assigned or encumbered by any participant. Nothing herein
         shall prevent any participant's interest hereunder from being subject
         to involuntary attachment, levy or other legal process.

10.      The Plan will be administered by or under the direction of the
         Committee. The Committee will have the authority to adopt, amend,
         revise and repeal such rules, guidelines, procedures and practices
         governing the Plan as it, from time to time, in its sole discretion
         deems advisable.

         The Committee will have full authority to determine the manner in which
         the Plan will operate, to interpret the provisions of the Plan and to
         make all determinations hereunder. All such interpretations and
         determinations will be final and binding on Progressive, all Plan
         participants and all other parties. No such interpretation or
         determination may be relied on as a precedent for any similar action or
         decision.

         The Plan will be administered by the Committee in accordance with the
         requirements of Section 162(m) of the Internal Revenue Code, as
         amended, and the rules and regulations promulgated thereunder (the
         "Code").

11.      The Plan is subject to approval by the holders of The Progressive
         Corporation's Common Shares, $1.00 par value ("shareholders") in
         accordance with the requirements of Section 162(m) of the Code and no
         Annual Bonus will be paid hereunder unless the Plan has been so
         approved.

12.      The Plan may be terminated, amended or revised, in whole or in part, at
         any time and from time to time by the Committee, in its sole
         discretion; provided that the Committee may not increase the amount of
         compensation payable hereunder to any participant above the amount that
         would otherwise be payable upon attainment of the applicable
         performance goals, or accelerate the payment of any portion of the
         Annual Bonus due to any participant under the Plan without discounting
         the amount of such payment in accordance with Section 162(m) of the
         Code, and further provided that any amendment or revision of the Plan
         required to be approved by shareholders pursuant to Section 162(m) of
         the Code will not be effective until approved by The Progressive
         Corporation's shareholders in accordance with the requirements of
         Section 162(m).

13.      The Plan will be unfunded and all payments due under the Plan will be
         made from Progressive's general assets.

14.      Nothing in the Plan shall be construed as conferring upon any person
         the right to remain a participant in the Plan or to remain employed by
         Progressive, nor shall the Plan limit Progressive's right to discipline
         or discharge any of its officers or employees or change any of their
         job titles, positions, duties or compensation.

                                        6


<PAGE>

15.      Progressive shall have the unrestricted right to set off against or
         recover out of any bonuses or other sums owed to any participant under
         the Plan any amounts owed by such participant to Progressive.

16.      This Plan supersedes all prior plans, agreements, understandings and
         arrangements regarding bonuses or other cash incentive compensation
         payable or due to any participant from Progressive. Without limiting
         the generality of the foregoing, this Plan supersedes and replaces The
         Progressive Corporation 1999 Executive Bonus Plan, as heretofore in
         effect (the "Prior Plan"), which is and shall be deemed to be
         terminated as of December 27, 2003 (the "Termination Date"); provided,
         that any bonuses or other sums earned under the Prior Plan with respect
         to any period ended on or prior to the Termination Date shall be
         unaffected by such termination and shall be paid to the appropriate
         participants when and as provided thereunder.

17.      This Plan is adopted and, subject to the provisions of Paragraph 11
         hereof, is to be effective, as of December 28, 2003, which is the
         commencement of Progressive's 2004 fiscal year. Subject to the
         provisions of Paragraph 11, this Plan shall be effective for the 2004
         Plan year (which coincides with Progressive's 2004 fiscal year) and for
         each Plan year thereafter unless and until terminated by the Committee.

18.      This Plan shall be interpreted and construed in accordance with the
         laws of the State of Ohio.

                                        7


<PAGE>

Exhibit No. 10(K)

                           THE PROGRESSIVE CORPORATION
                   2004 INFORMATION TECHNOLOGY INCENTIVE PLAN

1.       The Progressive Corporation and its subsidiaries ("Progressive" or the
"Company") have adopted The Progressive Corporation 2004 Information Technology
Incentive Plan (the "Plan") as part of their overall compensation program for
employees assigned to the Company's Information Technology Organization ("IT
Organization").

2.       There is a strong correlation between computer systems availability and
the economic performance of the Company. All 3 sales channels, customer service
and claims handling are dependent on electronic systems. When systems are down,
Progressive incurs lost productivity costs and, in some cases, may forfeit
revenue opportunities. The Plan is designed to incent employees within the IT
Organization to find creative ways to eliminate scheduled and unscheduled system
downtime, and shift the risk associated with technology changes away from times
when downtime is most costly to the business.

3.       A significant aspect of the Plan is that it encourages continuous
improvement. Each year, the complexity of the Progressive computing environment
increases, as we introduce new applications
 and increasingly target systems to
the end consumer. The target payout for the Plan will be set at the amount of
"up time points" earned the previous year (adjusted proportionately for any
change in the duration of the current Plan year). In order to receive a payout
above the target, the performance achieved needs to exceed the previous year's
performance level (as so adjusted) in a more complex environment. Plan years
will coincide with Progressive's fiscal years.

4.       All regular employees of Progressive (including managers) who are
assigned primarily to the IT Organization are eligible to be selected for
participation in the Plan. The Chief Executive Officer, after consulting with
the Chief Human Resource Officer, ("Designated Officers") shall have the
authority to select Plan participants for any given Plan year.

5.       Annual payments under the Plan will be determined by application of the
following formula:

      Annual IT Incentive Payment = Paid Earnings x Target Percentage x IT
                               Performance Factor.

         The Annual IT Incentive Payment payable to any participant with respect
to any given Plan year will not exceed $75,000.00.

6.       Paid Earnings for any Plan year means the following items paid to a
participant during

                                        1


<PAGE>

the Plan year: (a) regular, used Earned Time Benefit, sick, holiday, funeral and
overtime pay, and (b) retroactive payments of any of the foregoing items
relating to the same Plan year.

         For purposes of the Plan, Paid Earnings shall not include any
short-term or long-term disability payments made to the participant, the
earnings replacement component of any worker's compensation award, any lump sum
merit awards, payments from the merit cash pool, any bonus or incentive
compensation awards or any unused Earned Time Benefit.

         Notwithstanding the foregoing, if the sum of the regular, used Earned
Time Benefit, sick, holiday and funeral pay received by a participant for a Plan
year exceeds his/her salary range maximum for that Plan year (determined as of
the end of the 24th pay period), then his/her Paid Earnings for that Plan year
shall equal his/her salary range maximum, plus any of the following items
received by such participant for that Plan year: (a) overtime pay and (b)
retroactive payments of regular, used Earned Time Benefit, sick, holiday,
overtime and funeral pay.

7.       Target Percentages vary by position and shall be determined on an
annual basis by the Designated Officers.

8.       In the discretion of the Designated Officers, participants in this Plan
may also participate in The Progressive Corporation 2004 Gainsharing Plan, or
any successors thereto.

9.       The IT Performance Factor

         The IT Performance Factor is based on application availability and
accuracy measured on a point system, and may vary from 0 to 2.0. Points are
awarded for every day that production systems, both mainframe and client/server,
are outage free. If there is an outage in any production system, all of the
points relating to that application are lost for that day. Measured
applications, measured hours, outage definitions, point values and
administrative guidelines will be defined on an annual basis by or under the
direction of the Designated Officers. A Performance Matrix approved by the
Designated Officers will assign a Performance Score to various point levels that
may be achieved.

         For 2004, and for each Plan year thereafter until otherwise determined
by the Designated Officers, the applicable Plan rules shall be as set forth in
Schedule I attached hereto.

         The best possible score in any given week is 10 points per application
(or a total of 200 points). Attached hereto as Schedule II is the 2004
Performance Matrix with the breakdown of scores and related outcomes. For 2004,
a target of 1.00 will be achieved by earning between 10,204 and 10,240 points
out of a possible 10,600 points. The Designated Officers will establish the
applicable performance targets, the performance

                                        2


<PAGE>

scores that will be awarded for various point levels achieved and the maximum
potential points that may be earned and the resulting performance score, for
subsequent Plan years.

10.      Subject to Paragraph 11 below, no later than December 31 of each Plan
year, each participant will receive an initial payment in respect of his or her
Annual IT Incentive Payment for that Plan year equal to 75% of an amount
calculated on the basis of Paid Earnings for the first 24 pay periods of the
Plan year, estimated earnings for the remainder of the Plan year, performance
data through the first 24 pay periods of the Plan year and forecasted
performance results for the remainder of the Plan year. No later than February
15 of the following year, each participant shall receive the balance of his or
her Annual IT Incentive Payment, if any, for such Plan year, based on his or her
Paid Earnings and performance data for the entire Plan year.

11.      Unless otherwise determined by the Committee, and except as expressly
provided herein, in order to be entitled to receive an Annual IT Incentive
Payment for any Plan year, the participant must be assigned to the IT
Organization and be an active employee of the Company on November 30 of that
Plan year ("Qualification Date"). Individuals who are hired on or after December
1 of any Plan year are not entitled to receive an Annual IT Incentive Payment
for that Plan year.

         Any participant who is on a leave of absence covered by the Family and
Medical Leave Act of 1993, personal leave of absence approved by the Company,
military leave or short or long-term disability on the Qualification Date with
respect to any Plan year will be entitled to receive an Annual IT Incentive
Payment for that Plan year, calculated as provided in Paragraphs 5 and 10 above
and based on the amount of Paid Earnings received by such participant for the
Plan year.

         Annual IT Incentive Payments will be net of any legally required
deductions for federal, state and local taxes and other items.

12.      The right to any Annual IT Incentive Payment hereunder may not be sold,
transferred, assigned or encumbered by any participant. Nothing herein shall
prevent any participant's interest hereunder from being subject to involuntary
attachment, levy or other legal process.

13.      The Plan shall be administered by or under the direction of the
Compensation Committee of the Board of Directors of The Progressive Corporation
("Committee"). The Committee shall have the authority to adopt, alter, modify,
amend and repeal such rules, guidelines, procedures and practices governing the
Plan as it shall, from time to time, in its sole discretion, deem advisable.

         The Committee shall have full authority to determine the manner in
which the Plan will operate, to interpret the provisions of the Plan and to make
all determinations hereunder. All such interpretations and determinations shall
be final and binding on Progressive, all Plan participants and all other
parties. No such interpretation or determination shall be relied on as a
precedent for any similar action or decision.

                                        3


<PAGE>

         Unless otherwise determined by the Committee, all of the authority of
the Committee hereunder (including, without limitation, the authority to
administer the Plan, interpret the provisions hereof, waive any of the
requirements specified herein and make determinations hereunder and to
establish, change or modify performance targets and measures) may be exercised
by the Designated Officers. In the event of a dispute or conflict, the
determination of the Committee will govern.

14.      The Plan may be terminated, amended or revised, in whole or in part, at
any time and from time to time by the Committee, in its sole discretion.

15.      The Plan will be unfunded and all payments due under the Plan shall be
made from Progressive's general assets.

16.      Nothing in the Plan shall be construed as conferring upon any person
the right to remain a participant in the Plan or to remain employed by
Progressive, nor shall the Plan limit Progressive's right to discipline or
discharge any of its employees or change any of their job titles, duties or
compensation.

17.      Progressive shall have the unrestricted right to set off against or
recover out of any Annual IT Incentive Payment or other sums owed to any
participant under the Plan any amounts owed by such participant to Progressive.

18.      This Plan supersedes any and all prior plans, agreements,
understandings and arrangements regarding bonuses or other cash incentive
compensation payable to participants by or due from Progressive and relating to
the availability of computer systems. Without limiting the generality of the
foregoing, this Plan supersedes and replaces The Progressive Corporation 2003
Information Technology Incentive Plan (the "Prior Plan"), which is and shall be
deemed to be terminated as of December 27, 2003 (the "Termination Date");
provided, that any bonuses or other sums earned and payable under the Prior Plan
with respect to any Plan year ended on or prior to the Termination Date shall be
unaffected by such termination and shall be paid to the appropriate participants
when and as provided thereunder.

19.      This Plan is adopted, and is to be effective, as of December 28, 2003,
which is the commencement of Progressive's 2004 fiscal year. This Plan shall be
effective for the 2004 Plan year (which coincides with Progressive's 2004 fiscal
year) and for each Plan year thereafter unless and until terminated by the
Committee.

20.      This Plan shall be interpreted and construed in accordance with the
laws of the State of Ohio.

                                        4


<PAGE>

                                                                      SCHEDULE I

                      Information Technology Incentive Plan
                                   2004 RULES

1. System Measurements

The intent of this program is to ensure that incidents that have major business
impact are counted as an outage. An outage is defined as an event (excluding a
telecommunication failure) that prevents 100 or more customers from using the
application for more than 15 minutes. We define a customer as an agent, policy
holder or internal user.

