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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington D.C. 20549

SCHEDULE 14A

(Rule 14a-101)

INFORMATION REQUIRED IN PROXY STATEMENT

SCHEDULE 14A INFORMATION

Proxy Statement Pursuant to Section 14(a) of the

Securities Exchange Act of 1934

(Amendment No.    )

 

Filed by the Registrant    x

 

Filed by a Party other than the Registrant    ¨

 

Check the appropriate box:

 

¨	Preliminary Proxy Statement

 

¨	Confidential, for Use of the Commission Only (as permitted by Rule 14a-6(e)(2))

 

x	Definitive Proxy Statement

 

¨	Definitive Additional Materials

 

¨	Soliciting Material Pursuant to §240.14a-12

THE PROGRESSIVE CORPORATION

(Name of Registrant as Specified in its Charter)

 

 

(Name of Person(s) Filing Proxy Statement, if other than the Registrant)

Payment of Filing Fee (Check the appropriate box):

 

x		No fee required.
¨		Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
		(1)        Title of each class of securities to which transaction applies:
		(2)        Aggregate number of securities to which transaction applies:
		(3)        Per unit price or other underlying value of transaction computed pursuant to Exchange Act Rule 0-11 (set forth the amount on which the filing fee is calculated and state how it was determined):
		(4)        Proposed maximum aggregate value of transaction:
		(5)        Total fee paid:
¨		Fee paid previously with preliminary materials:
¨		Check box if any part of the fee is offset as provided by Exchange Act Rule 0-11(a)(2) and identify the filing for which the offsetting fee was paid previously. Identify the previous filing by registration statement number, or the Form or Schedule and the date of its filing.
		(1)        Amount Previously Paid:
		(2)        Form, Schedule or Registration Statement No.:
		(3)        Filing Party:
		(4)        Date Filed:

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NOTICE OF ANNUAL MEETING OF SHAREHOLDERS

The Progressive Corporation will hold its Annual Meeting of Shareholders on Friday, May 16, 2014, at 10:00 a.m., local time, at Studio 96, 6671 Beta Drive, Mayfield Village, Ohio. At the Annual Meeting, shareholders will be asked to:

 

1.

Elect as directors the seven nominees identified in the attached Proxy Statement, each to serve for a term of one year;

 

2.

Cast an advisory vote to approve our executive compensation program;

 

3.

Ratify the appointment of PricewaterhouseCoopers LLP as our independent registered public accounting firm for 2014; and

 

4.

Transact such other business as may properly come before the meeting.

The foregoing items of business are described more fully in the Proxy Statement accompanying this Notice. Only shareholders of record of The Progressive Corporation (NYSE:PGR) at the close of business on March 18, 2014, are entitled to receive notice of and to vote at the meeting or any adjournment or postponement of the meeting.

Your vote is important. Whether or not you plan to be present at the meeting, please vote by Internet or telephone (following the instructions on the enclosed proxy card), or by completing and returning the proxy card in the enclosed postage-paid envelope. If you later choose to revoke your proxy, you may do so before voting occurs at the Annual Meeting by following the procedures described in the “Questions and Answers about the Annual Meeting and Voting” section in the attached Proxy Statement.

By Order of the Board of Directors.

Charles E. Jarrett, Secretary

March 21, 2014

The Proxy Statement and the 2013 Annual Report to Shareholders

are also available at progressiveproxy.com.

 

