01—Abstract
Summary
Summary of the 10-K filed February 28, 2012. Cited figures are marked; the original filing is the authoritative source.
The Progressive Corporation (PGR) reported a solid 2011 despite an active catastrophe year.
Net premiums written rose 5% to $15.1 billiona, and net income was $1.0 billion, or $1.59 per diluted share, compared with $1.61 in 2010. The combined ratio deteriorated modestly to 93.0 from 92.4, leaving an underwriting profit margin of 7.0% versus a 4% long-term target. Management attributed the decline to roughly 1.4 points of catastrophe losses (largely Hurricane Irene and spring storms) and less favorable reserve development than in 2010, partly offset by lower auto claim frequency (down about 2%).
Favorable prior-year reserve development still contributed $242 millionb, or 1.6 combined ratio points. The company's capital management was a major focus during the year. Progressive issued $500 million of 3.75% Senior Notes due 2021, repurchased 51.3 million common shares for $997.8 million, and retired $15 million of its 6.70% Debentures.
It declared a $0.4072c per share annual variable dividend ($249.4 million) paid in February 2012, based on a Gainshare factor of 1.10 and a 33-1/3% target. Total capital stood at $8.2 billion, and the debt-to-total-capital ratio rose to 29.6%, though it fell to about 25.9% after the $350 million 6.375% notes were retired in January 2012. Shareholders' equity declined to $5.8 billion, largely due to buybacks and lower unrealized investment gains.
Operationally, the company continued to grow policies in force, which rose 5%d to about 12.3 million in Personal Lines, driven by Direct auto (up 6%) and a record Agency auto base. Snapshot usage-based insurance expanded nationally, and retention improved as policy life expectancy in personal auto rose 2%. Risks for investors include the company's dependence on auto insurance pricing cycles, rising Commercial Auto severity, reserve uncertainty, cyber and regulatory exposures, and the variable nature of the annual dividend, which Progressive does not guarantee and which will vary with underwriting results and the Gainshare factor.
02—Key points
Key Highlights
- Net premiums written grew 5% to $15.146 billion, with Personal Lines accounting for about 90% of volume and Direct auto policies in force up 6%.
- Net income was $1.015 billion ($1.59 per diluted share) versus $1.068 billion ($1.61) in 2010; total revenues rose 3.6% to $15.5 billion.
- The combined ratio rose to 93.0 from 92.4, yielding a 7.0% underwriting margin that still exceeded the company's 4% target; Commercial Auto margin fell to 9.1% from 12.5%.
- Favorable prior-year reserve development of $242.0 million (1.6 points) and catastrophe losses of 1.4 points influenced results; net loss and LAE reserves totaled $6.5 billion.
- Capital returns totaled about $1.3 billion in 2011: $997.8 million in share repurchases, a $249.4 million annual dividend declared in December 2011, and $15 million of debt retired.
- The company issued $500 million of 3.75% Senior Notes due 2021 and had $2.0 billion of marketable securities at the holding company; the investment portfolio was $16.0 billion, with a 3.2% total return and a 1.9-year fixed-income duration.
- Statutory surplus reached $5.3 billion, with a 2.9-to-1 premiums-to-surplus ratio, and the insurance subsidiaries could pay $1.2 billion in dividends in 2012 without prior approval.
03—One dollar
04—Financials
Financial Highlights
Figures from 10-KFY2011filed February 28, 2012Financial Statements
FY2011 against FY2010
| Line item | FY2011FY2010 | Change |
|---|---|---|
| Revenue | $15.77B$15.22B | +3.7% |
| Interest Expense | $132.70M$133.50M | −0.6% |
| Net Income | $1.02B$1.07B | −4.9% |
| EPS (Basic) | $1.61$1.62 | −0.6% |
| EPS (Diluted) | $1.59$1.61 | −1.2% |
| Shares Outstanding (Basic) | 632.30M657.90M | −3.9% |
| Shares Outstanding (Diluted) | 636.90M663.30M | −4.0% |
05—Questions
Frequently Asked Questions
How did Progressive perform in 2011 compared with 2010?
Progressive grew net premiums written 5% to $15.1 billion and generated net income of $1.0 billion ($1.59 per diluted share), slightly below 2010's $1.61. The combined ratio rose modestly to 93.0 from 92.4, reflecting higher catastrophe losses (Hurricane Irene and spring storms) and less favorable reserve development, though the underwriting margin of 7.0% remained above the company's 4% target.
What is Progressive's annual variable dividend and how much was paid?
Progressive's dividend is a formula-based payment equal to after-tax underwriting income times a Board-set target percentage (33-1/3% for 2011 and 2012) times a Gainshare factor (1.10 for 2011). For 2011, the Board declared $0.4072 per share, or $249.4 million, paid in February 2012. No dividend is paid if the Gainshare factor is zero or if after-tax comprehensive income is less than after-tax underwriting income, and the Board can change the policy at any time. Because the amount varies, investors should not expect a fixed payout.
Why did Progressive's shareholder equity decline in 2011?
Total shareholders' equity fell to $5.8 billion from $6.0 billion, mainly because the company repurchased $997.8 million of its common shares, paid the $263.6 million dividend that was declared for 2010, and recorded $91.2 million of negative other comprehensive income as unrealized investment gains decreased. These effects outweighed net income of $1.0 billion.
What are the key risks highlighted in the filing?
Key risks include the cyclical nature of auto insurance pricing and competition from large insurers; the difficulty of accurately pricing risk and estimating loss reserves, which could require adverse adjustments; exposure to catastrophes such as hurricanes; extensive state regulation that limits rate changes; ongoing class action litigation (including personal injury protection and bodily injury claims); cyber-security threats and reliance on third-party vendors; and investment market risks, including interest rate, credit, and liquidity risks. Downgrades in credit or financial strength ratings could also raise borrowing costs and affect premium growth.
How is Progressive positioned in the auto insurance market?
Progressive ranked fourth in the U.S. private passenger auto market, with an estimated 8.0% share based on 2010 industry premiums. It writes personal auto insurance in all 50 states and the District of Columbia, and it is estimated to be in the top four in commercial auto. Growth initiatives include the usage-based Snapshot program, which expanded to 39 states and D.C. in its Direct channel, multi-product bundling through Progressive Home Advantage, and mobile quoting and purchasing tools.
06—Continue