Progressive Universal Insurance Company

Report of the Examination of Progressive Universal Insurance Company Mayfield Village, Ohio As of December 31, 2007 TABLE OF CONTENTS Page I. INTRODUCTION .................................................................................................................. 2 II. HISTORY AND PLAN OF OPERATION .............................................................................. 4 III. MANAGEMENT AND CONTROL ........................................................................................ 6 IV. AFFILIATED COMPANIES .................................................................................................. 8 V. REINSURANCE ................................................................................................................. 12 VI. FINANCIAL DATA .............................................................................................................. 13 VII. SUMMARY OF EXAMINATION RESULTS ....................................................................... 23 VIII. CONCLUSION.................................................................................................................... 24 IX. SUMMARY OF COMMENTS AND RECOMMENDATIONS.............................................. 26 X. ACKNOWLEDGMENT ....................................................................................................... 27 State of Wisconsin / OFFICE OF THE COMMISSIONER OF INSURANCE Jim Doyle, Governor Sean Dilweg, Commissioner Wisconsin.gov February 12, 2009 125 South Webster Street • P.O. Box 7873 Madison, Wisconsin 53707-7873 Phone: (608) 266-3585 • Fax: (608) 266-9935 E-Mail: ociinformation@wisconsin.gov Web Address: oci.wi.gov Honorable Sean Dilweg Commissioner of Insurance State of Wisconsin 125 South Webster Street Madison, Wisconsin 53703 Honorable Alfred W. Gross Chair, Financial Condition (E) Committee, NAIC Commissioner of Insurance Commonwealth of Virginia 1300 East Main Street Richmond, Virginia 23219 Honorable Merle D. Scheiber Secretary, Midwestern Zone, NAIC Director of Insurance State of South Dakota 445 East Capitol Avenue Pierre, South Dakota 57501-3185 Honorable Morris J. Chavez Secretary, Western Zone, NAIC Superintendent of Insurance State of New Mexico 1120 Paseo de Paralta Santa Fe, New Mexico 87504 Honorable James J. Donelon Secretary, Southeastern Zone, NAIC Commissioner of Insurance State of Louisiana 1702 North 3rd Street Baton Rouge, Louisiana 70802 Commissioners: In accordance with the instructions of the Wisconsin Commissioner of Insurance, a compliance examination has been made of the affairs and financial condition of: PROGRESSIVE UNIVERSAL INSURANCE COMPANY Mayfield Village, Ohio and this report is respectfully submitted. I. INTRODUCTION The previous examination of Progressive Universal Insurance Company (the company or PUIC) was conducted by the State of Illinois in 2003 as of December 31, 2002. The current examination covered the intervening period ending December 31, 2007, and included a review of such 2008 transactions as deemed necessary to complete the examination. The examination was conducted in accordance with the NAIC Financial Condition Examiners Handbook, which sets forth guidance for planning and performing an examination to evaluate the financial condition and identify prospective risks of an insurer. This approach includes the obtaining of information about the company including corporate governance, the identification and assessment of inherent risks within the company, and the evaluation of system controls and procedures used by the company to mitigate those risks. The examination also included an assessment of the principles used and significant estimates made by management, as well as an evaluation of the overall financial statement presentation and management’s compliance with statutory accounting principles, annual statement instructions, and Wisconsin laws and regulations. The examination consisted of a review of all major phases of the company's operations and included the following areas: History Management and Control Corporate Records Conflict of Interest Fidelity Bonds and Other Insurance Employees' Welfare and Pension Plans Territory and Plan of Operations Affiliated Companies Growth of Company Reinsurance Financial Statements Accounts and Records Data Processing The examinations of Progressive Casualty Insurance Company and affiliates were conducted concurrently with the examination of the company. The examiners from the Ohio Department of Insurance acted in the capacity as the lead state for the coordinated exams. 