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The Progressive Corporation

Proxy Statement

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General Information Regarding Proxy Materials and the Annual Meeting of Shareholders			1
Questions and Answers about the Annual Meeting and Voting			1
Item 1: Election of Directors			5
Nominees for Election at the Annual Meeting			7
Directors Whose Terms will Continue after the Annual Meeting			9
Other Board of Directors Information			10
Board of Directors Independence Determinations			10
Leadership Structure			10
Risk Oversight			11
Meetings of the Board of Directors and Attendance			12
Meetings of the Non-Management and Independent Directors			12
Board Committees			12
Executive Committee			13
Audit Committee			13
Compensation Committee			14
Investment and Capital Committee			14
Nominating and Governance Committee			14
Communications with the Board of Directors			16
Certain Relationships and Related Transactions			16
Compensation Committee Interlocks and Insider Participation			17
Report of the Audit Committee			18
Security Ownership of Certain Beneficial Owners and Management			19
Security Ownership of Certain Beneficial Owners			19
Security Ownership of Directors and Executive Officers			20
Section 16(a) Beneficial Ownership Reporting Compliance			21
Compensation Discussion and Analysis			22
Highlights for 2013			22
Our Executive Compensation Program			23
Elements of Compensation – Annual Decisions and Awards			24
Salaries			24
Annual Cash Bonuses			24
Equity Awards			27
Additional Comments Regarding 2013 Compensation Decisions			29
Other Elements of Compensation			30
Procedures and Policies			34
Related Considerations			37
Compensation Committee Report			38
Compensation Programs and Risk Management			39
Executive Compensation			40
Summary Compensation Table			40
Grants of Plan-Based Awards			42
Narrative Disclosure to Summary Compensation Table and Grants of Plan-Based Awards Table			43
Outstanding Equity Awards at Fiscal Year-End			48
Option Exercises and Stock Vested			50
Nonqualified Deferred Compensation			51
Potential Payments Upon Termination or Change in Control			53
Compensation of Directors			58
Narrative Disclosure to Director Compensation Table			58
Item 2: Advisory vote to approve our executive compensation program			60
Item  3: Proposal to ratify the appointment of PricewaterhouseCoopers LLP as our independent registered public accounting firm for 2014			61
Other Independent Registered Public Accounting Firm Information			61
Approval of Audit and Non-Audit Services			61
Independent Registered Public Accounting Firm Fees			61
Shareholder Proposals			62
Householding			62
Charitable Contributions			62
Other Matters			62
Available Information			63

 

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THE PROGRESSIVE CORPORATION

PROXY STATEMENT

GENERAL INFORMATION REGARDING PROXY MATERIALS AND THE ANNUAL MEETING OF SHAREHOLDERS

The Board of Directors of The Progressive Corporation (NYSE:PGR) provides this Proxy Statement to you to solicit your proxy to act upon the matters outlined in the accompanying Notice of Annual Meeting of Shareholders, each described in more detail below.

The Annual Meeting will take place on Friday, May 16, 2014, at 10:00 a.m., local time, at Studio 96, 6671 Beta Drive, Mayfield Village, Ohio 44143. Your proxy also may be voted at any adjournment or postponement of the meeting.

The form of proxy (proxy card), this Proxy Statement, and Progressive’s 2013 Annual Report to Shareholders are being mailed to shareholders beginning on or about March 28, 2014.

All proxies that are properly completed and submitted over the Internet or by telephone, and all properly executed written proxies, will be voted at the meeting in accordance with the directions given by the shareholder, unless the shareholder properly revokes his or her proxy before voting occurs at the meeting.

Only shareholders of record of The Progressive Corporation at the close of business on March 18, 2014, the record date, are entitled to receive notice of and to vote at the meeting or any adjournment or postponement thereof. Each shareholder on the record date is entitled to one vote for each of our common shares, $1.00 par value, held by such shareholder. On the record date, we had 594,286,063 common shares outstanding.

QUESTIONS AND ANSWERS ABOUT THE ANNUAL MEETING AND VOTING

Why did I receive these materials?

You received these materials because you were a shareholder of The Progressive Corporation on the record date. We hold a meeting of our shareholders annually. This year’s meeting will be held on Friday, May 16, 2014. At the meeting, shareholders will be asked to vote on several items of business. Since it is not practical or convenient for all shareholders to attend the meeting in person, our Board of Directors is seeking your proxy to vote on these matters.

What is a proxy?

A proxy is the legal authority that you give to another person to vote the shares you own at our Annual Meeting. The person you designate to vote your shares also is referred to as your proxy. If you designate someone as your proxy in a written document, that document sometimes is referred to as a proxy or proxy card. When you submit a proxy card or you submit your vote over the Internet or by phone, the person named as your proxy is required to vote your shares at the Annual Meeting in the manner you have instructed. By voting via proxy, each shareholder is able to ensure that his or her vote is counted without having to attend the Annual Meeting in person.