The measured hours are 24 hours a day, Monday through Saturday. All day Sunday
is measured with the exception of our weekly system maintenance window which is
from 3:30am until 8:00am EST and, also, one(1) Sunday a quarter from Midnight to
8:00am EST.

Individual application service level agreements (SLAs) will take precedent over
these time frames. See chart below:


<TABLE>
<CAPTION>
       SYSTEM                     ADDITIONAL OUTAGE CLARIFICATIONS
--------------------------------------------------------------------------------
<S>                   <C>
Buy Button
--------------------------------------------------------------------------------
Cash
Disbursements         An outage is defined for Monday through Friday. An
(CDS)                 exception would be any requested Saturday or Sunday access
                      requested by the system owner 24 hours in advance.
--------------------------------------------------------------------------------
Claims CARS
--------------------------------------------------------------------------------
Claims PACMan         An outage for the start of day is defined as anytime
                      PACMan is not available by 6:00am Monday through Saturday.
--------------------------------------------------------------------------------
Claims Web
Tracker
--------------------------------------------------------------------------------
Claims Workbench
(CWB)
--------------------------------------------------------------------------------
Commercial Auto
(PRAT/WFC)
--------------------------------------------------------------------------------
DirectPro             An outage is defined as an event (excluding call routing
                      licensing issues) preventing quoting and/or selling. An
                      exception would be one (1) Sunday a month (Sunday before
                      Month End) from 3:30am until 5:30am EST.

                      We recognize at times, an individual state or states may
                      not be available for quoting or selling. There is not a
                      clear cut method to measure the business impact. In these
                      cases, the business will be consulted to determine the
                      impact.
--------------------------------------------------------------------------------
FAO
--------------------------------------------------------------------------------
Internet Progressive
Quote
--------------------------------------------------------------------------------
</TABLE>


                                        5


<PAGE>


<TABLE>
<S>                   <C>
--------------------------------------------------------------------------------
Internet Quotes
(E5)
--------------------------------------------------------------------------------
Personal
Progressive
--------------------------------------------------------------------------------
OPSS (Online
Underwriting
Guidelines)
--------------------------------------------------------------------------------
Ownership Work
Bench (OWB)
--------------------------------------------------------------------------------
POLARIS Billing       An outage for the start of day is defined as anytime the
System                POLARIS transactions are not available by 6:00am Monday
                      through Friday. On Saturday, Agent Bank (S6) and Common
                      EFT (S7) perform weekly file maintenance. An outage on
                      Saturday will be defined as anytime either of these 2
                      transactions are not available by 8:00am.
--------------------------------------------------------------------------------
Policy Services       An outage is defined as anytime their scanning system is
Work Flow (POWR)      totally unavailable (both locations down) for more than 30
                      minutes excluding their daily batch window between
                      midnight and 4:00am EST.
--------------------------------------------------------------------------------
ProRater Uploads
--------------------------------------------------------------------------------
PROTEUS (Atlantic,    An outage for start of day is defined as anytime the 30
Gulf, Midwest,        minute back-up occurs after 6:00am, or causes the
Pacific)              application to be unavailable over 30 minutes.
--------------------------------------------------------------------------------
Server Based
Rating (SBR)
--------------------------------------------------------------------------------
Telecom
--------------------------------------------------------------------------------
</TABLE>


* ProBill will be baselined in 2004 for inclusion in 2005. We may also baseline
the General Ledger application.

2. Customer Retention

An outage impacting 100 or more customers is defined as:

[ ]  E-mails are sent multiple times to the same person

[ ]  EFT (electronic fund transfers) incorrectly occur multiple times

[ ]  Bills are sent to the wrong person

[ ]  Billing is incorrect by more than $ 1.00

[ ]  Documents are retransmitted (post office, fax or email) because print was
     incorrect, forms were missing or forms were sent in error.

[ ]  Policyholder personal information is compromised by sharing or sending
     forms with the wrong person or agent.

3. Telecommunications

An outage is defined as anytime service (Data / Voice) is not available within
15 minutes of the failure. The measurement includes any outage at the offices
listed

                                        6


<PAGE>

below:

Direct (Strategic Alliance, DirectPro and Internet), Policy Services, Commercial
Vehicle and Claims Call Centers at the following locations:

Cleveland Campus I                  Colorado Springs, CO (Research Parkway)
Cleveland Campus II                 Colorado Springs, CO (Chapel Hills)
Brooklyn, OH                        Austin, TX
Tampa, FL (Sable Park)              Mentor, OH
Tampa, FL (Riverview)               Rancho Cordova, CA (Sacramento)
Tempe, AZ

In addition, a call routing outage is defined as anytime 100 unique customers
calls are not successfully completed to Progressive (i.e., fast busy,
non-working number recording) within a 15 minute period.

                                        7


<PAGE>

4. Availability of an Application

There can be times when an application is available but a particular transaction
could be out of service or malfunctioning. For our measurement purposes, this
would typically be counted as an outage.

We recognize there could be an occasion where the unavailable transaction
represents insignificant lost functionality (less than 1% of the days
transactions) to our customers. These transactions being unavailable would not
be counted as an outage.

5. Vendor Service Outages

Vendors are a critical component to our service delivery. We deal with 2 types
of vendors, Transaction Service Vendors (Equifax, Choicepoint, Discover, State
MVR Centers, etc.) and Infrastructure Vendors (IBM, MCI, Microsoft, Oracle,
etc.). It is the responsibility of the appropriate I/T group to manage and
evaluate the quality of service received from these vendors.

For purposes of this program, service disruptions caused by a Transaction
Service Vendor site not being available that is totally a vendor issue will not
be counted as an outage. However, we have several arrangements for failover to
an alternate vendor or alternate vendor site during an outage. If we are unable
to do the failover because of a Progressive related issue, this would be counted
as an outage.

For purposes of this program, service disruptions caused by an Infrastructure
Vendor will be counted as an outage.

6. Slow Response Time

Occasionally an application is available but the response time is poor. Slow
response time will not be counted as an outage.

7. Scheduled Maintenance

Occasionally, system or facility work needs to be performed that can not be
completed during our normal maintenance hours (see rule #1 for maintenance
hours). In spite of this downtime being scheduled in advance with our customers,
it will be counted as an outage.

8. IT Performance and Retention Point Values

                                 IT PERFORMANCE

Any day without an outage will be awarded points. Point values are weighted to
correspond with the value to the business based upon the volume of transactions.
The maximum number of points earned per week is 10 points per application
defined in Rule #1. The point value by workday is as follows:

                                        8


<PAGE>


<TABLE>
<CAPTION>
           DAY                      POINTS
------------------------------------------
<S>                                 <C>
Monday                              2.0
------------------------------------------
Tuesday                             2.0
------------------------------------------
Wednesday, Thursday, Friday         1.5
------------------------------------------
Saturday                            1.0
------------------------------------------
Sunday                              0.5
------------------------------------------
</TABLE>


                                        9


<PAGE>

Point values will not be adjusted for holidays. In other words, if a holiday is
celebrated on a Monday it will be given a 2 point value.

                              IT CUSTOMER RETENTION

Outages that negatively affect customers will be assessed a .5 point loss per
incident defined in Rule #2.

9. Communications of Status

On a daily basis, we will communicate any outage in the Morning Status Report
issued Monday through Friday by ETG. The outage will be highlighted in red.

Each Monday, ETG will distribute to all IT staff, the "Weekly IT Performance
Report", indicating the previous week's results as well as the annualized point
factor. In addition, a monthly report with year-to-date information will be
distributed to all IT staff by the first Friday of the fiscal month.

10. Appeal Process

Anyone within the organization has the right to appeal an outage. All appeals
should be made by a Lotus Note to Ed Locker. Ed will make sure the appeal is
presented in the Post Mortem review of the incident. If the outage was
misrepresented, a reversal will be carried in the Weekly IT Performance Report
and all associated status reports.

If the outage requires a judgment call, it will be reviewed by Jerry Winchell,
Tom Cunningham and Scott McPherson, who will act as the Ruling Committee. All
judgments made by the Ruling Committee are final.

11. 2004 Earned Points Chart

The attached 2004 Earned Points Chart correlates annual points earned to the IT
Performance Factor.

12. Scoring Rule Clarifications.

With the conversion to the new points distribution system for the Information
Technology Incentive Plan, we will be making some new decisions to support
scoring. Often there is not a right or wrong answer. However, it is extremely
important that we are consistent and wanted to publish our current assumptions.
All changes must be approved by the Ruling Committee.

[ ]  Points will not be charged against an application if all offices are closed
     that use the application. For example, CA's system is down on a Sunday
     outside of their work hours. No points charged to CA.

[ ]  The total population using the system at the time of the outage will always
     be used

                                       10


<PAGE>

     to determine if it is a performance loss. This is exactly what we do today.
     The point losses distributed amongst applications will be given no matter
     how many people are working on that application. In other words, we assess
     a point loss to the application even though there were less than 100 people
     using it. For example, we have 100 or more people down during a 20 minute
     production system outage. It is a point loss because it is over 15 minutes
     and impacted 100 people. If CA only had 1 person working, their system
     would still incur a point loss.

                                       11


<PAGE>

                                                                     SCHEDULE II

                     INFORMATION TECHNOLOGY INCENTIVE PLAN
                            2004 EARNED POINTS CHART


<TABLE>
<CAPTION>
      ANNUAL POINTS EARNED
---------------------------------
MINIMUM                   MAXIMUM             IT PERFORMANCE FACTOR
-------------------------------------------------------------------
<S>                       <C>                 <C>
 10,591                   10,600                      2.00
-------------------------------------------------------------------
 10,588                   10,590                      1.97
-------------------------------------------------------------------
 10,584                   10,587                      1.96
-------------------------------------------------------------------
 10,581                   10,583                      1.95
-------------------------------------------------------------------
 10,577                   10,580                      1.94
-------------------------------------------------------------------
 10,573                   10,576                      1.93
-------------------------------------------------------------------
 10,570                   10,572                      1.92
-------------------------------------------------------------------
 10,566                   10,569                      1.91
-------------------------------------------------------------------
 10,563                   10,565                      1.90
-------------------------------------------------------------------
 10,559                   10,562                      1.89
-------------------------------------------------------------------
 10,555                   10,558                      1.88
-------------------------------------------------------------------
 10,552                   10,554                      1.87
-------------------------------------------------------------------
 10,548                   10,551                      1.86
-------------------------------------------------------------------
 10,545                   10,547                      1.85
-------------------------------------------------------------------
 10,541                   10,544                      1.84
-------------------------------------------------------------------
 10,537                   10,540                      1.83
-------------------------------------------------------------------
 10,534                   10,536                      1.82
-------------------------------------------------------------------
 10,530                   10,533                      1.81
-------------------------------------------------------------------
 10,526                   10,529                      1.80
-------------------------------------------------------------------
 10,523                   10,525                      1.79
-------------------------------------------------------------------
 10,519                   10,522                      1.78
-------------------------------------------------------------------
 10,516                   10,518                      1.77
-------------------------------------------------------------------
 10,512                   10,515                      1.76
-------------------------------------------------------------------
 10,508                   10,511                      1.75
-------------------------------------------------------------------
 10,505                   10,507                      1.74
-------------------------------------------------------------------
 10,501                   10,504                      1.73
-------------------------------------------------------------------
 10,498                   10,500                      1.72
-------------------------------------------------------------------
 10,494                   10,497                      1.71
-------------------------------------------------------------------
 10,490                   10,493                      1.70
-------------------------------------------------------------------
 10,487                   10,489                      1.69
-------------------------------------------------------------------
 10,483                   10,486                      1.68
-------------------------------------------------------------------
 10,480                   10,482                      1.67
-------------------------------------------------------------------
 10,476                   10,479                      1.66
-------------------------------------------------------------------
 10,472                   10,475                      1.65
-------------------------------------------------------------------
 10,469                   10,471                      1.64
-------------------------------------------------------------------
 10,465                   10,468                      1.63
-------------------------------------------------------------------
 10,462                   10,464                      1.62
-------------------------------------------------------------------
</TABLE>


