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Risk Management at Progressive Insurance

• How we got started

• Getting corporate support

• Capital Management

• Examples of deliverables

• The value risk management brings to the firm

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Getting Started:

• Began in 2001 after a year of poor results

• Intended to respond to capital needs for foreseeable risks not in our pricing structure

• Viewed by Sr. Management as an opportunity to take a good look at Risk Management practices and firm’s overall risk appetite

• The leader must understand the business and the competition

• Our biggest challenge was with risk identification; keeping the scope narrow. • Initially focus on measuring and managing extreme risks; risks that could put you out of

business

Getting Support:

• A top down driven process is key

• Drive awareness throughout the organization. Get on the Board of Directors agenda.

• Identify all risks into one document; they must be easy to understand

• Be clear on your deliverable, value to the firm

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Capital Management Tools

Operational Leverage(Modeled)

3:1

Capital

Financial Leverage(Modeled)

<30%

Dividend Policy

Portfolio Asset Allocation(Modeled)85%/15%

Product Mix

Risk Transfer Policy(Insurance/Reinsurance)

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Underwriting: Monitor pricing and reserving discipline.

Investing: Maintain a liquid, diversified, high quality investment portfolio.

Financing: Maintain sufficient capital to support underwriting operations.

Our Financial PoliciesSupport efforts to grow as fast as possible below a 96 Combined Ratio

Progressive balances risk in underwriting with risk of investing and financing activities in order to have sufficient capital to support all the insurance we can profitably underwrite and service. We expect to earn a return on equity greater than its cost.

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Premium

Receivable

Fixed

Income

Portfolio

Equity

Portfolio

PP&E

Other

Assets

Payables

Unearned

Premium

Loss

Reserves

Debt

Shareholders’

Equity

Progressive’s Balance Sheet

Assets Liabilities& Equity

OperatingLiabilities

Capital

Portfolio

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Balance Sheet Management

The high frequency, low severity auto insurance business has a relatively short underwriting “tail” which limits our willingness to take interest rate credit, prepayment or concentration risk.

Progressive’s fixed income constraints reinforce our total return approach to portfolio management and mitigate the risk that sudden movements in investment markets could impair our ability to write insurance.

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2004 2005 2006 2007 2008 2009 2010 2011 2012

Net Written Premium [EP / WP] 0.96 10,000$ 11,000$ 12,100$ 13,310$ 14,641$ 16,105$ 17,716$ 19,487$ 21,436$

Required Statutory Surplus [P:S] 3.00 3,333$ 3,667$ 4,033$ 4,437$ 4,880$ 5,368$ 5,905$ 6,496$ 7,145$

Beginning of Year Surplus 3,500$ 3,333$ 3,667$ 4,033$ 4,437$ 4,880$ 5,368$ 5,905$ 6,496$

Add: GAAP Comprehensive Income 1,190 1,133 1,247 1,371 1,508 1,659 1,825 2,008 2,209

Less: Repurchases Interest, Change in DAC, PICI Returns (15) (25) (30) (35) (40) (41) (43) (44) (45)

End of Year Surplus Before Dividends 4,675 4,442 4,883 5,370 5,905 6,499 7,151 7,869 8,659

(Upstream) Downstream Dividends to PICI (1,342) (775) (850) (933) (1,025) (1,130) (1,245) (1,373) (1,514)

End of Year Statutory Surplus 3,333$ 3,667$ 4,033$ 4,437$ 4,880$ 5,368$ 5,905$ 6,496$ 7,145$

Holding Company-Invested Assets, Beginning of Year 1,155$ 2,275$ 2,175$ 2,948$ 3,243$ 4,247$ 5,342$ 5,951$ 6,913$

Intercomany Dividends From Subsidiaries 1,342 775 850 933 1,025 1,130 1,245 1,373 1,514

Cash Dividends to External Shareholders (16) (16) (16) (15) (15) (15) (15) (15) (15)

Debt Interest Payments (40) (40) (39) (38) (37) (37) (32) (32) (27)