Who is soliciting my proxy?

This solicitation of proxies is made by and on behalf of our Board of Directors. The Board has approved the matters to be acted upon at the Annual Meeting (described in more detail below). The Board recommends that you vote FOR each director nominee named in this Proxy Statement and FOR each of the other proposals listed in the Notice of Annual Meeting of Shareholders. However, you control your vote, and the voting instructions that you provide will be followed.

What is the purpose of the Annual Meeting?

At the Annual Meeting, shareholders will act upon the matters listed in the Notice of Annual Meeting of Shareholders. Also, once the business of the Annual Meeting is concluded, management will be available to respond to appropriate questions from shareholders.

What is a proxy statement?

This document (excluding the 2013 Annual Report to Shareholders, which is attached as an appendix) is our Proxy Statement. A proxy statement is a document that Securities and Exchange Commission (SEC) regulations require us to

 

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give shareholders when we are soliciting shareholders’ proxies to vote their shares. This Proxy Statement and the Annual Report contain important information about The Progressive Corporation and its subsidiaries and affiliates, and about the matters that will be voted on at the Annual Meeting. Please read these materials carefully so that you have the information you need to make informed decisions.

Who is entitled to vote at the Annual Meeting?

Holders of our common shares at the close of business on March 18, 2014, the record date, are entitled to receive the Notice of Annual Meeting and Proxy Statement and to vote their shares at the Annual Meeting. As of the record date, we had 594,286,063 common shares outstanding and entitled to vote. Each share is entitled to one vote on each matter properly brought before the meeting.

What is the difference between a “shareholder of record” and a shareholder who holds shares in “street name?”

If you hold Progressive shares directly in your name with our transfer agent, American Stock Transfer & Trust Company, LLC, you are a “shareholder of record” (also known as a “registered shareholder”). The Notice of Annual Meeting, Proxy Statement, Annual Report to Shareholders, and proxy card have been sent directly to you by Progressive or our representative.

If you own your shares indirectly through a broker, bank, or other financial institution, your shares are said to be held in “street name.” Technically, your bank or broker is the one that votes those shares. In this case, the Notice of Annual Meeting, Proxy Statement, Annual Report to Shareholders, and a voting instruction form have been forwarded to you by your broker, bank, other financial institution, or their designated representative. Through this process, your bank or broker collects the voting instructions from all of its customers who hold Progressive shares and then submits those votes to us.

Under New York Stock Exchange (NYSE) rules, your broker will NOT be able to vote your shares with respect to the election of directors or the vote on our executive compensation program UNLESS you provide voting instructions to your broker (see the question “What are broker discretionary voting and broker non-votes?” below for more information). We strongly encourage you to complete and return your voting instruction form and exercise your right to vote.

What methods can I use to vote?

By Telephone or Internet.    All shareholders of record can vote via the Internet or by touch-tone telephone from the U.S. and Canada, following the directions set forth on the proxy card. Telephone and Internet voting for street-name holders is typically made available by brokers, banks, or other financial institutions. If applicable to you, voting instructions will be included in the materials you receive from them.

If you vote by telephone or on the Internet, you do not have to return your proxy card or voting instruction form.

By Mail.    All shareholders of record can vote using the enclosed proxy card. Please be sure to complete, sign, and date the proxy card and return it in the enclosed, prepaid envelope. If you are a street-name holder, you will receive a voting form and instructions from your bank or broker.

In Person.    All shareholders of record may vote in person at the Annual Meeting. Street-name holders may vote in person at the Annual Meeting only if they bring a legal proxy from their bank or broker. If you are a street-name holder and you plan to vote in person, you must request the legal proxy from your bank or broker well in advance of the meeting date. A photo identification is required to vote in person. 401(k) plan holders are not eligible to vote in person at the Annual Meeting.