                                       12


<PAGE>


<TABLE>
<S>                       <C>                         <C>
 10,458                   10,461                      1.61
-------------------------------------------------------------------
 10,454                   10,457                      1.60
-------------------------------------------------------------------
 10,451                   10,453                      1.59
-------------------------------------------------------------------
 10,447                   10,450                      1.58
-------------------------------------------------------------------
 10,443                   10,446                      1.57
-------------------------------------------------------------------
 10,440                   10,442                      1.56
-------------------------------------------------------------------
 10,436                   10,439                      1.55
-------------------------------------------------------------------
 10,433                   10,435                      1.54
-------------------------------------------------------------------
 10,429                   10,432                      1.53
-------------------------------------------------------------------
 10,425                   10,428                      1.52
-------------------------------------------------------------------
 10,422                   10,424                      1.51
-------------------------------------------------------------------
 10,418                   10,421                      1.50
-------------------------------------------------------------------
 10,415                   10,417                      1.49
-------------------------------------------------------------------
 10,411                   10,414                      1.48
-------------------------------------------------------------------
 10,407                   10,410                      1.47
-------------------------------------------------------------------
 10,404                   10,406                      1.46
-------------------------------------------------------------------
 10,400                   10,403                      1.45
-------------------------------------------------------------------
 10,397                   10,399                      1.44
-------------------------------------------------------------------
 10,393                   10,396                      1.43
-------------------------------------------------------------------
 10,389                   10,392                      1.42
-------------------------------------------------------------------
 10,386                   10,388                      1.41
-------------------------------------------------------------------
 10,382                   10,385                      1.40
-------------------------------------------------------------------
 10,378                   10,381                      1.39
-------------------------------------------------------------------
 10,375                   10,377                      1.38
-------------------------------------------------------------------
 10,371                   10,374                      1.37
-------------------------------------------------------------------
 10,368                   10,370                      1.36
-------------------------------------------------------------------
 10,364                   10,367                      1.35
-------------------------------------------------------------------
 10,360                   10,363                      1.34
-------------------------------------------------------------------
 10,357                   10,359                      1.33
-------------------------------------------------------------------
 10,353                   10,356                      1.32
-------------------------------------------------------------------
 10,350                   10,352                      1.31
-------------------------------------------------------------------
 10,346                   10,349                      1.30
-------------------------------------------------------------------
 10,342                   10,345                      1.29
-------------------------------------------------------------------
 10,339                   10,341                      1.28
-------------------------------------------------------------------
 10,335                   10,338                      1.27
-------------------------------------------------------------------
 10,332                   10,334                      1.26
-------------------------------------------------------------------
 10,328                   10,331                      1.25
-------------------------------------------------------------------
 10,324                   10,327                      1.24
-------------------------------------------------------------------
 10,321                   10,323                      1.23
-------------------------------------------------------------------
 10,317                   10,320                      1.22
-------------------------------------------------------------------
 10,314                   10,316                      1.21
-------------------------------------------------------------------
 10,310                   10,313                      1.20
-------------------------------------------------------------------
 10,306                   10,309                      1.19
-------------------------------------------------------------------
 10,303                   10,305                      1.18
-------------------------------------------------------------------
 10,299                   10,302                      1.17
-------------------------------------------------------------------
 10,295                   10,298                      1.16
-------------------------------------------------------------------
 10,292                   10,294                      1.15
-------------------------------------------------------------------
 10,288                   10,291                      1.14
-------------------------------------------------------------------
</TABLE>


                                       13


<PAGE>


<TABLE>
<S>                       <C>                         <C>
 10,285                   10,287                      1.13
-------------------------------------------------------------------
 10,281                   10,284                      1.12
-------------------------------------------------------------------
 10,277                   10,280                      1.11
-------------------------------------------------------------------
 10,274                   10,276                      1.10
-------------------------------------------------------------------
 10,270                   10,273                      1.09
-------------------------------------------------------------------
 10,267                   10,269                      1.08
-------------------------------------------------------------------
 10,263                   10,266                      1.07
-------------------------------------------------------------------
 10,259                   10,262                      1.06
-------------------------------------------------------------------
 10,256                   10,258                      1.05
-------------------------------------------------------------------
 10,252                   10,255                      1.04
-------------------------------------------------------------------
 10,249                   10,251                      1.03
-------------------------------------------------------------------
 10,245                   10,248                      1.02
-------------------------------------------------------------------
 10,241                   10,244                      1.01
-------------------------------------------------------------------
 10,204                   10,240                      1.00
-------------------------------------------------------------------
 10,134                   10,203                      0.99
-------------------------------------------------------------------
 10,063                   10,133                      0.98
-------------------------------------------------------------------
 9,992                    10,062                      0.97
-------------------------------------------------------------------
 9,922                     9,991                      0.96
-------------------------------------------------------------------
 9,851                     9,921                      0.95
-------------------------------------------------------------------
 9,781                     9,850                      0.94
-------------------------------------------------------------------
 9,710                     9,780                      0.93
-------------------------------------------------------------------
 9,639                     9,709                      0.92
-------------------------------------------------------------------
 9,569                     9,638                      0.91
-------------------------------------------------------------------
 9,498                     9,568                      0.90
-------------------------------------------------------------------
 9,428                     9,497                      0.89
-------------------------------------------------------------------
 9,357                     9,427                      0.88
-------------------------------------------------------------------
 9,287                     9,356                      0.87
-------------------------------------------------------------------
 9,216                     9,286                      0.86
-------------------------------------------------------------------
 9,145                     9,215                      0.85
-------------------------------------------------------------------
 9,075                     9,144                      0.84
-------------------------------------------------------------------
 9,004                     9,074                      0.83
-------------------------------------------------------------------
 8,934                     9,003                      0.82
-------------------------------------------------------------------
 8,863                     8,933                      0.81
-------------------------------------------------------------------
 8,792                     8,862                      0.80
-------------------------------------------------------------------
 8,722                     8,791                      0.79
-------------------------------------------------------------------
 8,651                     8,721                      0.78
-------------------------------------------------------------------
 8,581                     8,650                      0.77
-------------------------------------------------------------------
 8,510                     8,580                      0.76
-------------------------------------------------------------------
 8,439                     8,509                      0.75
-------------------------------------------------------------------
 8,369                     8,438                      0.74
-------------------------------------------------------------------
 8,298                     8,368                      0.73
-------------------------------------------------------------------
 8,228                     8,297                      0.72
-------------------------------------------------------------------
 8,157                     8,227                      0.71
-------------------------------------------------------------------
 8,087                     8,156                      0.70
-------------------------------------------------------------------
 8,016                     8,086                      0.69
-------------------------------------------------------------------
 7,945                     8,015                      0.68
-------------------------------------------------------------------
 7,875                     7,944                      0.67
-------------------------------------------------------------------
 7,804                     7,874                      0.66
-------------------------------------------------------------------
</TABLE>


                                       14


<PAGE>


<TABLE>
<S>                        <C>                        <C>
 7,734                     7,803                      0.65
-------------------------------------------------------------------
 7,663                     7,733                      0.64
-------------------------------------------------------------------
 7,592                     7,662                      0.63
-------------------------------------------------------------------
 7,522                     7,591                      0.62
-------------------------------------------------------------------
 7,451                     7,521                      0.61
-------------------------------------------------------------------
 7,381                     7,450                      0.60
-------------------------------------------------------------------
 7,310                     7,380                      0.59
-------------------------------------------------------------------
 7,239                     7,309                      0.58
-------------------------------------------------------------------
 7,169                     7,238                      0.57
-------------------------------------------------------------------
 7,098                     7,168                      0.56
-------------------------------------------------------------------
 7,028                     7,097                      0.55
-------------------------------------------------------------------
 6,957                     7,027                      0.54
-------------------------------------------------------------------
 6,886                     6,956                      0.53
-------------------------------------------------------------------
 6,816                     6,885                      0.52
-------------------------------------------------------------------
 6,745                     6,815                      0.51
-------------------------------------------------------------------
 6,675                     6,744                      0.50
-------------------------------------------------------------------
 6,604                     6,674                      0.49
-------------------------------------------------------------------
 6,534                     6,603                      0.48
-------------------------------------------------------------------
 6,463                     6,533                      0.47
-------------------------------------------------------------------
 6,392                     6,462                      0.46
-------------------------------------------------------------------
 6,322                     6,391                      0.45
-------------------------------------------------------------------
 6,251                     6,321                      0.44
-------------------------------------------------------------------
 6,181                     6,250                      0.43
-------------------------------------------------------------------
 6,110                     6,180                      0.42
-------------------------------------------------------------------
 6,039                     6,109                      0.41
-------------------------------------------------------------------
 5,969                     6,038                      0.40
-------------------------------------------------------------------
 5,898                     5,968                      0.39
-------------------------------------------------------------------
 5,828                     5,897                      0.38
-------------------------------------------------------------------
 5,757                     5,827                      0.37
-------------------------------------------------------------------
 5,686                     5,756                      0.36
-------------------------------------------------------------------
 5,616                     5,685                      0.35
-------------------------------------------------------------------
 5,545                     5,615                      0.34
-------------------------------------------------------------------
 5,475                     5,544                      0.33
-------------------------------------------------------------------
 5,404                     5,474                      0.32
-------------------------------------------------------------------
 5,333                     5,403                      0.31
-------------------------------------------------------------------
 5,263                     5,332                      0.30
-------------------------------------------------------------------
 5,192                     5,262                      0.29
-------------------------------------------------------------------
 5,122                     5,191                      0.28
-------------------------------------------------------------------
 5,051                     5,121                      0.27
-------------------------------------------------------------------
 4,981                     5,050                      0.26
-------------------------------------------------------------------
 4,910                     4,980                      0.25
-------------------------------------------------------------------
 4,839                     4,909                      0.24
-------------------------------------------------------------------
 4,769                     4,838                      0.23
-------------------------------------------------------------------
 4,698                     4,768                      0.22
-------------------------------------------------------------------
 4,628                     4,697                      0.21
-------------------------------------------------------------------
 4,557                     4,627                      0.20
-------------------------------------------------------------------
 4,486                     4,556                      0.19
-------------------------------------------------------------------
 4,416                     4,485                      0.18
-------------------------------------------------------------------
</TABLE>


                                       15


<PAGE>


<TABLE>
<S>                        <C>                        <C>
 4,345                     4,415                      0.17
-------------------------------------------------------------------
 4,275                     4,344                      0.16
-------------------------------------------------------------------
 4,204                     4,274                      0.15
-------------------------------------------------------------------
 4,133                     4,203                      0.14
-------------------------------------------------------------------
 4,063                     4,132                      0.13
-------------------------------------------------------------------
 3,992                     4,062                      0.12
-------------------------------------------------------------------
 3,922                     3,991                      0.11
-------------------------------------------------------------------
 3,851                     3,921                      0.10
-------------------------------------------------------------------
 3,781                     3,850                      0.09
-------------------------------------------------------------------
 3,710                     3,780                      0.08
-------------------------------------------------------------------
 3,639                     3,709                      0.07
-------------------------------------------------------------------
 3,569                     3,638                      0.06
-------------------------------------------------------------------
 3,498                     3,568                      0.05
-------------------------------------------------------------------
 3,428                     3,497                      0.04
-------------------------------------------------------------------
 3,357                     3,427                      0.03
-------------------------------------------------------------------
 3,286                     3,356                      0.02
-------------------------------------------------------------------
 3,216                     3,285                      0.01
-------------------------------------------------------------------
   0                       3,215                      0.00
-------------------------------------------------------------------
</TABLE>


                                       16


<PAGE>

Exhibit No. 10(V)

                                 AMENDMENT NO. 1
                                       TO
                           THE PROGRESSIVE CORPORATION
                      2003 DIRECTORS EQUITY INCENTIVE PLAN

         The Progressive Corporation 2003 Directors Equity Incentive Plan (the
"Plan") is hereby amended as follows:

         1.       The following is hereby added as Paragraph (13) of SECTION 5,
                  thereof:

                  (13) Any Participant who is then eligible to participate in
                  The Progressive Corporation Directors Restricted Stock
                  Deferral Plan, or any other deferral plan hereafter adopted or
                  maintained by the Company for the benefit of Eligible
                  Directors which allows for the deferral of Restricted Stock
                  Awards, (a "Deferral Plan"), may elect to defer all or any
                  portion of any Restricted Stock Award granted to him or her
                  under this Plan, subject to and in accordance with the terms
                  of the applicable Deferral Plan.

         This Amendment will be effective as of February 1, 2004.

                                          /s/ Charles E. Jarrett
                                          --------------------------------------
                                          Charles E. Jarrett
                                          Secretary




<PAGE>

Exhibit No. 10(Y)

                 FIRST AMENDMENT TO THE PROGRESSIVE CORPORATION
                      EXECUTIVE DEFERRED COMPENSATION PLAN
                        (2003 AMENDMENT AND RESTATEMENT)

         WHEREAS, The Progressive Corporation Executive Deferred Compensation
   Plan is currently maintained pursuant to a 2003 Amendment and Restatement
   ("Plan"); and

         WHEREAS, it is deemed desirable to amend the Plan further;

         NOW, THEREFORE, the Plan is hereby amended in the respects hereinafter
   set forth, effective November 14, 2003:

         1.       Article 1, Section 1.18 of the Plan is hereby amended and
                  restated in its entirety to provide as follows:

   1.18           "Gainsharing Award" means any bonus or other incentive award
payable with respect to a Plan Year under The Progressive Corporation 2004
Gainsharing Plan, The Progressive Corporation 2004 Information Technology
Incentive Plan, The 2004 Progressive Capital Management Bonus Plan, The
Progressive Corporation 1999 Executive Bonus Plan (as amended on January 31,
2003) or any other plan or program as may be designated by the Committee.