2 Emphasis was placed on the audit of those areas of the company's operations accorded a high priority by the examiner-in-charge when planning the examination. The company is annually audited by an independent public accounting firm as prescribed by s. Ins 50.05, Wis. Adm. Code. An integral part of this compliance examination was the review of the independent accountant's work papers. Based on the results of the review of these work papers, alternative or additional examination steps deemed necessary for the completion of this examination were performed. The examination work papers contain documentation with respect to the alternative or additional examination steps performed during the course of the examination. Actuarial Review by the Ohio Insurance Department The company is a participant in a comprehensive reinsurance pooling agreement with Progressive Direct Insurance Company and certain of its property and casualty affiliates. In consequence, the company’s net loss and loss adjustment expense reserves are the product of the reserves of the Progressive insurance companies’ reinsurance pool and the company’s participation percentage in the pool. An actuary on the staff of the Ohio Department of Insurance reviewed the adequacy of the company’s loss reserves and loss adjustment expense reserves, as a function of its participation in the pool. The results of her work were reported to the examiner-in-charge. As deemed appropriate, reference is made in this report to the actuary’s conclusion. 3 II. HISTORY AND PLAN OF OPERATION The company was incorporated under Illinois law as Progressive Universal Insurance Company of Illinois on September 13, 1992, and commenced business on July 8, 1993. Ownership of the company was transferred to Progressive Direct Holdings, Inc., on January 1, 2004. Effective November 19, 2003, the company was redomesticated to Ohio from Illinois. Effective December 21, 2004, PUIC was redomesticated to Wisconsin from Ohio. In 2007, the company wrote direct premium in the following states: Oregon Wisconsin Virginia Iowa North Carolina Wyoming Nebraska Illinois Total $ 71,528,564 50,551,695 49,606,276 35,308,490 25,302,116 11,760,362 8,184,371 2,567,815 $254,809,689 28.1% 19.8 19.5 13.9 9.9 4.6 3.2 1.0 100.0% The company is licensed in Hawaii, Illinois, Iowa, Maine, Nebraska, North Carolina, Ohio, Oregon, Virginia, Wisconsin and Wyoming. PUIC has no employees. All operations are conducted by employees of Progressive Direct Insurance Company and other Progressive subsidiaries in accordance with their business practices and internal controls. Virtually all expenses are initially paid by Progressive Direct Insurance Company. Expenses other than commissions, taxes, licenses and fees are then allocated on the basis of specific identification, utilization estimates developed from such criteria as premium or claim volume, and time studies, in accordance with the Progressive reinsurance pooling agreement. Tax allocations are established in accordance with a written federal income tax allocation agreement. Intercompany balances with affiliates are created in the ordinary course of business, with settlements made on a quarterly basis. Written agreements with affiliates are further described in the section of this report titled “Affiliated Companies.” The company conducts its operations jointly with its affiliates from Progressive Direct Insurance Company’s home office in Mayfield Village, Ohio. Additional support services are provided by Progressive Direct Insurance Company’s personnel in a network of call centers and claim administration offices in over 450 locations throughout the United States. 4 The following table is a summary of the net insurance premiums written by the company in 2007. The growth of the company is discussed in the “Financial Data” section of this report. Direct Premium Reinsurance Assumed Reinsurance Ceded Net Premium Line of Business Homeowner’s multiple peril Inland marine Other liability – occurrence Other liability – claims made Private passenger auto liability Commercial auto liability Auto physical damage Total All Lines $ 2,291,628 1,308,604 775,830 $ 91,090 1,105,492 469,129 10,000 $ 2,291,628 1,308,604 775,830 $ 91,090 1,105,492 469,129 10,000 152,636,582 124,926 97,672,119 $254,809,689 86,955,047 544,927 53,205,013 $142,380,698 152,636,582 124,926 97,672,119 $254,809,689 86,955,047 544,927 53,205,013 $142,380,698 The company participates in a pooling reinsurance agreement with its property-casualty affiliates (Direct Pool). The Direct Pool consists of eight insurance companies that primarily write their business through the direct (1-800-PROGRESSIVE and Internet) channel. The Direct Pool writes private passenger automobile insurance and other specialty insurance coverages and related services in the United States. In addition, the Direct Pool writes some business that is generated by independent insurance agencies (Agency channel) which will move to an Agency channel company over time. The Direct Pool also writes commercial automobile business through both the Agency channel and Direct channel that consists primarily of liability and physical damage insurance for automobiles and trucks owned by small businesses, with the majority of customers insuring three or fewer vehicles. The reinsurance pooling agreement is further described in the section of this report titled “Reinsurance.” 