Debt Maturity Payments (100) (800) - (600) - (55) (700) (500) (30)

Debt Issuance Proceeds - - - - - - - - -

AT Return on PICI Assets 3.5% 40 80 76 103 114 149 187 208 242

Share Repurchases (107) (99) (98) (88) (82) (77) (76) (72) (68)

PICI Assets, End of Year 2,275 2,175 2,948 3,243 4,247 5,342 5,951 6,913 8,529

Contingency Load (600) (660) (726) (799) (878) (966) (1,063) (1,169) (1,286)

Capital Redundancy (Deficiency) 1,675$ 1,515$ 2,222$ 2,444$ 3,368$ 4,375$ 4,888$ 5,744$ 7,243$

Assume Growth At: 10%

Assume Combined Ratio At: 96%Note Contingency Load: Needed capital to address unexpected events not in our pricing model that may have an adverse effect on our company's capital and on its present and future value.

Capital Adequacy

•Note: values illustrated are for presentation purposes only

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Taxonomy of Progressive’s Business Risks

Underwriting Financing Investing

•Rate and Trade Practice Regulation•Litigation/Mass Tort Litigation•Loss Reserve Estimation Error•Information Technology Systems Failure•Process Innovation•Pricing Estimation Error•Product Innovation•Catastrophic Claims Events•Brand•Compliance and Regulatory Risk•Business Continuity•Customer Service Risk•People•Corporate Governance Environment•Growth and Profitability

•Billing and Cash Collection Interruption•Third Party Solvency•SEC Enforcement Action•Litigation•Regulatory Denial of Upstream Dividends•Rating Downgrades•P&C Industry Falls out of investor favor

•Investment Return•Investment Controls•Mergers and Acquisitions•Asset-Liability Management•Fiduciary Liability

Classifications of Business Risks

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Our regional cities provide climate, time zone and labor market diversity.

Estimated Number of Lost Work Days per Location Over a 20-year HorizonFull

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Year

Austin 0.0 0.0 0.1 1.8 0.3 0.4 0.3 1.2 2.7 1.3 0.3 0.0 8.4

Cleveland 1.1 1.1 2.8 2.6 2.4 3.0 4.4 5.1 0.0 0.0 0.1 0.7 23.3

Colorado Springs 0.3 0.3 0.7 0.1 0.7 1.5 0.0 0.0 0.0 0.1 0.5 0.3 4.5

Sacramento 0.7 0.5 0.5 0.2 0.1 0.1 0.1 0.1 0.1 0.2 0.5 0.5 3.6

Tampa 0.0 0.7 0.1 0.9 1.0 4.1 3.6 7.2 13.7 7.9 2.1 2.1 43.4

Phoenix 0.6 0.5 0.6 0.2 0.9 0.1 4.2 5.1 4.4 0.4 0.4 0.7 18.1

2.7 3.1 4.8 5.8 5.4 9.2 12.6 18.7 20.9 9.9 3.9 4.3 101.3

Forbes/Milken 2002 Survey ofCorrelation Matrix for Lost Work Days Time Places for Business & Careers

Significant Perils Austin Cleve. Springs Sacto. TampaPhoenix Zone(Ranking:1=Best; 200=worst)Austin Hurricane, Tornado, Wind 1.00 C 19Cleveland Tornado, Wind, Blizzard -0.13 1.00 E 172Colorado Springs Wind, Blizzard -0.43 0.07 1.00 M 29Sacramento Earthquake, Flood -0.52 -0.51 -0.02 1.00 P 18Tampa Hurricane, Tornado, Wind 0.80 -0.12 -0.33 -0.59 1.00 E 25Phoenix Wind, Flood 0.44 0.45 -0.56 -0.54 0.64 1.00 M/P 17

Note: Risk Management's J oe Platko, former geophysicist, compiled county-level data for variousperils to estimate number of lost work days at our major locations over a 20-year horizon. Hisestimates suggest we should expect to lose about five work days per year across these six locations.