         2.       Article 2, Section 2.3 of the Plan is hereby amended and
restated in its entirety to provide as follows:

   2.3            Fixed Deferral Periods.

If an Eligible Executive wishes to defer receipt of all or a portion of any
Award
 for a fixed period of time ("Fixed Deferral Period"), then his/her
Deferral Agreement relating to such Award shall specify that Fixed Deferral
Period. Such Fixed Deferral Period shall not be less than three (3) years
following (i) in the case of a deferral of all or a portion of a Gainsharing
Award, the end of the Plan Year in which the Gainsharing Award will be earned
and (ii) in the case of a deferral of a Restricted Stock Award, the end of the
Plan Year in which the last of the restrictions applicable to the Restricted
Stock Award expire. In the case of a Restricted Stock Award as to which
restrictions expire in installments, the Fixed Deferral Period must end on the
same date for all installments. Notwithstanding the preceding provisions of this
Section 2.3, Eligible Executives may not elect a Fixed Deferral Period with
respect to the deferral of any Performance-Based Restricted Stock Award.

         3.       Except as expressly provided in this Amendment, the terms and
                  provisions of the Plan shall remain entirely unchanged and
                  continue in full force and effect.

         IN WITNESS WHEREOF, the undersigned has hereunto caused this Amendment
to be executed by its duly authorized representative effective as of the date
set forth above.

THE PROGRESSIVE CORPORATION

By: /s/ Charles E. Jarrett
    ----------------------------------------------------
Title: Vice President, Secretary and Chief Legal Officer


<PAGE>

Exhibit No. 10(Z)

                 SECOND AMENDMENT TO THE PROGRESSIVE CORPORATION
                      EXECUTIVE DEFERRED COMPENSATION PLAN
                        (2003 AMENDMENT AND RESTATEMENT)

         WHEREAS, The Progressive Corporation Executive Deferred Compensation
Plan is currently maintained pursuant to a 2003 Amendment and Restatement and
the First Amendment thereto ("Plan"); and

         WHEREAS, it is deemed desirable to amend the Plan further;

         NOW, THEREFORE, the Plan is hereby amended in the respects hereinafter
set forth:

         1.       Effective December 31, 2003, The Table of Contents of the
                  Plan, Line 1.34 is hereby amended to provide as follows:

   1.34           "Withdrawal Amount" 4

         2.       Effective December 31, 2003, as it relates to distributions of
                  Deferrals of Restricted Stock Awards and effective January 31,
                  2004 as it relates to distributions of all other Deferrals,
                  Article 3, Section 3.4 of the Plan is hereby amended and
                  restated in its entirety to provide as follows:

   3.4            Form of Distribution.

All distributions shall be made in cash.

         3.       Effective January 31, 2004, the last sentence in Article 3,
                  Section 3.5 shall be deleted and replaced by the following
                  sentence:

The Withdrawal Amount shall be paid in cash.

         4.       Except as expressly provided in this Amendment, the terms and
                  provisions of the Plan
 shall remain entirely unchanged and
                  continue in full force and effect.

         IN WITNESS WHEREOF, the undersigned has hereunto caused this Amendment
to be executed by its duly authorized representative effective as of the date
set forth above.

                                          THE PROGRESSIVE CORPORATION

                                          By: /s/ Charles E. Jarrett
                                              ----------------------------------
                                              Title: Vice President & Secretary


<PAGE>

Exhibit No. 10(AA)

                           THE PROGRESSIVE CORPORATION
                      EXECUTIVE DEFERRED COMPENSATION PLAN
                               DEFERRAL AGREEMENT

THIS DEFERRAL AGREEMENT is entered into pursuant to the provisions of The
Progressive Corporation Executive Deferred Compensation Plan ("Plan"). All
capitalized terms in this Agreement shall have the meanings ascribed to them in
the Plan.

1. Deferral Election. I hereby elect to defer receipt of the following portion
of my Gainsharing Award (Eligible Incentive Plans include: The Progressive
Corporation 2004 Gainsharing Plan; The Progressive Corporation 2004 Information
Technology Incentive Plan; The 2004 Progressive Capital Management Bonus Plan;
and The Progressive Corporation 1999 Executive Bonus Plan) earned in respect to
the year ending December 31, 2004 (SELECT ONE AND ENTER ANY DESIRED PERCENTAGE
NOT LESS THAN 10%)

         I elect to defer _______% of my entire Gainsharing Award OR

         I elect to defer _______% of that portion, if any, of my Gainsharing
         Award that exceeds $_________.

2. Fixed Deferral Period. (The Plan gives you the option of electing a Fixed
Deferral Period. If you elect a Fixed Deferral Period, the balance of your
Deferral Account established pursuant to this Agreement will be distributed to
you within 30
 days after the end of the Fixed Deferral Period, or, if earlier,
the date you die or incur a Termination of Employment or the date a Change in
Control occurs. If you do not elect a Fixed Deferral Period, your Account will
be distributed upon the earlier of the date you die or incur a Termination of
Employment or the date a Change in Control occurs.)

PLEASE SELECT ONE OF THE FOLLOWING:

I elect a Fixed Deferral Period ending ON ________________ (MUST BE A DATE AT
LEAST 3 YEARS AFTER THE END OF THE CALENDAR YEAR IN WHICH THE GAINSHARING AWARD
IS EARNED)

OR

         ____I do not wish to elect a Fixed Deferral Period.

3. Method of Distribution. I hereby elect that any distribution of the balance
of the Deferral Account established pursuant to this Agreement made on account
of Termination of Employment or expiration of a Fixed Deferral Period be paid as
follows: (CHECK ONE)

         ____ in a single lump sum payment

OR in

         Three annual installments ___
         Five annual installments ___
         Ten annual installments ___

I understand that Plan distributions made on account of reasons other than
Termination of Employment or expiration of a Fixed Deferral Period will be made
in a single lump sum payment, unless the Plan provides otherwise. I understand
that I may change the method of distribution elected above at least one year
prior to the date of distribution to the extent permitted by the Plan.

4. Investment Election. I direct that the amount I have deferred pursuant to
Section 1 of this Agreement shall be deemed to be invested in the following
Investment Funds in the percentages indicated: (MUST BE INCREMENTS OF 1%)

         ______%  Fidelity Retirement Money Market Portfolio

         ______%  PIMCO Total Return Fund (Admin)

         ______%  Oakmark Equity and Income Fund

         ______%  Vanguard Institutional Index Fund

                                        1


<PAGE>

         ______%  Washington Mutual Investors Fund - Class A

         ______%  FMA Small Company Portfolio-Institutional Class

         ______%  Fidelity Dividend Growth Fund

         ______%  Fidelity Mid-Cap Stock Fund (1)

         ______%  Wasatch Small Cap Growth Fund

         ______%  Fidelity Diversified International Fund (2)

         ______%  Janus Worldwide Fund

         ______%  The Progressive Corporation Stock Fund

         100%     TOTAL

(1) There is a short-term trading fee of 0.75% for shares held less than 30 days
on Fidelity Mid-Cap Stock Fund.

(2) There is a short-term trading fee of 1.0% for shares held less than 30 days
on Fidelity Diversified International Fund.

I understand that I may transfer amounts among Investment Funds only to the
extent permitted by the Plan. I also understand that this investment election is
merely a device used to determine the amount payable to me under the Plan and
does not provide me with any actual rights or interests in any particular funds,
securities or property of the Company, any Affiliated Company or the Trust, in
any stock of The Progressive Corporation or in any investment funds offered
under the Plan. I also understand that my right to receive distributions under
the Plan makes me a general creditor of the Company with no greater priority
than any other general creditor of the Company.

5. Miscellaneous. I understand that this Agreement is subject to the terms,
conditions and limitations of the Plan, as in effect from time to time, in all
respects and that, except as expressly permitted by the Plan, all elections made
in this Agreement are irrevocable. I acknowledge that I have received, read and
understand the Plan Description dated November, 2003 relating to the Plan. I
agree to accept as final and binding all decisions and interpretations of the
Committee relating to the Plan, the Trust and this Agreement.

NAME OF ELIGIBLE EXECUTIVE:

DATE:

SSN:

Your electronic submission of this Election Form will create a date/time stamp
and serve as your signature

Received and accepted on behalf of the Committee this ____ day of
_________________, _______.

                                        2


<PAGE>

Exhibit No. 10(AC)

                           THE PROGRESSIVE CORPORATION
                      EXECUTIVE DEFERRED COMPENSATION PLAN
              PERFORMANCE-BASED RESTRICTED STOCK DEFERRAL AGREEMENT

THIS DEFERRAL AGREEMENT is entered into pursuant to the provisions of The
Progressive Corporation Executive Deferred Compensation Plan ("Plan"). All
capitalized terms in this Agreement shall have the meanings ascribed to them in
the Plan.

1. Deferral Election. I hereby elect to defer receipt of all Performance-Based
Restricted Stock Awards granted to me in 2004 under The Progressive Corporation
2003 Incentive Plan. This election shall become effective as of the date the
restrictions applicable to such Awards (or portion thereof) expire and shall not
apply to any Award (or portion thereof) that fails to vest free of all
restrictions.

2. Method of Distribution. I hereby elect that any distribution of the balance
of the Deferral Account established pursuant to this Agreement made on account
of Termination of Employment be paid as follows: (CHECK ONE)

         Single lump sum payment   ( )

OR in

         Three annual installments ( )
         Five annual installments  ( )
         Ten annual installments   ( )

I understand that Plan distributions made on account for reasons other than
Termination of Employment
 will be made in a single lump sum payment, unless the
Plan provides otherwise. I understand that I may change the method of
distribution elected above at least one year prior to the date of distribution
to the extent permitted by the Plan.

3. Investment of Deferral Account. I understand that each amount credited to the
Deferral Account established pursuant to this Agreement shall be deemed to be
invested in the Company Stock Fund for six months and one day following the date
that such amount is first credited to such Deferral Account. Thereafter, I
understand that I may elect to have such amount deemed to be invested in one or
more of the other Investment Funds available under the Plan. I also understand
that these deemed investments are merely devices used to determine the amount
payable to me under the Plan and do not provide me with any actual rights or
interests in any particular funds, securities or property of the Company, any
Affiliated Company or the Trust, in any stock of The Progressive Corporation or
in any Investment Funds offered under the Plan. I also understand that my right
to receive distributions under the Plan makes me a general creditor of the
Company with no greater right or priority than any other general creditor of the
Company.

4. Miscellaneous. I understand that this Agreement is subject to the terms,
conditions and limitations of the Plan, as in effect from time to time, in all
respects and that, except as expressly

                                        1


<PAGE>

permitted by the Plan, all elections made in this Agreement are irrevocable. I
acknowledge that I have received, read and understand the Plan Description dated
December, 2003 relating to the Plan. I agree to accept as final and binding all
decisions and interpretations of the Committee relating to the Plan, the Trust
and this Agreement.

NAME OF ELIGIBLE EXECUTIVE:
DATE:
SSN:

Your electronic submission of this Election Form will create a date/time stamp
and serve as your signature.

                                        2


<PAGE>

Exhibit No. 10(AE)

                           THE PROGRESSIVE CORPORATION
                      EXECUTIVE DEFERRED COMPENSATION PLAN
                 TIME-BASED RESTRICTED STOCK DEFERRAL AGREEMENT

THIS DEFERRAL AGREEMENT is entered into pursuant to the provisions of The
Progressive Corporation Executive Deferred Compensation Plan ("Plan"). All
capitalized terms in this Agreement shall have the meanings ascribed to them in
the Plan.

1. Deferral Election. I hereby elect to defer receipt of all Time-Based
Restricted Stock Awards granted to me in 2004 under The Progressive Corporation
2003 Incentive Plan. This election shall become effective as of the date the
restrictions applicable to such Awards (or portion thereof) expire and shall not
apply to any Award (or portion thereof) that fails to vest free of all
restrictions.

2. Fixed Deferral Period. (The Plan gives you the option of electing a Fixed
Deferral Period. If you elect a Fixed Deferral Period, the balance of your
Deferral Account established pursuant to this Agreement will be distributed to
you within 30 days after the end of the Fixed Deferral Period, or, if earlier,
the date you die or incur a Termination of Employment or the date a Change in
Control occurs. If you do not elect a Fixed Deferral Period, your Account
 will
be distributed within 30 days of the earlier of the date you die or incur a
Termination of Employment or the date a Change in Control occurs.)