401(k) Plan Holders.    If you hold shares in our 401(k) plan, you will receive separate information on how to instruct the plan trustee to vote the shares held on your behalf under the plan. If your voting instructions are received on a timely basis, your 401(k) plan shares will be voted according to the instructions received. If you do not specify your voting instructions in the manner required, your shares will not be voted. To allow the trustee sufficient time to process instructions, you must submit your voting instructions by 11:59 p.m., eastern time, on Tuesday, May 13, 2014.

If I submit a proxy, may I later change or revoke it?

If you are a shareholder of record, you can revoke your proxy at any time before votes are cast at the Annual Meeting by:

 

•

providing written notice to the Secretary of the company;

 

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•

timely delivering a valid, later-dated, and signed proxy card or a later-dated vote by telephone or via the Internet; or

 

•

voting in person at the Annual Meeting.

If you are a street-name holder of shares, you may submit new voting instructions by contacting your bank, broker, or other financial institution. You may also vote in person at the Annual Meeting, if you obtain a legal proxy as described in the answer to the previous question.

If you hold shares in our 401(k) plan, you can change your voting instructions at any time prior to 11:59 p.m., eastern time, on Tuesday, May 13, 2014; voting for 401(k) plan shares in person at the Annual Meeting is not permitted.

Only your last vote will be counted. All shares that have been properly voted and not revoked will be voted at the Annual Meeting as instructed.

Who counts the votes?

Votes will be tabulated by or under the direction of the Inspectors of Election, some of whom may be regular employees of Progressive. The Inspectors of Election will certify the results of the voting at the Annual Meeting.

What are my voting options and what vote is needed to pass the proposals included in this Proxy Statement?

You have the right to vote “FOR” or “AGAINST” each director nominee and each other proposal, or to “ABSTAIN” from voting. The following table summarizes the vote required for approval regarding the director elections and each other proposal, as well as the Board’s voting recommendation.

 

Item Number		Proposal		Board Recommendation		Affirmative Vote Required for Approval		Broker Discretionary Voting Allowed1		Effect of Abstentions and Broker Non-Votes1
1		Elect as directors the seven nominees identified in this Proxy Statement, each to serve for a term of one year		FOR each nominee		Majority of votes cast		No		See note 2
2		Cast an advisory vote to approve our executive compensation program		FOR		Majority of votes cast		No		See note 2
3		Ratify the appointment of PricewaterhouseCoopers LLP as our independent registered public accounting firm for 2014		FOR		Majority of votes cast		Yes		See note 2

 

1	See the question below entitled “What are broker discretionary voting and broker non-votes?” for additional explanation.

 

2	Abstentions and unvoted shares (including broker non-votes) will not be taken into account.

What are broker discretionary voting and broker non-votes?

For shares held in “street name,” when a broker or bank does not receive voting instructions from its customers, the question arises whether the broker or bank nonetheless has the discretion to vote those shares. For us, the answer to that question depends on whether the NYSE classifies the matter being voted on as “routine” or “non-routine.”

For routine matters, the NYSE gives brokers and banks the discretion to vote, even if they have not received voting instructions from their customers (sometimes referred to as the “beneficial owners”). Each bank or broker has its own policies that control whether or not it casts votes for routine matters. In this Proxy Statement, only the ratification of our independent registered public accounting firm (Item 3) is expected to be considered routine by the NYSE.

For non-routine matters, the NYSE prohibits banks and brokers from casting votes on behalf of the beneficial owners if they have not received voting instructions. When the bank or broker is unable to vote under these rules, it reports the number of unvoted shares to us as “broker non-votes.” In this Proxy Statement, the election of directors (Item 1) and the advisory vote on our executive compensation program (Item 2) are expected to be considered non-routine by the NYSE. As a result, on each of those items, if you hold your shares in street name, your shares will be voted only if you give instructions to your bank or broker.

 

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The NYSE will make final determinations about our proposals and will inform the banks and brokers whether each proposal is considered routine or non-routine. To ensure that your shares are voted, we strongly encourage you to provide your bank or broker with your voting instructions.