5 III. MANAGEMENT AND CONTROL Board of Directors The board of directors consists of five members. All directors are elected annually to serve a one-year term. The directors receive no compensation for their service on the board. All directors are employees of other Progressive companies. Members of the board may also be members of other boards of directors in the holding company system controlled by The Progressive Corporation. Currently the board of directors consists of the following persons: Name and Residence James Haas Cleveland Hts., Ohio Alexander Ho Solon, Ohio Christine Johnson Chesterland, Ohio Caroline Koran Bay Village, Ohio Scott Ziegler Richmond, Virginia Principal Occupation Direct Product Development Leader Term Expires 2009 Marketing Process Manager 2009 Customer Contact/Retention Manager 2009 HR Business Leader 2009 National Product Management Leader 2009 Officers of the Company The officers serving at the time of this examination are as follows: 2007 Compensation* $5,479 3,100 3,096 659 1,209 3,682 1,752 3,348 1,773 Name Scott Ziegler Michael Uth Jeffrey Briglia Karen Kosuda Scott Coleman James Haas Mariann Marshall Alexander Ho Raymond Ling Office President Secretary Treasurer Assistant Secretary Assistant Treasurer Vice President Vice President Vice President Assistant Vice President * Total 2007 compensation for all officers is allocated to each company based on net written premium. 6 Committees of the Board The company's bylaws allow for the formation of certain committees by the board of directors. The committees at the time of the examination are listed below: Executive Committee Scott Ziegler, Chair Caroline Koran Christine Johnson Investment Committee Scott Ziegler, Chair Caroline Koran Christine Johnson 7 IV. AFFILIATED COMPANIES PUIC is a member of a holding company system. Its ultimate parent is The Progressive Corporation. The abbreviated organizational chart below depicts the relationships among the affiliates in the direct succession of control of the company. A brief description of the significant affiliates follows the organizational chart. Organizational Chart As of December 31, 2007 The Progressive Corporation (OH) Progressive Direct Holdings, Inc. (DE) Progressive Freedom Insurance Company (NJ) Progressive Choice Insurance Company (OH) Midland Financial Group, Inc. (OH) Progressive Max Insurance Company (OH) Progressive Specialty Insurance Agency (OH) Mountain Laurel Assurance Company (OH) Progressive Direct Resource Services Company (OH) Progressive Paloverde Insurance Company (IN) Progressive Auto Pro Insurance Agency, Inc. (FL) Progressive Marathon Insurance Company (MI) Progressive Select Insurance Company (FL) Progressive Premier Ins Company of IL (OH) Progressive Direct Insurance Company (OH) Progressive Garden State Insurance Company (NJ) Progressive Universal Insurance Company (WI) The Progressive Corporation The Progressive Corporation is an Ohio-domiciled insurance holding company formed in 1965. The predecessor organization commenced business in 1937. The Progressive Corporation became publicly traded after an initial public offering in 1971, and its common stock is 8 currently listed on the New York Stock Exchange. As of December 31, 2007, the audited financial statements of The Progressive Corporation reported assets of $18.8 billion, liabilities of $13.9 billion, and stockholder equity of $4.9 billion. Operations for 2007 produced net income of $1.2 billion on total revenues of $14.7 billion. Progressive Direct Holdings, Inc. Progressive Direct Holdings, Inc., is a Delaware-domiciled insurance holding company formed in 2003 and owned by The Progressive Corporation. The company has virtually no expenses and revenue is solely from dividends from its subsidiaries and any gain/loss on the investments in subsidiaries. As of December 31, 2007, the unaudited financial statements of Progressive Direct Holdings, Inc., reported assets of $1.33 billion, liabilities of $17.7 million, and equity of $1.31 billion. Net income for 2007 was $317 million on total revenues of $317 million. Progressive Direct Insurance Company Progressive Direct Insurance Company, a property casualty insurer domiciled in Ohio, provides administrative services through affiliated agreements discussed below. As of December 31, 2007, the audited financial statements of Progressive Direct Insurance Company reported assets of $2.8 billion, liabilities of $2.0 billion, and policyholders’ surplus of $862 million. Operations for 2007 produced net income of $194 million on premium earned of $2.7 billion. Agreements with Affiliates In addition to common staffing and management control, various written agreements affect PUIC’s relationship to its affiliates. The pooling agreement is described in the reinsurance section of the report. A brief summary of the other agreements follows: 1. Type: Parties: Effective: Terms: Consolidated Tax Allocation Agreement PUIC along with other members of the Progressive holding company system August 1, 2005 The agreement establishes that an estimated consolidated tax liability will be computed quarterly for The Progressive Corporation, with each member company’s recoverable or payable equal to the amount that the member company would have reported on a nonconsolidated basis. Settlements are to be made within ninety (90) days of each quarter in which The Progressive Corporation is required to make a federal income tax estimated payment. 