PLEASE SELECT ONE OF THE FOLLOWING:

I elect a Fixed Deferral Period ending on _______________________.* 

*MUST BE A DATE AT LEAST 3 YEARS AFTER THE END OF THE CALENDAR YEAR IN WHICH THE
RESTRICTED STOCK AWARD BECOMES FULLY VESTED. FOR EXAMPLE, IF A TIME-BASED
RESTRICTED STOCK AWARD VESTS IN THREE EQUAL INSTALLMENTS IN 2007, 2008 AND 2009,
YOU MUST SELECT A DATE AT LEAST 3 YEARS AFTER THE END OF THE CALENDAR IN WHICH
THE LAST INSTALLMENT VESTS (IN THIS CASE, NO EARLIER THAN JANUARY 1, 2013).

OR

I do not wish to elect a Fixed Deferral Period ( ).

3. Method of Distribution. I hereby elect that any distribution of the balance
of the Deferral Account established pursuant to this Agreement made on account
of Termination of Employment or expiration of a Fixed Deferral Period be paid as
follows: (CHECK ONE)

         Single lump sum payment   ( )

OR in

         Three annual installments ( )
         Five annual installments  ( )
         Ten annual installments   ( )

                                        1


<PAGE>

I understand that Plan distributions made on account for reasons other than
Termination of Employment or expiration of a Fixed Deferral Period will be made
in a single lump sum payment, unless the Plan provides otherwise. I understand
that I may change the method of distribution elected above at least one year
prior to the date of distribution to the extent permitted by the Plan.

4. Investment of Deferral Account. I understand that each amount credited to the
Deferral Account established pursuant to this Agreement shall be deemed to be
invested in The Company Stock Fund for six months and one day following the date
that such amount is first credited to such Deferral Account. Thereafter, I
understand that I may elect to have such amount deemed to be invested in one or
more of the other Investment Funds available under the Plan. I also understand
that these deemed investments are merely devices used to determine the amount
payable to me under the Plan and do not provide me with any actual rights or
interests in any particular funds, securities or property of the Company, any
Affiliated Company or the Trust, in any stock of The Progressive Corporation or
in any Investment Funds offered under the Plan. I also understand that my right
to receive distributions under the Plan makes me a general creditor of the
Company with no greater right or priority than any other general creditor of the
Company.

5. Miscellaneous. I understand that this Agreement is subject to the terms,
conditions and limitations of the Plan, as in effect from time to time, in all
respects and that, except as expressly permitted by the Plan, all elections made
in this Agreement are irrevocable. I acknowledge that I have received, read and
understand the Plan Description dated December, 2003 relating to the Plan. I
agree to accept as final and binding all decisions and interpretations of the
Committee relating to the Plan, the Trust and this Agreement.

NAME OF ELIGIBLE EXECUTIVE:
DATE:
SSN:

Your electronic submission of this Election Form will create a date/time stamp
and serve as your signature.

                                        2


<PAGE>

Exhibit No. 10(AH)

                           THE PROGRESSIVE CORPORATION
                    DIRECTORS RESTRICTED STOCK DEFERRAL PLAN
                           EFFECTIVE FEBRUARY 1, 2004

                                    ARTICLE I

                             PURPOSE; PARTICIPATION

                  1.1      PURPOSE. The purpose of this plan, which shall be
known as The Progressive Corporation Directors Restricted Stock Deferral Plan
(the "Plan") is to provide directors of the Company who are not employees of the
Company or its subsidiaries with an opportunity to defer the receipt of Common
Shares with respect to Eligible Restricted Stock Awards.

                                   ARTICLE II

                                   DEFINITIONS

                  For purposes of this Plan, the following terms shall have the
following meanings:

                  "BOARD" means the Board of Directors of the Company.

                  "CHANGE IN CONTROL" means a "Change in Control" or "Potential
Change in Control" within the meaning of The Progressive Corporation 2003
Directors Equity Incentive Plan (as amended from time to time).

                  "COMMITTEE" means the Compensation Committee of the Board.

                  "COMPANY" means The Progressive Corporation, an Ohio
corporation, and its successors.

                  "COMPANY DIRECTORS EQUITY PLAN" means any equity compensation
plan for directors who are not employees of the Company or its subsidiaries
maintained by the Company

                                      -1-


<PAGE>

providing for the award of Restricted Stock, including
 but not limited to, The
Progressive Corporation 2003 Directors Equity Incentive Plan.

                  "DEFERRAL ELECTION" means an election, filed with the
Committee, pursuant to which a Participant elects to have all or part of an
Eligible Restricted Stock Award converted into Stock Units under this Plan, and
to have such Stock Units credited to his or her Stock Account under the Plan
pursuant to Section 4.2 hereof.

                  "DESIGNATED DEFERRAL PERIOD" shall mean the deferral period
selected by the Participant with respect to an Eligible Restricted Stock Award,
which deferral period shall specify the date on which distribution of Shares
with respect to such Eligible Restricted Stock Award shall be made or begin.

                  "DIVIDEND EQUIVALENT AMOUNTS" means the amount of dividends or
other distributions to shareholders of the Company that a Participant would have
received had the Participant's Stock Units been actual Shares as of the date of
a dividend or other distribution by the Company.

                  "ELIGIBLE RESTRICTED STOCK AWARD" means an award of Restricted
Stock made, or to be made, under a Company Directors Equity Plan.

                  "PARTICIPANT" means any director of the Company who is not an
employee of the Company or its subsidiaries and who participates in this Plan by
timely completing a Deferral Election.

                  "PLAN YEAR" means each calendar year during the term of this
Plan.

                  "RESTRICTED STOCK" means Shares awarded, or to be awarded, to
a Participant in the form of restricted stock under and pursuant to the terms of
a Company Directors Equity Plan.

                  "SHARES" means the Common Shares, $1.00 par value, of the
Company.

                                       -2-


<PAGE>

                  "STOCK ACCOUNT" means an individual bookkeeping account
established for each Participant pursuant to Section 4.3 hereof, with respect to
Stock Units credited to the Participant.

                  "STOCK UNITS" means the units credited to a Participant's
Stock Account, as described in Sections 4.2 and 4.4 hereof. Each Stock Unit
credited to a Participant's Stock Account shall represent the right, subject to
the terms and conditions of this Plan, to receive one (1) Share at the end of
the Participant's Designated Deferral Period or at such other time as this Plan
may specify for distribution to be made or begin.

                                   ARTICLE III

                                  PARTICIPATION

                  3.1      ELIGIBILITY AND PARTICIPATION. Directors who shall be
eligible to participate in this Plan shall be those directors who are not
employees of the Company or its subsidiaries.

                                   ARTICLE IV

                               DEFERRAL ELECTIONS

                  4.1      DEFERRAL ELECTIONS. In the first Plan Year this Plan
is in effect each director who is eligible to participate in this Plan may file
a Deferral Election with the Committee at any time prior to the grant of
Restricted Stock which is the subject of such Deferral Election; thereafter each
eligible director who elects to participate in this Plan for any Plan Year shall
file a Deferral Election with the Committee before the beginning of such Plan
Year, provided that any director who was not a director during the previous Plan
Year may file a Deferral Election with the Committee (i) within thirty (30) days
after he/she is elected to the Board and (ii) prior to the grant of Restricted
Stock which is the subject of such Deferral Election. The Deferral Election
shall be in the form prescribed by the Committee, and in

                                       -3-


<PAGE>

accordance with such rules and procedures as may be established by the Committee
in its sole discretion. Once made, a Participant's Deferral Election shall be
irrevocable. A Deferral Election shall be deemed to have been made when the
completed and executed election form is received and accepted by the Committee
or its designated agent. A separate Deferral Election shall be made by a
Participant with respect to all or part of each Eligible Restricted Stock Award
to be subject to a Deferral Election during such Plan Year. If an eligible
Participant fails to file an appropriate election form with respect to any
Eligible Restricted Stock Award before the beginning of a Plan Year (or before
the grant of Restricted Stock in the first year a director is eligible to
participate in this Plan), he or she shall be deemed to have elected not to make
a Deferral Election for such Plan Year.

                  4.2      EFFECT OF DEFERRAL ELECTION. If a Participant timely
files a Deferral Election with the Committee with respect to an Eligible
Restricted Stock Award, each share of Restricted Stock subject to a Deferral
Election will be automatically cancelled immediately prior to vesting and will
be replaced with a corresponding Stock Unit credited to the Participant's Stock
Account in accordance with Section 4.3. A timely Deferral Election with respect
to an Eligible Restricted Stock Award will defer the delivery to the Participant
of the Shares subject thereto until the end of the Participant's Designated
Deferral Period or such other time as this Plan may specify for distribution to
be made or begin.

                  4.3      STOCK ACCOUNTS. The Committee shall establish and 
maintain a separate bookkeeping account in the name of each Participant who
makes a Deferral Election during the course of his or her participation in the
Plan. Each Participant's Stock Account shall consist of the sum of the Stock

                                       -4-


<PAGE>

Units credited to such Participant's Stock Account. Each Participant's Stock
Account shall be adjusted as follows:

                           (a)      As of the date of vesting of an Eligible
                  Restricted Stock Award to which a Participant's Deferral
                  Election is applicable, the Participant's Stock Account shall
                  be credited with that number of Stock Units equal to the
                  number of Shares to which the Deferral Election relates;

                           (b)      As of the date on which a dividend is paid
                  on (or any other distribution is made on account of) Shares,
                  the Stock Account shall be credited with that number of Stock
                  Units and fraction thereof equal to the number of Shares and
                  fraction thereof that the Dividend Equivalent Amount would
                  have purchased on that date based on the average of the high
                  and low trading prices of the Shares on that date.

                           (c)      As of the date on which Shares are
                  distributed to the Participant in accordance with Section 4.5,
                  the Participant's Stock Account shall be reduced by an equal
                  number of Stock Units, and fractions thereof, if applicable.

In the event of any stock split, reverse split, combination or other changes
that impact the Company's capital structure, or Share status, each Participant's
Stock Account and the number of Stock Units credited thereto shall be equitably
adjusted by the Committee in its sole discretion in a manner consistent with the
treatment of outstanding equity awards pursuant to the Company Directors Equity
Plan.

                  4.4      DIVIDEND EQUIVALENT AMOUNTS. Dividend Equivalent
Amounts with respect to the Participant's Stock Units shall result in the
Participant's Stock Account being credited with an additional number of Stock
Units and/or fraction thereof equal to the Dividend Equivalent Amount divided by
the average of the high and low trading prices of Shares on the date specified
in Section 4.3(b) and shall become subject to the Deferral Election applicable
to the Stock Units to which the Dividend Equivalent Amount relates.

                  4.5      DISTRIBUTION OF SHARES FROM STOCK ACCOUNTS. Subject
to any limitation set forth in this Plan or any other limitations as may be
established by the Committee in its sole

                                       -5-


<PAGE>

discretion, each Deferral Election shall specify the method of distribution with
respect to the Eligible Restricted Stock Award which is subject to the Deferral
Election. A Participant may elect to have his or her Stock Units with respect to
any Eligible Restricted Stock Award which is subject to a Deferral Election
distributed in any of the following number of installments following the
expiration of the earlier of (i) the termination of the Participant's service as
a director of the Company or (ii) the Participant's Designated Deferral Period
with respect to such Eligible Restricted Stock Award:

                  (1)      a single lump sum;

                  (2)      3 equal or substantially equal annual installments;

                  (3)      5 equal or substantially equal annual installments;
                           or

                  (4)      10 equal or substantially equal annual installments.

A Participant may elect a different method of distribution with respect to each
Eligible Restricted Stock Award that is subject to a Deferral Election.
Distributions will commence on the first business day of the month following the
month specified in the Deferral Election or, in the event of termination of a
Participant's service as a director, within thirty (30) days following such
termination.

Notwithstanding the foregoing, if a Change in Control occurs or a Participant
dies, a distribution with respect to all the Stock Units then held in the
Participant's Stock Account shall be made to him/her or his/her beneficiaries in
a single lump sum within thirty (30) days following the Change in Control or the
date the Committee receives written notice of his/her death.

Distributions with respect to the Stock Units credited to a Participant's Stock
Account under this Plan shall in all cases be satisfied by the delivery by the
Company of a number of Shares equal to the number of Stock Units with respect to
which such distribution is being made, except that any

                                       -6-


<PAGE>

fractional share shall be satisfied in cash, based on the average of the high
and low trading prices of Shares on the business day immediately preceding such
distribution.