Can I access the Notice of Annual Meeting, Proxy Statement, Annual Report on Form 10-K, and the Annual Report to Shareholders on the Internet?

The Notice of Annual Meeting, Proxy Statement, and 2013 Annual Report to Shareholders are available on a dedicated website at progressiveproxy.com. Our Annual Report on Form 10-K is available at the Investor Relations section of our website at progressive.com/sec. We will also provide a copy of any of these documents to any shareholder free of charge, upon request by email to investor_relations@progressive.com, by calling (440) 395-2222, or by writing to: The Progressive Corporation, Investor Relations, 6300 Wilson Mills Road, Box W33, Mayfield Village, OH 44143.

If you hold your shares in street name, your bank or broker may also provide you copies of these documents electronically. Please check the information provided in the proxy materials delivered to you by your bank or broker regarding the availability of this service.

WHETHER OR NOT YOU PLAN TO ATTEND THE ANNUAL MEETING, THE BOARD OF DIRECTORS STRONGLY ENCOURAGES YOU TO VOTE YOUR SHARES BY PROXY PRIOR TO THE MEETING. YOUR VOTE IS IMPORTANT. PLEASE FOLLOW THE VOTING INSTRUCTIONS CAREFULLY TO MAKE SURE THAT YOUR SHARES ARE VOTED APPROPRIATELY.

 

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ITEM 1: ELECTION OF DIRECTORS

Seven of our directors have been nominated for election this year. Information about the structure of our Board of Directors, the process for selecting nominees for director positions, and our individual directors follows.

Board Structure.    Our Code of Regulations establishes the number of directors at no fewer than five and no more than 13. The number of directors has been fixed at 10, and there are currently 10 directors on the Board.

At our Annual Meeting in 2012, shareholders approved a change requiring the annual election of directors beginning in 2013. Accordingly, the seven nominees for director named below, if elected by shareholders, each will serve a term of one year. Our other current directors were elected by shareholders in 2012 for three-year terms. Each of those existing terms will continue after the Annual Meeting and will expire in 2015, and each nominee for election (or re-election) at that time will then be subject to election for a one-year term to the board. As a result of this process, beginning in 2015, the full board will be elected for annual one-year terms.

At the Annual Meeting, the shares represented by the proxies obtained in response to this Proxy Statement, unless otherwise specified, will be voted for the election as directors of the seven nominees named below, each to serve for a one-year term, and until their respective successors are duly elected. If, by reason of death or other unexpected occurrence, any one or more of the nominees named below is not available for election, the proxies will be voted for substitute nominee(s), if any, as the Board of Directors may propose.

Nominees for Director.    Based upon a recommendation from the Board’s Nominating and Governance Committee, the Board has nominated the following persons for election to the Board:

 

•

Stuart B. Burgdoerfer

 

•

Charles A. Davis

 

•

Lawton W. Fitt

 

•

Jeffrey D. Kelly

 

•

Heidi G. Miller, Ph.D.

 

•

Patrick H. Nettles, Ph.D., and

 

•

Glenn M. Renwick.

Each of the seven nominees for director is currently a director of the company.

Voting Requirements.    Proxies cannot be voted at the Annual Meeting for a greater number of persons than the seven nominees named in this Proxy Statement.

If written notice is given by any shareholder to the President, a Vice President, or the Secretary not less than 48 hours before the time fixed for holding the Annual Meeting that he or she desires that the voting for election of directors be cumulative, and if an announcement of the giving of such notice is made at the meeting by the Chairman or Secretary or by or on behalf of the shareholder giving such notice, each shareholder will have the right to cumulate his or her voting power in the election of directors. Under cumulative voting, each shareholder may give one nominee a number of votes equal to the number of directors to be elected multiplied by the number of shares he or she holds, or distribute such number of votes among the seven nominees, as the shareholder sees fit. If the enclosed proxy is executed and returned, or you submit your proxy by telephone or over the Internet, and voting for the election of directors is cumulative, the persons named in the enclosed proxy will have the authority to cumulate votes and to vote the shares represented by such proxy, and by other proxies held by them, so as to elect as many of the seven nominees named above as possible.