9 2. Type: Parties: Cash Management Agreement PUIC, Progressive Casualty Insurance Company (Casualty) and other Progressive affiliates January 1, 1998 All cash receipts or disbursements attributable to PUIC and the other affiliates named in the agreement are deposited in or withdrawn from a centralized account (Cashier Account) that is managed by Casualty. Pursuant to the terms of the agreement, PUIC has a balance in this account that reflects its claim against or obligation to the Cashier Account. Casualty provides the company with monthly statements that show the month-end balances. Account balances are considered loans and interest is payable or receivable to the company’s account depending on the balance. The provisions of an Interest Agreement to which PUIC is a party govern the rate of interest. Each participant to the agreement receives a quarter-end balance that represents a net amount against any other intercompany transaction. Settlements are to be in cash or readily marketable securities valued at market value. Interest Agreement PUIC, Progressive Casualty Insurance Company and other Progressive affiliates November 12, 1992 This agreement establishes the variable interest rate that governs each entity’s participation in Casualty’s Cashier Account as noted in the Cash Management Agreement in #2 above. Interest is to be computed at the prevailing 90-day U.S. Treasury bill rate on the last day of each month rounded to the nearest quarter of a percent. Investment Services Agreement PUIC along with other participating affiliates and Progressive Capital Management Corp. (Progressive Capital). Progressive Capital was formerly known as PPLP Corporation, then Progressive Partners, Inc., until it changed its name to that currently used on June 8, 1998. November 2, 1992 Progressive Capital provides investment management services to members of the Progressive holding company system named in the agreement. The agreement requires each of the participating companies to reimburse Progressive Capital for an equitable portion of the costs and expenses it incurs in providing its services. Progressive Capital does not charge any additional management fees to the participating companies. Licensing Agreement PUIC, Progressive Casualty Insurance Company and other Progressive affiliates May 1, 2002 Effective: Terms: 3. Type: Parties: Effective: Terms: 4. Type: Parties: Effective: Terms: 5. Type: Parties: Effective: 10 Terms: Casualty grants its affiliates the right to use Casualty’s various proprietary marks. Joint Servicing (Cost Allocation) Agreement PUIC and Progressive Direct Insurance Company (Direct) July 1, 2007 The company provides Direct with underwriting and loss adjustment services for specific business produced, and Direct provides the company with similar services for other specific business provided. In exchange for these services, the companies charge management fees based on each company’s use of the other’s services. General Agency Agreement PUIC and Progressive Specialty Insurance Agency, Inc., (Agency) and other Progressive affiliates December 1, 2006 Agency will act as participating companies’ respective general agent in the states of California, Kentucky, Louisiana, Washington and other such states as the parties may agree upon. 6. Type: Parties: Effective: Terms: 7. Type: Parties: Effective: Terms: 11 V. REINSURANCE Effective December 27, 2003, and last amended March 1, 2006, the company and seven of its property-casualty affiliates (Direct Pool) participate in a pooling reinsurance agreement under which 100% of the underwriting business of each member company, net of external reinsurance, is ceded to Progressive Direct Insurance Company, the Direct Pool manager and a Direct Pool participant. The combined premiums, losses, and expenses are then retroceded to each Direct Pool member based on predetermined pooling percentages. The pooling percentages are as follows: Participation: Progressive Direct Insurance Company Progressive Marathon Insurance Company Progressive Max Insurance Company Progressive Advanced Insurance Company Progressive Universal Insurance Company Progressive Premier Insurance Company of Illinois Progressive Paloverde Insurance Company Mountain Laurel Assurance Company Total 77.5% 6.0 6.0 4.0 4.0 2.0 0.5 0.0 100.0% 12 VI. FINANCIAL DATA The following financial statements reflect the financial condition of the company as reported to the Commissioner of Insurance in the December 31, 2007, annual statement. Also included in this section are schedules that reflect the growth of the company, NAIC Insurance Regulatory Information System (IRIS) ratio results for the period under examination, and the compulsory and security surplus calculation. Adjustments made as a result of the examination are noted at the end of this section in the area captioned "Reconciliation of Surplus per Examination." 