In 1994, the Company completed its new corporate office complex on a 42-acre parcel in Mayfield Village, Ohio, owned by a subsidiary. The new facility consists of 517,800 square feet of space and replaces office space held under leases in a number of locations in the Cleveland, Ohio area. The project's cost of $75.5 million was funded through operating cash flows. The Company's central data processing facility occupies a modern, three-story brick, building containing approximately 107,000 square feet of office space, on this same parcel.
The Company owns a modern three-story building containing approximately 96,700 square feet of office space in Mayfield Heights, Ohio. The property was purchased in December 1993 for approximately $6.5 million, and is occupied by the Company's Northeast Division.
The Company's Florida Division is headquartered in a modern, two-story building containing approximately 60,000 square feet of office space in Tampa, Florida. The property was financed with, and is owned subject to a mortgage granted in connection with, industrial development revenue bonds bearing interest equal to 79.45% of a specified prime commercial lending rate. The remaining annual principal amounts payable are $368,000 in 1996 and 1997 and $92,000 in 1998.
The Company leases approximately 590,000 square feet of modern office space at various locations throughout the United States for its other business units and staff functions. In addition, the Company leases approximately 288 processing and claim offices at various locations throughout the United States. Two offices are leased in Canada. These leases are generally short-term to medium-term leases of standard commercial office space.
(1)Total revenues for 1992 include $106.0 million ($70.0 million after taxes), or $.97 per share, for the Company's California Proposition 103 reserve reduction.
During the three-year period ended December 31, 1995, the Company sold 4,950,000 Common Shares for net proceeds of $177.0 million and repurchased 1.2 million Common Shares at a total cost of $36.4 million (average cost of $31.92 per share) and .6 million of its 9 3/8% Serial Preferred Shares, Series A, at a total cost of $14.4 million (average cost $27.08 per share). The Company also sold $350.0 million of notes, repaid $170.0 million borrowed under its credit facilities, and redeemed the entire $70.0 million of its 8 3/4% Debentures. During the same period, The Progressive Corporation received $254.3 million from its insurance subsidiaries, net of capital contributions made to these subsidiaries. The regulatory restrictions on subsidiary dividends are described in Item 5(c) on page 12 herein.
The Company invests in fixed-maturity, equity and short-term securities. The Company's investment strategy recognizes its need to maintain capital adequate to support its insurance operations and commitment to risk adverse investment policies. Therefore, the Company evaluates the risk/reward trade-offs of investment opportunities, measuring their effects on stability, diversity, overall quality and liquidity of the investment portfolio. The majority of the portfolio is invested in high-grade, fixed-income securities, of which short- and intermediate-term securities represented $2,876.2 million, or 76.4%, in 1995 and $2,319.4 million, or 72.9%, in 1994. Long-term securities were $191.9 million, or 5.1%, in 1995 and $245.0 million, or 7.7%, in 1994. The duration of the fixed-income portfolio was 2.2 years at December 31, 1995. Early in 1995, the Company eliminated a substantial portion of its municipal securities with maturities longer than 5 years in response to the proposal of a "flat tax," which would effectively eliminate the tax advantage of these securities.
A relatively small portion of the investment portfolio was invested in marketable equity securities providing risk/reward balance and diversification. Common stocks represented $310.0 million, or 8.2%, in 1995 and $106.2 million, or 3.4%, in 1994. The increase in common stocks reflects the Company's objective to increase its position in common stock investments to 15% of the entire portfolio and to optimize value and further diversify the portfolio through foreign equity investments. The foreign equity portfolio, which may utilize stock index futures and foreign currency forwards, comprised $52.6 million of the common stock portfolio at December 31, 1995. The remainder of the equity portfolio of $382.3 million, or 10.1%, in 1995 and $370.1 million, or 11.6%, in 1994, was comprised of over 90% of fixed-rate preferred stocks with mechanisms that may provide an opportunity to liquidate at par.