A nominee for director in an uncontested election will be elected as a director only if he or she receives a majority of the votes cast, which is sometimes referred to as a “majority voting standard.” If the election for directors is contested (that is, there are more nominees than the number of director positions up for election), the majority voting standard does not apply, and the nominees receiving the highest number of votes will be elected (a “plurality voting standard”). The election of directors at this year’s Annual Meeting is an uncontested election, so each nominee must receive a majority of the votes cast to be elected.

 

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If an incumbent director is not elected by a majority of the votes cast in an uncontested election, the director is not automatically removed from the Board, but under our Corporate Governance Guidelines, he or she is expected to tender a resignation from the Board within 10 days after the certification of the shareholder vote. If that resignation is not made contingent on the Board’s determination to accept or reject such resignation, the resignation will be effective immediately. If the resignation is contingent on Board action, the Board will review the resignation under procedures set forth in our Corporate Governance Guidelines and announce its determination whether to accept or reject the resignation within 120 days from the certification of the shareholder vote. If a director is not elected by a majority of the votes cast, but fails to tender his or her resignation during the 10-day period after certification, his or her term of office will expire automatically upon the expiration of the 10 days.

Selection of Nominees for Director.    The Nominating and Governance Committee evaluates each director candidate individually when considering whether he or she should be nominated to serve on the Board. The Committee looks for candidates who have demonstrated the ability to satisfy the fundamental criteria set forth in the Committee’s charter – integrity, judgment, commitment, preparation, participation, and contribution – and who possess the general qualities required to serve successfully as a director, including intelligence, thoughtfulness, and diligence. The Committee reviews the extent of the candidate’s demonstrated excellence and success in his or her chosen career and the specific skills the candidate would be expected to add to the Board.

The Committee also considers the Board’s needs, the qualifications of other available candidates, and how the addition of the candidate to the Board would enhance the Board’s overall diversity and capabilities. The Board seeks to include individuals with a wide variety of talents, skills, experiences, and perspectives, in addition to considering demographic criteria such as gender, race, and age. It is the Board’s policy to include among its members individuals of both genders, and from different racial and ethnic groups, whenever possible. The directors believe that such diversity provides the Board with broader perspectives, a wide array of thoughts and ideas, and insight into the views and priorities of our diverse customer, agent, and employee bases. To evaluate the impact of the addition of a candidate on the diversity of the Board, the Committee considers how distinct the candidate’s background, experience, skills, and personal characteristics are from those of the incumbent directors and whether the candidate would bring a unique perspective to the Board. The Committee assesses the effectiveness of its practices for consideration of diversity in nominating director candidates by periodically analyzing the diversity of the Board as a whole and, based on that analysis, determining whether it may be desirable to add to the Board a director with a certain type of background, talent, experience, personal characteristics, skills, or a combination thereof. Currently, Progressive’s Board includes a mixture of long-tenured and newer directors with strong operating experience in a wide variety of industries, such as financial services, healthcare, communications, retailing, and manufacturing, and with substantial experience working in a variety of functions, including consumer marketing, technology, investments, capital management, finance, accounting and control, and risk analysis. Our directors also have a wealth of experience serving on an array of public, private, and non-profit boards.

Director Information.    The following information is provided for each person nominated for election as a director, and for those directors whose terms will continue after the Annual Meeting, and includes descriptions of each director’s specific experience, qualifications, attributes, and skills that led the Nominating and Governance Committee and the Board to conclude that he or she should serve on the Board of Directors. Unless otherwise indicated, each such nominee or director has held the principal occupation indicated for more than the last five years.