If a Participant is receiving a distribution in installments, Dividend
Equivalent Amounts will continue to be credited with respect to the
undistributed Stock Units remaining in such Participant's Stock Account until
all such Stock Units have been distributed.

                                    ARTICLE V

                                  MISCELLANEOUS

                  5.1      BENEFICIARIES. Each Participant shall have the right
to designate in writing one or more beneficiaries to receive distributions in
the event of the Participant's death by filing with the Company a beneficiary
designation on a form provided by the Committee. The designated beneficiary or
beneficiaries may be changed by a Participant at any time prior to his or her
death by the delivery to the Committee of a new beneficiary designation form.
The change shall become effective only when the new beneficiary designation form
is received and accepted by the Committee; provided, however, any beneficiary
designation form received by the Committee after the designating Participant's
death will be disregarded. If no beneficiary shall have been designated, or if
no designated beneficiary shall survive the Participant, distribution pursuant
to this provision shall be made to the Participant's estate.

                  5.2      ADMINISTRATION. Except for those powers and duties
expressly reserved for the Board hereunder, the Committee will have full power
to administer the Plan. Such power includes, but is not limited to, the
following authority:

                                    (a)      To make and enforce such rules and
                  regulations as it deems necessary or proper for the efficient
                  administration of Plan;

                                    (b)      To interpret the Plan and to decide
                  all matters arising thereunder, including the right to resolve
                  or remedy any ambiguities, errors,

                                       -7-


<PAGE>

                  inconsistencies or omissions. All such interpretations shall
                  be final and binding on all parties;

                                    (c)      To determine the amount of
                  distributions to be made to each Participant and beneficiary
                  or other person in accordance with the provisions of the Plan;

                                    (d)      To authorize distributions under
                  the Plan;

                                    (e)      To keep such records and submit
                  such filings, elections, applications, returns or other
                  documents or forms as may be required under applicable law;

                                    (f)      To appoint such agents, counsel,
                  accountants and consultants as may be desirable in
                  administering the Plan;

                                    (g)      To exercise the other powers that
                  are expressly granted to it herein, or that are impliedly
                  necessary for it to carry out any of its responsibilities
                  hereunder; and

                                    (h)      By written instrument to delegate
                  any of the foregoing powers to one or more designated officers
                  or employees of the Company or other persons.

                  All decisions of the Committee or its designees shall be
binding upon all Participants and their respective legal representatives,
successors and assigns, and any and all persons claiming under or through any of
them. No member of the Committee or any of its designees shall be liable to any
Participant or to the Company for any determination made within the scope of the
administrative and interpretive functions provided in this Plan. No member of
the Committee shall participate in any discussion or determination involving his
or her own rights, benefits or obligations under this Plan.

                  5.3      REPORTS. Until a Participant's entire Stock Account
shall have been distributed in full, the Company will furnish or make available
to the Participant a written or electronic report, at least annually, setting
forth any changes in such Account and the amounts credited to such Account.

                                       -8-


<PAGE>

                  5.4      ASSIGNMENT AND ALIENATION OF BENEFITS. The right of
each Participant to any account, benefit, Stock Unit, right or distribution
hereunder shall not, to the extent permitted by law, be subject in any manner to
attachment or other legal process for the debts of such Participant, and no
account, benefit, Stock Unit, right or distribution shall be subject to
anticipation, alienation, sale, pledge, transfer, assignment or encumbrance;
provided, however, the Company shall have the unrestricted right to set off
against or recover out of any distributions due a Participant, beneficiary or
other person at the time such distributions would otherwise have been made
hereunder, any amounts owed the Company or any subsidiary of the Company by such
Participant, beneficiary or other person.

                  5.5      DIRECTOR AND SHAREHOLDER STATUS. Nothing in the Plan
shall interfere with or limit in any way the right of the Company or its
shareholders to terminate any Participant's service as a director, at any time,
nor confer upon any Participant any right to continue as a director of the
Company or to be nominated for election to the Board at any time. The Plan will
not give any person any right or claim to any benefits under the Plan unless
such right or claim has specifically accrued under the terms of the Plan.
Participation in the Plan shall not create any rights in a Participant (or any
other person) as a shareholder of the Company until Shares are registered in the
name of, and distributed to, the Participant (or such other person).

                  5.6      ASSETS. No assets shall be segregated or earmarked in
respect of any Stock Units, Dividend Equivalent Payments or Stock Accounts. The
Plan and the crediting of Stock Accounts hereunder shall not constitute a trust
and shall be structured solely for the purpose of recording an unsecured
contractual obligation. All amounts payable pursuant to the terms of this Plan
shall be paid from the general assets of the Company and in no event shall any

                                       -9-


<PAGE>

Participant or beneficiary have any claims or rights to any payment hereunder
that are superior to any claims or rights of any general creditor of the
Company.

                  5.7      TAXES. The Company shall not be responsible for the
tax consequences under federal, state or local law of any election made by any
Participant under the Plan. The Company shall have the right to make required
information reporting and/or to withhold or deduct from any distribution to be
made pursuant to this Plan, or to otherwise require prior to the distribution of
any amount hereunder, payment by the Participant of any federal, state or local
taxes required by law to be withheld with respect to any such distribution to
the Participant. In addition, to the extent the Company shall be required, prior
to the date on which distributions are to be made to a Participant under this
Plan, to withhold any taxes in connection with any Stock Units or Dividend
Equivalent Amounts credited to a Participant's accounts under this Plan, the
Participant agrees that the Company shall have the right to make such
withholding or to require direct payment of such withholding taxes by the
Participant to the Company.

                  5.8      AMENDMENT. Notwithstanding any other provision of
this Plan, the Board may amend this Plan at any time for any reason without
liability to any Participant, beneficiary or other person for any such amendment
or for any other action taken pursuant to this Section 5.8, provided that no
such amendment shall be made retroactively in a manner that would deprive any
Participant of any rights or benefits which have accrued to his/her benefit
under the Plan as of the date such amendment is proposed to be effective, unless
such amendment is necessary to comply with applicable law.

                  5.9      TERMINATION. Notwithstanding any other provision of
this Plan, the Board may terminate this Plan at any time for any reason without
any liability to any Participant, beneficiary or other person for any such
termination or for any other action taken pursuant to this

                                      -10-


<PAGE>

Section 5.9. Following termination of this Plan, and notwithstanding the
provisions of any Deferral Election entered into prior to such termination, no
additional deferrals may be made hereunder, but all existing Stock Accounts
shall be administered in accordance with the Plan, as in effect immediately
prior to termination, and shall be distributed in accordance with the terms of
this Plan and the applicable Deferral Elections, unless and until the Board
elects to accelerate distributions as provided below. At any time on or after
the effective date of termination of this Plan, the Board, in its sole
discretion, may elect to accelerate the distribution with respect to all Stock
Units in all Stock Accounts. Such distributions shall be made in a lump sum.
Upon completion of distributions to all Participants, or beneficiaries, as the
case may be, no Participant, beneficiary or person claiming under or through
them, will have any claims in respect of this Plan.

                  5.10     NOTICES TO COMMITTEE. The Committee shall designate
one or more addresses to which notices and other communications to the Committee
shall be sent with respect to this Plan. No notice or other communication shall
be considered to have been given to or received by the Committee until it has
been delivered to the Committee's attention at one of such designated addresses.

                  5.11     NO LIABILITY. Participation in the Plan is entirely
at the risk of each Participant. Neither the Company, the Committee, the Board
nor any other person associated with this Plan shall have any liability for any
loss or diminution in the value of Stock Accounts, or for any failure of this
Plan to effectively defer recognition of income or to achieve any Participant's
desired tax treatment or financial results.

                  5.12     FACILITY OF PAYMENT. If the Committee determines that
a Participant or beneficiary entitled to receive a payment under this Plan is
(at the time such payment is to be

                                      -11-


<PAGE>

made) a minor or physically, mentally or legally incompetent to receive such
payment and that another person or any institution has legal custody of such
minor or incompetent individual, the Committee may cause payment to be made to
such person or institution having custody of such Participant or beneficiary.
Such payment, to the extent made, shall operate as a complete discharge of
obligation by the Committee, the Company and the Board.

                  5.13     SECURITIES LAW PROVISIONS. The issuance and
distribution of Shares pursuant to this Plan will not be registered under the
Federal or any state securities laws. The Shares will be "restricted securities"
as that term is defined under Rule 144 of the Securities Act of 1933 (the
"Securities Act") and may not be sold or transferred absent registration under
the Securities Act or in accordance with an applicable exemption.

                  5.14     EFFECTIVE DATE. This Plan was adopted by the Board
effective as of February 1, 2004 (the "Effective Date") and shall remain in
effect until terminated pursuant to Section 5.9.

                  5.15     APPLICABLE LAW. This Plan shall be interpreted under
the laws of the State of Ohio.

                  IN WITNESS WHEREOF, the Company has caused this instrument to
be executed by its duly authorized officer as of the 1st day of February, 2004.

                                          THE PROGRESSIVE CORPORATION

                                          By: /s/ Charles E. Jarrett
                                              ----------------------------------
                                          Title: Vice President

                                      -12-


<PAGE>

Exhibit No. 10(AI)

                  Directors Restricted Stock Deferral Agreement

                      THE PROGRESSIVE CORPORATION DIRECTORS
                         RESTRICTED STOCK DEFERRAL PLAN
                               DEFERRAL AGREEMENT

THIS DEFERRAL AGREEMENT is entered into pursuant to the provisions of The
Progressive Corporation Directors Restricted Stock Deferral Plan ("Plan"). All
capitalized terms in this Agreement shall have the meanings ascribed to them in
the Plan.

1.       Deferral Election. I hereby elect to defer receipt of the following
         portion of each Restricted Stock Award granted to me in 2004 under The
         Progressive Corporation 2003 Directors Equity Incentive Plan. This
         election shall become effective as of the date the restrictions
         applicable to such Awards (or portion thereof) expire and shall not
         apply to any Award (or portion thereof) that fails to vest free of all
         restrictions.

         PLEASE INDICATE THE PERCENTAGE OF EACH AWARD YOU WOULD LIKE TO DEFER:
         ______%

2.       Designated Deferral Period. (The Plan gives you the option of electing
         a Designated Deferral Period. If you elect a Designated Deferral
         Period, the balance of your deferral account established pursuant to
         this Agreement will be distributed to you within thirty (30) days
         following the date the Designated Deferral
 Period ends, or, if earlier,
         the date you die or terminate your service as a director of The
         Progressive Corporation or the date a Change in Control occurs. If you
         do not elect a Designated Deferral Period, your account will be
         distributed within thirty (30) days following the earlier of the date
         you die or terminate your service as a director of The Progressive
         Corporation or the date a Change in Control occurs.)

PLEASE CHECK ONE OF THE FOLLOWING:

____I elect a Designated Deferral Period ending on the __ day of __________,
20____.

OR

_____ I do not wish to elect a Designated Deferral Period.

3.       Method of Distribution. I hereby elect that any distribution of the
         balance of the deferral account established pursuant to this Agreement
         made on account of termination of service as a director or expiration
         of a Designated Deferral Period be paid as follows: (CHECK ONE)

         in a single lump sum payment______

                                        1


<PAGE>

OR in

         Three annual installments ____
         Five annual installments  ____
         Ten annual installments   ____

I understand that Plan distributions made on account of reasons other than
termination of service as a director or expiration of a Designated Deferral
Period will be made in a single lump sum payment, unless the Plan provides
otherwise.

4.       Investment of Deferral Account. I understand that each amount credited
         to the deferral account established pursuant to this Agreement shall be
         deemed to be invested in the Common Shares, $1.00 par value, of The
         Progressive Corporation until distribution of the balance of the
         account. I also understand that this deemed investment is merely a
         device used to determine the amount payable to me under the Plan and
         does not provide me with any actual rights or interests in such Common
         Shares or any other particular funds, securities or property of The
         Progressive Corporation or any of its affiliates. I also understand
         that my right to receive distributions under the Plan makes me a
         general creditor of The Progressive Corporation with no greater right
         or priority than any other general creditor of The Progressive
         Corporation.

5.       Miscellaneous. I understand that this Agreement is subject to the
         terms, conditions and limitations of the Plan, as in effect from time
         to time, in all respects and that, except as expressly permitted by the
         Plan, all elections made in this Agreement are irrevocable. I
         acknowledge that I have received, read and understand the Plan document
         establishing the Plan. I agree to accept as final and binding all
         decisions and interpretations of the Committee relating to the Plan and
         this Agreement.

NAME OF ELIGIBLE DIRECTOR

DATE:
SSN:

Your electronic submission of this Election Form will create a date/time stamp
and serve as your signature.