As of December 31, 1995, the Company's portfolio had $78.7 million in unrealized gains, compared to $41.1 million in unrealized losses in 1994. This increase in value was the result of falling interest rates and rising prices in the bond and stock market. The weighted average fully taxable equivalent book yield of the portfolio was 6.9%, 6.7% and 6.8% for the years ended December 31, 1995, 1994 and 1993, respectively.
Investments in the Company's portfolio have varying degrees of risk. Equity securities generally have greater risks than the non-equity portion of the portfolio since these securities are subordinate to rights of debt holders and other creditors of the issuer. Financial instruments with off-balance-sheet risk are used to manage the risks and enhance the yields of the available-for-sale portfolio. This is accomplished by modifying the basis, duration, interest rate or foreign currency characteristics of the portfolio or hedged securities. Net cash requirements are limited to changes in market values which may vary based upon changes in interest rates and other factors. Exposure to credit risk is limited to the carrying value; unless otherwise noted, collateral is not required to support the credit risk. During 1995, the Company added a government bond trading portfolio to benefit from short-term market rate opportunities. The Company has stringent restrictions on the amount of open positions in the trading portfolio limiting its exposure to acceptable levels. At December 31, 1995, there were no trading securities or off-balance-sheet trading positions.
Operating income, which excludes net realized gains and losses from security sales and one-time items, was $220.1 million, or $2.84 per share, in 1995, $212.7 million, or $2.76 per share, in 1994 and $197.3 million, or $2.61 per share, in 1993. The GAAP combined ratio was 94.3 in 1995, 91.7 (88.5 including the elimination of the "supplemental reserve" discussed below) in 1994 and 89.3 in 1993.
The Company's Core divisions' net premiums written grew 21%, 38% and 25% for 1995, 1994 and 1993, respectively, primarily driven by an increase in unit sales. In 1995, the Company raised rates an average of 6.5%, compared to no rate changes in 1994 and a rate decrease of .8% in 1993. The Company continues to write standard and preferred auto risks which represented between 5% and 10% of total Core business volume. The Company anticipates continued growth in its Core business in 1996, which could result from the number of states in which the Company seeks to insure all auto risks, from working with independent agents dedicated to regaining market share and from integrating other buying options. The Core divisions generated underwriting profit margins of 5% in 1995, 7% in 1994 and 10% in 1993; the Company's strategy is to achieve a 4% underwriting margin.
During 1994, the Company settled the dispute, arising out of its 1985 acquisition of American Star Insurance Company (since renamed National Continental Insurance Company), over the seller's refusal to pay certain losses on pre-sale business written by American Star. Under the settlement, National Continental received $10.1 million from the seller and agreed to be solely responsible for the next $20 million of gross losses. The seller will thereafter be responsible for half the losses, net of reinsurance, if it achieves certain minimum net worth requirements. In addition to the $10.1 million, National Continental will be entitled to the proceeds of various treaty and facultative reinsurance policies that had been purchased by American Star. National Continental has established reserves for these exposures, which are mainly for product liability and environmental claims, in amounts it believes to be adequate based on information currently available to it, including a study by independent actuaries for the seller. Total reserves on this business are $27.9 million, of which $8.8 million is recoverable from reinsurers. The Company will continue to monitor these exposures, adjust the related reserves appropriately as additional information becomes known and disclose any material developments.
Policy acquisition and other underwriting expenses as a percentage of premiums earned were 23% in 1995, compared to 25% in 1994 and 28% in 1993. The decrease primarily reflects process improvement initiatives and lower commission programs.
Service businesses generated a pretax operating profit of $8.7 million in 1995, compared to $10.0 million in 1994 and $6.8 million in 1993.
The Consolidated Financial Statements of the Company, along with the related notes, supplementary data and report of independent accountants, are incorporated by reference from the Company's 1995 Annual Report, pages 33 through 46 and pages 50 through 55.