13 Progressive Universal Insurance Company Assets As of December 31, 2007 Net Admitted Assets $ 86,985,781 1,473,951 Assets Bonds Investment income due and accrued Premiums and considerations: Uncollected premiums and agents’ balances in course of collection Deferred premiums, agents' balances, and installments booked but deferred and not yet due Reinsurance: Amounts recoverable from reinsurers Net deferred tax asset Receivable from parent, subsidiaries, and affiliates Write-ins for other than invested assets: State unearned surcharge recoverable Miscellaneous other assets Prepaid expenses Total Assets $ 86,985,781 1,473,951 Nonadmitted Assets $ 7,889,450 2,057,651 5,831,799 37,315,378 5,304,500 5,215,469 7,150,667 37,315,378 5,304,500 4,614,055 7,150,667 601,414 177,633 108,464 42,582 $151,663,875 177,633 108,464 42,582 $2,810,111 $148,853,764 14 Progressive Universal Insurance Company Liabilities, Surplus, and Other Funds As of December 31, 2007 Losses Reinsurance payable on paid loss and loss adjustment expenses Loss adjustment expenses Commissions payable, contingent commissions, and other similar charges Other expenses (excluding taxes, licenses, and fees) Taxes, licenses, and fees (excluding federal and foreign income taxes) Current federal and foreign income taxes Unearned premiums Advance premium Ceded reinsurance premiums payable (net of ceding commissions) Amounts withheld or retained by company for account of others Drafts outstanding Write-ins for liabilities: Miscellaneous other liabilities State plan liability Escheatable property Total liabilities Common capital stock Gross paid in and contributed surplus Unassigned funds (surplus) Surplus as regards policyholders Total Liabilities and Surplus $ 2,502,500 37,649,368 5,688,340 45,840,208 $148,853,764 $ 40,379,112 936,212 10,043,194 8,583 1,517,742 1,283,178 692,232 37,495,942 1,203,690 (1,139,459) 111,829 10,080,029 377,909 23,279 84 103,013,556 15 Progressive Universal Insurance Company Summary of Operations For the Year 2007 Underwriting Income Premiums earned Deductions: Losses incurred Loss expenses incurred Other underwriting expenses incurred Total underwriting deductions Net underwriting gain (loss) Investment Income Net investment income earned Net realized capital gains (losses) Net investment gain (loss) Other Income Net gain (loss) from agents or premium balances charged off Finance and service charges not included in premiums Write-ins for miscellaneous income: Interest income on intercompany balances Miscellaneous other expense Total other income Net income (loss) after dividends to policyholders but before federal and foreign income taxes Federal and foreign income taxes incurred Net Income $ $141,200,873 $83,802,434 17,780,764 30,014,829 131,598,027 9,602,846 3,646,929 339,988 3,986,917 (4,229,769) 3,887,522 954,425 (593) 611,585 14,201,348 4,739,755 9,461,593 16 Progressive Universal Insurance Company Cash Flow For the Year 2007 Premiums collected net of reinsurance Net investment income Miscellaneous income Total Benefit- and loss-related payments Commissions, expenses paid, and aggregate write-ins for deductions Federal and foreign income taxes paid (recovered) Total deductions Net cash from operations Proceeds from investments sold, matured, or repaid: Bonds Net gains (losses) on cash, cash equivalents, and short-term investments Total investment proceeds Cost of investments acquired (long-term only): Bonds Net cash from investments Cash from financing and miscellaneous sources: Capital and paid in surplus less treasury stock Dividends to stockholders Other cash provided (applied) Net cash from financing and miscellaneous sources Reconciliation: Net change in cash, cash equivalents, and short-term investments Cash, cash equivalents, and short-term investments: Beginning of year End of Year $145,676,265 4,613,546 397,098 150,686,909 $ 79,476,998 46,839,491 4,336,575 130,653,064 20,033,845 $100,284,806 (38) 100,284,768 115,664,009 (15,379,241) 2,284,202 12,000,000 5,061,194 (4,654,604) - $ - 17 Progressive Universal Insurance Company Compulsory and Security Surplus Calculation December 31, 2007 Assets Less liabilities Adjusted surplus Annual premium: Lines other than