Implications: 1.) Despite adverse labor laws, we should maintain a permanent presence in Sacramento.2.) We should avoid placing overlapping services in Tampa and Austin.3.) With exception of Cleveland, our major cities represent attractive markets for recruiting.

Maintain Locations of Our Major Regional Cities

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Liquidity Risk

What Happened on 9/11?

Exchange Closed until 9/17

Our Fixed Income Custodian was Down

Our cash needs average $40M per day

Pre 9/11 Sources of Cash

Lockbox (ACH)Fixed Income

Custodian

Lockbox (ACH)Fixed Income

CustodianEquity Custodian

Local Emergency Facility

Post 9/11 Sources of Cash

Equity Custodian

Additional Source of Cash Helps Protect Against:•Payment System Interruption•Interruption in Trade Settlement Process (Investments)•Lack of access to daily cash receipts but daily distributions can be made without interruption.

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As of April 15, 2004 Excludes Real Estate

Name of Company S&P RatingFixed Income

exposure ($ mm) ****Equities

exposure ($ mm) Business exposureReplacement costs

or Exposure ($ mm)*Switching

costs (range)**Level of

substitution*** Notes/Recommendation

Telecom/IT:

Company #1 BBB+ none $ 1.3 mm Mainframe software Database

$ 15 mm High Medium This software is used to schedule and control our mainframe environment. Company was recently put on negative outlook by S&P. The IT dept has included this company as one of 4 vendors in its Pilot Vendor Management Program. Company #2 is one of the altern

Company #2 A+ none $ 26 mm Mainframe Severe High None New application development currently underway. The mainframe is also strategic platform to manage our data, now and in the future. There are no plans to change vendors. PGR intends to re-negotiate and extend its Enterprise Contract that expires 11/2003 a

Company #3 A- none $ 13.1 mm PC Hardware Servers

Marginal Low High Standardized servers and hardware is readily available. Switching to other standard products is available and relatively easy. Company #3 was upgraded by S&P from BBB+ to A- on 10/17/02.

Company #4 BBB+ none $ 5 mm Cellular / Network $ 5 mm Low High Switching cellular carriers is relatively low in cost. Company #4 also serves as major voice/data network provider at Progressive.

Service Providers:Company #5 AA- $ 156.1 mm $ 41.2 mm Lockboxes / ACH Marginal Low High This bank collects 50% of all cash receipts. 30% (ACHs) can be switched

immediately 20% (Lockboxes) and would incur marginal switching costs.

Company #6 A+ $ 88.3 mm $ 8.5 mm Cash Receipts via Credit cards

Marginal Low High PGR has signed a 3-year, $XX mm deal with this Company for Merchant Services. This company is also a service provider for another company we use for credit card processing company. While we do not have direct exposure from Company #6, we have real exposur

Company #7 BBB+ $ 35.7 mm none Rental Car $ 6 mm Low Low Company #7 provides rental car service to PGR's Claims service centers. Company #7 is the only vendor providing this service at this time. Alternate rental car companies are available but not on a national basis.

Changes in BOLD* In some cases the exposure may not be in excess of $ 10 mm, however the vendor provides an important service and the annual expenses exceed $ 10 mm. ** Switching Costs: Low (Below $ 5 mm) Medium (Between $ 5 & $ 10 mm) High (Above $ 10 mm) are the 3 options defining the dollar value in terms of switching vendors.*** Level of substitution: Low-Medium-High defines the state of competition for the vendor and the availability of other vendors in the market.

Mapping Portfolio Credit Risk with Business Risks

•Note: values illustrated are for presentation purposes only

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What has Risk Management Done for Us?

• Produces a systematic listing of issues and events and prioritizes risks

• Evaluates existing controls in management system to mitigate high priority risks

• Identifies business risks and assesses their potential impact and likelihood of occurrence

• Used as an essential element to identify future need for capital or excess capital position.

• Eliminates excess credit exposure to any one company when combine business risks with investment portfolio risks.

• Assists with Regulatory and Rating Agency discussions and disclosures

• Provides basis for formalizing risk management tools: Accept, Prevent, Hedge, Diversify, Transfer