Received and accepted on behalf of the Committee this ____ day of ____________,
______.

                                        2


<PAGE>
                                                                               .
                                                                               .
                                                                               .

Exhibit No. 11

                           THE PROGRESSIVE CORPORATION
                        COMPUTATION OF EARNINGS PER SHARE
                      (MILLIONS - EXCEPT PER SHARE AMOUNTS)
                      

<TABLE>
<CAPTION>
                                            2003                  2002                  2001
                                     -------------------   -------------------   -------------------
                                                   Per                   Per                   Per
Years Ended December 31,               Amount     Share      Amount     Share      Amount     Share
                                     ---------   -------   ---------   -------   ---------   -------
<S>                                  <C>         <C>       <C>         <C>       <C>         <C>
BASIC:
Net income                           $ 1,255.4   $  5.79   $   667.3   $  3.05   $   411.4   $  1.86
                                     =========   =======   =========   =======   =========   =======
Average shares outstanding               216.8                 219.0                 221.0
                                     =========             =========             =========

DILUTED:

Net income                           $ 1,255.4   $  5.69   $   667.3   $  2.99   $   411.4   $  1.83
                                     =========   =======   =========   =======   =========   =======

Average shares outstanding               216.8                 219.0                 221.0
Net effect of dilutive stock-based         3.7                   4.2                   4.2
compensation
                                     ---------             ---------             ---------
Total                                    220.5                 223.2                 225.2
                                     =========             =========             =========
</TABLE>


All share and per share amounts were adjusted for the April 22, 2002, 3-for-1
stock split.




<PAGE>
                                                                               .
                                                                               .
                                                                               .

Exhibit No. 12

                           THE PROGRESSIVE CORPORATION
                COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
                                   (millions)
                                   (unaudited)


<TABLE>
<CAPTION>
                                                               Years Ended December 31,
                                              ---------------------------------------------------------
                                                2003        2002        2001        2000        1999
                                              ---------   ---------   ---------   ---------   ---------
<S>                                           <C>         <C>         <C>         <C>         <C>
Income before income taxes                    $ 1,859.7   $   981.4   $   587.6   $    31.8   $   412.2
                                              ---------   ---------   ---------   ---------   ---------
Fixed Charges:
  Interest and amortization on indebtedness        97.0        75.1        53.4        81.1        79.8
  Portion of rents representative
     of the interest factor                         7.5         5.6         7.4         8.0         6.8
                                              ---------   ---------   ---------   ---------   ---------
Total fixed charges                               104.5        80.7        60.8        89.1        86.6
                                              ---------   ---------   ---------   ---------   ---------
Total income available for fixed charges(1)   $ 1,963.0   $ 1,062.0   $   647.7   $   118.0   $   495.6
                                              =========   =========   =========   =========   =========
Ratio of earnings to fixed charges                 18.8        13.2        10.7         1.3         5.7
                                              =========   =========   =========   =========   =========
</TABLE>


(1) Excludes interest capitalized, net of amortized interest, of $1.2 million,
$.1 million, $.7 million, $2.9 million, and $3.2 million for the years ended
December 31, 2003, 2002, 2001, 2000 and 1999, respectively.




EX-13 Annual Report
 

THE PROGRESSIVE CORPORATION AND SUBSIDIARIES

REPORT OF PRICEWATERHOUSECOOPERS LLP, INDEPENDENT AUDITORS

To the Board of Directors and Shareholders, The Progressive Corporation:

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, changes in shareholders’ equity and cash flows present fairly, in all material respects, the financial position of The Progressive Corporation and its subsidiaries at December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

(-s- PRICEWATERHOUSECOOPERS LLP)
Cleveland, Ohio
January 21, 2004

- APP.-B-1 -

 


 

THE PROGRESSIVE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

                               
          (millions – except per share amounts)
For the years ended December 31,   2003   2002   2001

 
 
 
REVENUES
                       
 
Net premiums earned
  $ 11,341.0     $ 8,883.5     $ 7,161.8  
 
Investment income
    465.3       455.2       413.6  
 
Net realized gains (losses) on securities
    12.7       (78.6 )     (111.9 )
 
Service revenues
    41.8       34.3       24.7  
 
Other income1
    31.2              
 
 
   
     
     
 
   
Total revenues
    11,892.0       9,294.4       7,488.2  
 
 
   
     
     
 
EXPENSES
                       
 
Losses and loss adjustment expenses
    7,640.4       6,299.1       5,264.1  
 
Policy acquisition costs
    1,249.1       1,031.6       864.9  
 
Other underwriting expenses
    1,010.1       874.2       686.9  
 
Investment expenses
    11.5       11.5       12.7  
 
Service expenses
    25.7       22.0       19.8  
 
Interest expense
    95.5       74.6       52.2  
 
 
   
     
     
 
   
Total expenses
    10,032.3       8,313.0       6,900.6  
 
 
   
     
     
 
NET INCOME
                       
 
Income before income taxes
    1,859.7       981.4       587.6  
 
Provision for income taxes
    604.3       314.1       176.2  
 
 
   
     
     
 
 
Net income
  $ 1,255.4     $ 667.3     $ 411.4  
 
 
   
     
     
 
COMPUTATION OF EARNINGS PER SHARE
                       
 
Basic:
                       
 
Average shares outstanding
    216.8       219.0       221.0  
 
 
   
     
     
 
     
Per share
  $ 5.79     $ 3.05     $ 1.86  
 
 
   
     
     
 
 
Diluted:
                       
 
Average shares outstanding
    216.8       219.0       221.0  
 
Net effect of dilutive stock-based compensation
    3.7       4.2       4.2  
 
 
   
     
     
 
     
Total equivalent shares
    220.5       223.2       225.2  
 
 
   
     
     
 
     
Per share
  $ 5.69     $ 2.99     $ 1.83  
 
 
   
     
     
 

1See Note 3 – Income Taxes for discussion.

All share and per share amounts were adjusted for the April 22, 2002, 3-for-1 stock split.

See notes to consolidated financial statements.

- APP.-B-2 -

 


 

THE PROGRESSIVE CORPORATION AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

                         
                    (millions)
December 31,   2003   2002

 
 
ASSETS
               
 
Investments:
               
   
Available-for-sale:
               
     
Fixed maturities, at market (amortized cost: $8,899.0 and $7,409.4)
  $ 9,133.4     $ 7,712.5  
     
Equity securities, at market:
               
       
Preferred stocks (cost: $751.3 and $631.9)
    778.8       656.7  
       
Common equities (cost: $1,590.6 and $1,425.3)
    1,972.1       1,347.3  
   
Short-term investments, at amortized cost (market: $648.0 and $567.8)
    648.0       567.8  
     
 
   
     
 
       
Total investments
    12,532.3       10,284.3  
 
Cash
    12.1       16.9  
 
Accrued investment income
    97.4       77.9  
 
Premiums receivable, net of allowance for doubtful accounts of $66.8 and $54.6
    2,079.6       1,742.8  
 
Reinsurance recoverables, including $41.4 and $34.8 on paid losses
    271.3       215.7  
 
Prepaid reinsurance premiums
    114.7       96.7  
 
Deferred acquisition costs
    412.3       363.5  
 
Income taxes
    81.6       219.2  
 
Property and equipment, net of accumulated depreciation of $476.4 and $392.4
    584.7       503.1  
 
Other assets
    95.5       44.3  
     
 
   
     
 
       
Total assets
  $ 16,281.5     $ 13,564.4  
     
 
   
     
 
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
 
Unearned premiums
  $ 3,894.7     $ 3,304.3  
 
Loss and loss adjustment expense reserves
    4,576.3       3,813.0  
 
Accounts payable, accrued expenses and other liabilities
    1,290.1       1,190.1  
 
Debt
    1,489.8       1,489.0  
     
 
   
     
 
       
Total liabilities
    11,250.9       9,796.4  
     
 
   
     
 
 
Shareholders’ equity:
               
   
Common Shares, $1.00 par value (authorized 300.0, issued 230.1, including treasury shares of 13.7 and 12.1)
    216.4       218.0  
   
Paid-in capital
    688.3       584.7  
   
Unamortized restricted stock
    (28.9 )      
   
Accumulated other comprehensive income (loss):
               
     
Net unrealized appreciation on investment securities
    418.2       162.4  
     
Net unrealized gains on forecasted transactions
    10.7       11.7  
     
Foreign currency translation adjustment
    (3.9 )     (4.8 )
   
Retained earnings
    3,729.8       2,796.0  
     
 
   
     
 
       
Total shareholders’ equity
    5,030.6       3,768.0  
     
 
   
     
 
       
Total liabilities and shareholders’ equity
  $ 16,281.5     $ 13,564.4  
     
 
   
     
 

See notes to consolidated financial statements.

- APP.-B-3 -

 


 

THE PROGRESSIVE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY

                                                         
                            (millions – except per share amounts)
For the years ended December 31,   2003   2002   2001

 
 
 
RETAINED EARNINGS
                                               
 
Balance, Beginning of year
  $ 2,796.0             $ 2,497.4             $ 2,220.4          
   
Net income
    1,255.4     $ 1,255.4       667.3     $ 667.3       411.4     $ 411.4  
 
           
             
             
 
   
Cash dividends on Common Shares ($.100, $.096 and $.093 per share, split effected)
    (21.7 )             (21.1 )             (20.6 )        
   
Treasury shares purchased
    (297.5 )             (200.7 )             (112.5 )        
   
Capitalization of stock split
                  (147.0 )                      
   
Other, net
    (2.4 )             .1               (1.3 )        
   
 
   
             
             
         
 
Balance, End of year
  $ 3,729.8             $ 2,796.0             $ 2,497.4          
   
 
   
             
             
         
ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS), NET OF TAX
                                               
 
Balance, Beginning of year
  $ 169.3             $ 125.9             $ 64.7          
     
Changes in:
                                               
       
Unrealized appreciation
            255.8               40.9               52.0  
       
Net unrealized gains on forecasted transactions
            (1.0 )             2.5               9.2  
       
Foreign currency translation adjustment
            .9                              
 
           
             
             
 
   
Other comprehensive income
    255.7       255.7       43.4       43.4       61.2       61.2  
   
 
   
     
     
     
     
     
 
Balance, End of year
  $ 425.0             $ 169.3             $ 125.9          
   
 
   
             
     
     
         
Comprehensive Income
          $ 1,511.1             $ 710.7             $ 472.6  
 
           
             
             
 
COMMON SHARES, $1.00 PAR VALUE
                                               
 
Balance, Beginning of year
  $ 218.0             $ 73.4             $ 73.5          
   
Stock options exercised
    2.8               1.2               .8          
   
Treasury shares purchased1
    (5.0 )             (3.6 )             (.9 )        
   
Restricted stock issued, net of forfeitures
    .6                                      
   
Capitalization of stock split
                  147.0                        
   
 
   
             
             
         
 
Balance, End of year
  $ 216.4             $ 218.0             $ 73.4          
   
 
   
             
             
         
PAID-IN CAPITAL
                                               
 
Balance, Beginning of year
  $ 584.7             $ 554.0             $ 511.2          
   
Stock options exercised
    47.2               21.4               25.2          
   
Tax benefits on stock options exercised
    44.0               19.3               24.4          
   
Treasury shares purchased
    (14.3 )             (10.0 )             (6.8 )        
   
Restricted stock issued, net of forfeitures
    26.7                                      
   
 
   
             
             
         
 
Balance, End of year
  $ 688.3             $ 584.7             $ 554.0          
   
 
   
             
             
         
UNAMORTIZED RESTRICTED STOCK
                                               
 
Balance, Beginning of year
  $             $             $          
   
Restricted stock issued, net of forfeitures
    (37.3 )                                    
   
Restricted stock market value adjustment
    (2.6 )                                    
   
Amortization of restricted stock
    11.0                                      
   
 
   
             
             
         
 
Balance, End of year
  $ (28.9 )           $             $          
   
 
   
             
             
         
Total Shareholders’ Equity
  $ 5,030.6             $ 3,768.0             $ 3,250.7          
 
   
             
             
         

1The Company did not split treasury shares. In 2002, the Company repurchased 136,182 Common Shares prior to the stock split and 3,471,916 Common Shares subsequent to the stock split.

There are 20.0 million Serial Preferred Shares authorized; no such shares are issued or outstanding.

There are 5.0 million Voting Preference Shares authorized; no such shares have been issued.

See notes to consolidated financial statements.