accident and health Factor Compulsory surplus (subject to a minimum of $2 million) Compulsory Surplus Excess (or Deficit) $148,853,764 103,013,556 45,840,208 $142,380,698 20% 28,476,139 $ 17,364,069 Adjusted surplus (from above) Security surplus: (140% of compulsory surplus, factor reduced 1% for each $33 million in premium written in excess of $10 million, with a minimum factor of 110%) Security Surplus Excess (or Deficit) $ 45,840,208 38,727,549 $ 7,112,659 18 Progressive Universal Insurance Company Reconciliation and Analysis of Surplus For the Five-Year Period Ending December 31, 2007 The following schedule is a reconciliation of total surplus during the period under examination as reported by the company in its filed annual statements: 2007 Surplus, beginning of year Net income Change in net deferred income tax Change in nonadmitted assets Capital changes: Paid in Surplus adjustments: Paid in Dividends to stockholders Write-ins for gains and (losses) in surplus: Surplus adjustment to comply with state licensing requirement Surplus, End of Year 2006 2005 2004 2003 $ 45,439,198 9,461,593 168,933 486,282 $36,781,339 11,319,729 569,269 (598,805) $ 47,026,509 8,545,268 653,249 (1,443,687) $18,434,307 6,192,318 3,453,084 (953,200) $ 5,559,498 361,518 233,315 (220,024) 1,102,500 2,284,202 (12,000,000) 2,367,666 (5,000,000) (18,000,000) 19,900,000 10,097,500 1,300,000 $45,840,208 $45,439,198 $36,781,339 $47,026,509 $18,434,307 19 Progressive Universal Insurance Company Insurance Regulatory Information System For the Five-Year Period Ending December 31, 2007 The company’s NAIC Insurance Regulatory Information System (IRIS) results for the period under examination are summarized below. Unusual IRIS results are denoted with asterisks and discussed below the table. Ratio #1 #2 #3 #4 #5 #6 #7 #8 #9 #10 #11 #12 #13 Gross Premium to Surplus Net Premium to Surplus Change in Net Premiums Written Surplus Aid to Surplus Two-Year Overall Operating Ratio Investment Yield Gross Change in Surplus Net Change in Adjusted Surplus (established in 2005) Liabilities to Liquid Assets Agents’ Balances to Surplus One-Year Reserve Development to Surplus Two-Year Reserve Development to Surplus Estimated Current Reserve Deficiency to Surplus 2007 866% 311* 5 0 88 4.6 1 (4) 74 13 0 (6) (9) 2006 843% 298 14 0 86 4.2 24 17 76 14 (6) (7) (6) 2005 710% 323* (20) 0 86 3.8 (22)* (22)* 74 0 (5) (5) (47) 2004 617% 315* 999* 0 83 3.2* 168* 57 4 (1) (5) (31) 2003 395% 40 244* 0 78 2.2* 229* 16 4 1 (1) 0 Ratio No. 2 measures underwriting risk in terms of premium volume, net of the effects of premiums ceded to reinsurers, as compared to policyholders’ surplus. The exceptional results for 2004, 2005 and 2007 were because the company targets a 3.1 to 1 writings to surplus ratio. The Wisconsin Office of the Commissioner of Insurance has not objected to this higher than normal writings ratio due in part to the company’s historically strong operating results and the holding company’s demonstrated ability to provide capital necessary to maintain the target writings ratio. Ratio No. 3 reflects the percentage change in net premiums written from the prior year. The exceptional results in 2003 and 2004 were a result of the company entering into a 100% reinsurance pooling agreement, as discussed in the “Reinsurance” section of the report. Ratio No. 6 evaluates the yield on investments that an insurer recognizes during an operating year as investment income and realized gains compared to annual average cash and total invested assets. The exceptional results in 2003 and 2004 were due to the company paying 20 dividends to its parent late in the year which reduced the average invested assets. In addition, the company’s investment in municipal bonds negatively affected the calculated yield. The tax equivalent investment yields were 4.1% in 2003 and 3.0% in 2004. Ratios No. 7 and No. 8 measure the improvement or deterioration in the insurer’s financial condition during the year by comparing changes in the policyholders’ surplus from yearto-year. The exceptional result in 2005 was due to an $18 million dividend payment to the company’s parent in excess of net income. The exceptional results for 2004 and 2003 were due to capital contributions of $19.9 million from Progressive Direct Holdings, Inc., and $12.5 million from The Progressive Corporation in 2004 and 2003, respectively. Growth of Progressive Universal Insurance Company Surplus as Regards Policyholders $45,840,208 45,439,198 36,781,339 47,026,509 18,434,307 5,559,498 Loss and LAE Ratio 71.9% 68.1 70.1 67.5 66.2 66.0 Year 2007 2006 2005 2004 2003 2002 Admitted Assets $148,853,764 139,275,622 121,424,252 127,376,719 32,881,569 11,442,234 Gross Premium Written Net Premium Written $142,380,698 135,567,795 118,799,602 148,214,286 7,287,877 2,120,081 Liabilities $103,013,556 93,836,424 84,642,913 80,350,210 14,447,262 5,882,736 Net Income $ 