- APP.-B-4 -

 


 

THE PROGRESSIVE CORPORATION AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

                                 
                            (millions)
For the years ended December 31,   2003   2002   2001

 
 
 
CASH FLOWS FROM OPERATING ACTIVITIES
                       
 
Net income
  $ 1,255.4     $ 667.3     $ 411.4  
 
Adjustments to reconcile net income to net cash provided by operating activities:
                       
   
Depreciation and amortization
    89.3       83.9       81.0  
   
Amortization of restricted stock
    11.0              
   
Net realized (gains) losses on securities
    (12.7 )     78.6       111.9  
   
Changes in:
                       
     
Unearned premiums
    590.4       587.6       80.2  
     
Loss and loss adjustment expense reserves
    763.3       575.0       251.6  
     
Accounts payable, accrued expenses and other liabilities
    124.5       256.6       103.4  
     
Prepaid reinsurance premiums
    (18.0 )     (19.1 )     18.1  
     
Reinsurance recoverables
    (55.6 )     (14.2 )     36.2  
     
Premiums receivable
    (336.8 )     (245.7 )     69.9  
     
Deferred acquisition costs
    (48.8 )     (46.9 )     (6.7 )
     
Income taxes
    (.1 )     (65.1 )     30.2  
     
Tax benefits from exercise of stock options
    44.0       19.3       24.4  
     
Other, net
    31.0       34.7       23.0  
 
 
   
     
     
 
       
Net cash provided by operating activities
    2,436.9       1,912.0       1,234.6  
 
 
   
     
     
 
CASH FLOWS FROM INVESTING ACTIVITIES
                       
 
Purchases:
                       
       
Available-for-sale: fixed maturities
    (9,491.6 )     (7,924.9 )     (4,935.2 )
       
equity securities
    (771.2 )     (680.7 )     (1,696.0 )
 
Sales:
                       
       
Available-for-sale: fixed maturities
    7,189.3       5,823.3       3,335.5  
       
equity securities
    337.8       412.0       1,436.3  
 
Maturities, paydowns, calls and other:
                       
       
Available-for-sale: fixed maturities
    779.2       594.0       451.9  
       
equity securities
    91.7             135.9  
 
Net purchases of short-term investments
    (80.2 )     (340.4 )     (40.6 )
 
Net unsettled security transactions
    (37.1 )     115.3       (95.3 )
 
Purchases of property and equipment
    (171.1 )     (89.9 )     (74.9 )
 
 
   
     
     
 
       
Net cash used in investing activities
    (2,153.2 )     (2,091.3 )     (1,482.4 )
 
 
   
     
     
 
CASH FLOWS FROM FINANCING ACTIVITIES
                       
 
Proceeds from exercise of stock options
    50.0       22.6       26.0  
 
Proceeds from debt
          398.6       365.4  
 
Payments of debt
          (.8 )     (.5 )
 
Dividends paid to shareholders
    (21.7 )     (21.1 )     (20.6 )
 
Acquisition of treasury shares
    (316.8 )     (214.3 )     (120.2 )
 
 
   
     
     
 
       
Net cash provided by (used in) financing activities
    (288.5 )     185.0       250.1  
 
 
   
     
     
 
 
Increase (decrease) in cash
    (4.8 )     5.7       2.3  
 
Cash, Beginning of year
    16.9       11.2       8.9  
 
 
   
     
     
 
 
Cash, End of year
  $ 12.1     $ 16.9     $ 11.2  
 
 
   
     
     
 

See notes to consolidated financial statements.

- APP.-B-5 -

 


 

THE PROGRESSIVE CORPORATION AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

December 31, 2003, 2002 and 2001

- 1 - REPORTING AND ACCOUNTING POLICIES

NATURE OF OPERATIONS The Progressive Corporation, an insurance holding company formed in 1965, owns 68 subsidiaries and has 1 mutual insurance company affiliate and 1 reciprocal insurance company affiliate (the Company) as of December 31, 2003. The insurance subsidiaries and affiliates provide personal automobile insurance and other specialty property-casualty insurance and related services throughout the United States. The Company’s Personal Lines segment writes insurance for private passenger automobiles and recreation vehicles through both an independent agency channel and a direct channel. The Company’s Commercial Auto segment writes insurance for automobiles and trucks owned by small businesses primarily through the independent agency channel.

BASIS OF CONSOLIDATION AND REPORTING The accompanying consolidated financial statements include the accounts of The Progressive Corporation, its subsidiaries and affiliates. All of the subsidiaries and the affiliates are wholly owned or controlled. All intercompany accounts and transactions are eliminated in consolidation.

ESTIMATES The Company is required to make estimates and assumptions when preparing its financial statements and accompanying notes in conformity with accounting principles generally accepted in the United States of America (GAAP). Actual results could differ from those estimates.

INVESTMENTS Available-for-sale: fixed maturity securities are debt securities, which may have fixed or variable principal payment schedules, may be held for indefinite periods of time, and may be used as a part of the Company’s asset/liability strategy or sold in response to changes in interest rates, anticipated prepayments, risk/reward characteristics, liquidity needs or similar economic factors. These securities are carried at market value with the corresponding unrealized appreciation or depreciation, net of deferred income taxes, reported in accumulated other comprehensive income. Market values are obtained from a recognized pricing service or other quoted sources. The asset-backed portfolio is accounted for under the retrospective method; prepayment assumptions are based on market expectations. For interest only and non-investment-grade asset-backed securities, the prospective method is used in accordance with the guidance prescribed by Emerging Issues Task Force Issue (EITF) 99-20, “Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interest in Securitized Financial Assets.”

     Available-for-sale: equity securities include common equities and nonredeemable preferred stocks and are reported at quoted market values. Changes in the market values of these securities, net of deferred income taxes, are reflected as unrealized appreciation or depreciation in accumulated other comprehensive income. Changes in value of foreign equities due to foreign currency exchange rates are limited by foreign currency hedges; unhedged amounts are not material and changes in value are recognized in income in the current period. The Company held no foreign equities or foreign currency hedges during 2003 or 2002.

     Trading securities are securities bought principally for the purpose of sale in the near term and, when not material to the Company’s financial position, cash flows or results of operations, are reported at market value within the available-for-sale portfolio. The Company had no trading securities at December 31, 2003; derivatives used for trading are discussed below. In prior years, the net activity in trading securities was not material to the Company’s financial position or cash flows; the effect on results of operations is separately disclosed in Note 2 - Investments. To the extent the Company has trading securities, changes in market value would be recognized in income in the current period.

     Derivative instruments may include futures, options, forward positions, foreign currency forwards and interest rate swap agreements and may be used in the portfolio for risk management or trading purposes or to hedge the exposure to: changes in fair value of an asset or liability (fair value hedge); foreign currency of an investment in a foreign operation (foreign currency hedge); or variable cash flows of a forecasted transaction (cash flow hedge). These derivative instruments would be recognized

- APP.-B-6 -

 


 

as either assets or liabilities and measured at fair value with changes in fair value recognized in income in the period of change. Changes in the fair value of the hedged items would be recognized in income while the hedge was in effect.

     At December 31, 2003, the Company held two derivatives classified as trading securities. The Company sold default protection related to two issuers, using credit default swaps and matched the notional value of these positions with Treasury notes with an equivalent principal value and maturity to replicate a cash bond position. Changes in the fair value of the credit default swaps and the Treasury notes are recognized in income in the current period.

     During 2003, the Company held no derivatives classified as cash flow hedges. Changes in fair value of these hedges are reported as a component of accumulated other comprehensive income and subsequently amortized into earnings over the life of the hedged transaction. Gains and losses on hedges on forecasted transactions are amortized over the life of the hedged item (see Note 4 – Debt). Hedges on forecasted transactions that no longer qualify for hedge accounting due to lack of correlation are considered derivatives used for risk management purposes.

     During 2003, the Company had no fair value or foreign currency hedges or derivative instruments held or issued for risk management purposes. To the extent the Company held fair value hedges, changes in the hedge, along with the hedged items would be recognized in income in the period of change while the hedge was in effect. Gains and losses on foreign currency hedges would offset the foreign exchange gains and losses on the foreign investments. Derivatives held or issued for risk management purposes would be recognized in income during the period of change.

     Derivatives designated as hedges would also be evaluated on established criteria to determine the effectiveness of their correlation to, and ability to reduce risk of, specific securities or transactions; effectiveness would be reassessed regularly. If the effectiveness of a fair value hedge becomes non-compliant, the adjustment in the change in value of the hedged item would no longer be recognized in income during the current period.

     For all derivative positions, net cash requirements are limited to changes in market values, which may vary based upon changes in interest rates, currency exchange rates and other factors. Exposure to credit risk is limited to the carrying value; collateral may be required to limit credit risk.

     Short-term investments include Eurodollar deposits, commercial paper and other securities maturing within one year and are reported at amortized cost, which approximates market.

     Investment securities are exposed to various risks such as interest rate, market and credit risk. Market values of securities fluctuate based on the magnitude of changing market conditions; significant changes in market conditions could materially affect portfolio value in the near term. The Company continually monitors its portfolio for pricing changes, which might indicate potential impairments and performs detailed reviews of securities with unrealized losses based on predetermined criteria. In such cases, changes in market value are evaluated to determine the extent to which such changes are attributable to (i) fundamental factors specific to the issuer, such as financial conditions, business prospects or other factors or (ii) market-related factors, such as interest rates or equity market declines. When a security in the Company’s investment portfolio has an unrealized loss in market value that is deemed to be other than temporary, the Company reduces the book value of such security to its current market value, recognizing the decline as a realized loss in the income statement. Any future increases in the market value of securities written down are reflected as changes in unrealized gains as part of accumulated other comprehensive income within shareholders’ equity.

     Realized gains and losses on securities are computed based on the first-in first-out method and include write-downs on available-for-sale securities considered to have other than temporary declines in market value.

PROPERTY AND EQUIPMENT Property and equipment are recorded at cost. Depreciation is provided over the estimated useful lives of the assets using accelerated methods for computers and the straight-line method for all other fixed assets. The useful lives range from 3 to 4 years for computers, 10 to 40 years for buildings and improvements, and 5 to 6 years for all other property and equipment. Property and equipment includes software capitalized for internal use. At December 31, 2003 and 2002, land and buildings comprised 75% and 73%, respectively, of total property and equipment.

     Total interest capitalized was $1.5 million, $.5 million and $1.2 million in 2003, 2002 and 2001, respectively, relating to both the Company’s construction projects and capitalized computer software costs.

INSURANCE PREMIUMS AND RECEIVABLES Insurance premiums written are earned on a pro rata basis over the period of risk, using a mid-month convention. Insurance premiums written in 2004 and forward will be earned based on a daily earnings

- APP.-B-7 -

 


 

convention. The Company provides insurance and related services to individuals and small commercial accounts throughout the United States, and offers a variety of payment plans. Generally, premiums are collected prior to providing risk coverage, minimizing the Company’s exposure to credit risk. The Company performs a policy level evaluation to determine the extent the premiums receivable balance exceeds its unearned premiums balance. The Company then ages this exposure to establish an allowance for doubtful accounts based on prior experience.

INCOME TAXES The income tax provision is calculated under the balance sheet approach in accordance with Statement of Financial Accounting Standards (SFAS) 109 “Accounting for Income Taxes.” Deferred tax assets and liabilities are recorded based on the difference between the financial statement and tax bases of assets and liabilities at the enacted tax rates. The principal assets and liabilities giving rise to such differences are net unrealized gains/losses on securities, loss reserves, unearned premiums reserves, deferred acquisition costs and non-deductible accruals. The Company reviews its deferred tax assets for recoverability. At December 31, 2003, the Company is able to demonstrate that the benefit of its deferred tax assets is fully realizable and, therefore, no valuation allowance is recorded.

LOSS AND LOSS ADJUSTMENT EXPENSE RESERVES Loss reserves represent the estimated liability on claims reported to the Company, plus reserves for losses incurred but not yet reported (IBNR). These estimates are reported net of amounts recoverable from salvage and subrogation. Loss adjustment expense reserves represent the estimated expenses required to settle these claims and losses. The methods of making estimates and establishing these reserves are reviewed regularly, and resulting adjustments are reflected in income currently. Such loss and loss adjustment expense reserves could be susceptible to significant change in the near term.

REINSURANCE The Company’s reinsurance transactions include premiums written under state-mandated involuntary plans for commercial vehicles (Commercial Auto Insurance Procedures–CAIP), for which the Company retains no loss indemnity risk (see Note 6 – Reinsurance for further discussion). In addition, the Company cedes auto premiums to state-provided reinsurance facilities and premiums in its non-auto programs to limit its exposure in those particular markets. Prepaid reinsurance premiums were recognized on a pro rata basis over the period of risk, primarily using a mid-month convention and consistent with premiums written. Beginning in 2004, prepaid reinsurance premiums will be earned based on a daily earnings convention. Because the Company’s primary line of business, auto insurance, is written at relatively low l