9,461,593 11,319,729 8,545,268 6,192,318 361,518 281,497 Year 2007 2006 2005 2004 2003 2002 Premium Earned $141,200,873 132,627,353 118,004,803 117,903,875 5,976,157 1,465,816 Expense Ratio 20.7% 19.7 20.3 17.6 19.4 18.7 Combined Ratio 92.6% 87.8 90.4 85.1 85.6 84.7 $397,190,387 382,942,541 261,026,789 290,355,874 72,904,761 21,205,261 For the past few years, the overall personal lines market has been in a soft market cycle which has constrained growth. From 2003 to 2007, rates have generally moved downwards. In late 2007 and through 2008, rates have been rising across all books of business in personal lines. These rate increases have been in response to rising loss costs. These rate changes have generally been less than 5% during this period. There have been no significant changes in 21 underwriting standards during 2003 through 2007. The company primarily writes personal lines business through the direct channel. In 2005, the company began writing specialty private passenger automobile insurance which consists of motorcycles and other recreational vehicle products through the Wisconsin direct channel. In 2007, additional coverages were added for recreational vehicles as well as offering an insurance product for golf carts. In 2008, the Progressive Insurance Group rolled out its new Internet product, Name Your Price, which allows customers to build a policy package based on how much they wish to pay. Reconciliation of Surplus per Examination No adjustments were made to surplus as a result of the examination. The amount of surplus reported by the company as of December 31, 2007, is accepted. 22 VII. SUMMARY OF EXAMINATION RESULTS Compliance with Prior Examination Report Recommendations The previous examination of Progressive Universal Insurance Company conducted by the State of Illinois resulted in no recommendations and no adjustments to surplus. Summary of Current Examination Results The current examination resulted in no adverse comments or recommendations. 23 VIII. CONCLUSION The company was incorporated under Illinois law by Progressive Northern Insurance Company on September 13, 1992, and commenced business on July 8, 1993. Ownership of the company was transferred to Progressive Direct Holdings, Inc., on January 1, 2004. Effective November 19, 2003, the company was redomesticated to Ohio from Illinois. Effective December 21, 2004, PUIC was redomesticated to Wisconsin from Ohio. PUIC has no employees. All operations are conducted by employees of Progressive Direct Insurance Company and other Progressive subsidiaries in accordance with their business practices and internal controls. Virtually all expenses are initially paid by Progressive Direct Insurance Company. Expenses other than commissions, taxes, licenses and fees are then allocated on the basis of specific identification, utilization estimates developed from such criteria as premium or claim volume, and time studies, in accordance with the Progressive reinsurance pooling agreement. Tax allocations are established in accordance with a written federal income tax allocation agreement. The company participates in a pooling reinsurance agreement with its property-casualty affiliates (Direct Pool). The Direct Pool consists of eight insurance companies that primarily write their business through the direct (1-800-PROGRESSIVE and Internet) channel. The Direct Pool writes private passenger automobile insurance and other specialty insurance coverages and related services in the United States. In addition, the Direct Pool writes some business that is generated by independent insurance agencies (Agency channel) which will move to an Agency channel company over time. The Direct Pool also writes commercial automobile business through both the Agency channel and Direct channel that consists primarily of liability and physical damage insurance for automobiles and trucks owned by small businesses, with the majority of customers insuring three or fewer vehicles. The previous examination of Progressive Universal Insurance Company conducted by the State of Illinois resulted in no recommendations and no adjustments to surplus. The current examination resulted in no adverse comments or recommendations. No adjustments 24 were made to surplus as a result of the examination. The amount of surplus reported by the company as of December 31, 2007, is accepted. 25 IX. SUMMARY OF COMMENTS AND RECOMMENDATIONS The current examination resulted in no adverse comments or recommendations. 26 X. ACKNOWLEDGMENT The courtesy and cooperation extended during the course of the examination by the officers and employees of the company are acknowledged. In addition to the undersigned, the following representatives of the Office of the Commissioner of Insurance, State of Wisconsin, participated in the examination: Name David Jensen Title Financial Insurance Examiner Respectfully submitted, Rick Anderson Examiner-in-Charge 27