 

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Nominees for Election at the Annual Meeting

 

Name (Age)		Principal Occupation, Last Five Years Business Experience, and Qualifications		Last Five Years Other Directorships
Stuart B. Burgdoerfer (50)   Director since: 2009 Term expires: 2014 (2015 if re-elected)		Executive Vice President and Chief Financial Officer, L Brands, Inc., Columbus, Ohio (retailing)   Mr. Burgdoerfer has been selected to serve as a director of the company because he has substantial experience working in leadership roles as a financial professional, including his current role as the Chief Financial Officer of L Brands, Inc. (formerly Limited Brands, Inc.) and, before that, as Senior Vice President of Finance of The Home Depot, Inc. Mr. Burgdoerfer enhances the Board’s financial expertise and is a valuable member of our Audit Committee as an Audit Committee Financial Expert.		Current: None   Former: None
Charles A. Davis (65)   Director since: 1996 Term expires: 2014 (2015 if re-elected)		Chief Executive Officer, Stone Point Capital LLC, Greenwich, Connecticut (private equity investing)   Mr. Davis has broad financial, investment, and capital management expertise developed through his work at Goldman Sachs Group, investment management experience at MMC Capital, Inc., service as Chief Executive Officer of Stone Point Capital LLC and his position as a member of the Advisory Committee of Deutsche Bank (Americas). The Board values Mr. Davis’s extensive knowledge of Progressive’s business and history, which he has gained through his service as a director of the company since 1996. He also has substantial experience serving on the boards of other public and private companies.		Current: AXIS Capital Holdings Limited and The Hershey Company   Former: None
Lawton W. Fitt (60)   Director since: 2009 Term expires: 2014 (2015 if re-elected)		Corporate Director   Ms. Fitt was chosen to serve on the Board because she has substantial experience in the areas of investment banking and risk analysis, including insight into the operation of capital markets, as a result of her work as a partner at Goldman Sachs Group. In addition, she attained executive management experience through her work as the Secretary of the Royal Academy of Arts in London. Ms. Fitt’s service as a director at various other for-profit and non-profit organizations also factored into the decision to select her to serve on the Board of Directors.		Current: Ciena Corporation, The Carlyle Group, and Thomson Reuters Corporation   Former: Frontier Communications Corporation

 

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Name (Age)		Principal Occupation, Last Five Years Business Experience, and Qualifications		Last Five Years Other Directorships
Jeffrey D. Kelly (60)   Director since: 2012 Prior service: 2000-2009 Term expires: 2014 (2015 if re-elected)		Executive Vice President and Chief Financial Officer, RenaissanceRe Holdings Ltd., Pembroke, Bermuda (reinsurance services) since July 2009   Mr. Kelly brings a strong history of executive management, investment management, capital markets, and operational experience in the financial services industry. Among other responsibilities, he has served as the principal financial officer at a major commercial bank and now at a large reinsurer. Mr. Kelly was highly regarded by Board members during his prior tenure with the Board and its committees, and this experience gives him valuable insight into our insurance and investment operations. Due to his current role as CFO at RenaissanceRe, Mr. Kelly also brings to the Board a different perspective about our industry.		Current: None   Former: None
Heidi G. Miller, Ph.D. (60)   Director since: 2011 Term expires: 2014 (2015 if re-elected)		Retired; President of International, JPMorgan Chase & Co., New York, New York (financial services) from June 2010 through January 2012; Chief Executive Officer, J.P. Morgan Treasury & Securities Services, New York, New York (financial services) prior to June 2010   Dr. Miller was elected to the Board as a result of her deep financial, executive management, and international business experience acquired during her career in the financial services and other industries. Most recently, as JPMorgan’s President of International, she led the firm’s global expansion efforts and spearheaded the development of its international business strategy. She also jointly led J.P. Morgan Global Corporate Bank and had previously served as the chief financial officer at three major financial institutions. She has been appointed as a member of our Audit Committee and is recognized by the Board as an Audit Committee Financial Expert.		Current: General Mills, Inc.   Former: None
Patrick H. Nettles, Ph.D. (70)   Director since: 2004 Term expires: 2014 (2015 if re-elected)		Executive Chairman of the Board, Ciena Corporation, Linthicum, Maryland (telecommunications)   Dr. Nettles’s extensive technical experience, including his experience working as an engineer, engineering manager, and his position as Chairman of the Board of Ciena Corporation, are chief among the reasons he was selected to serve on the Board of Directors. His experience and education, which includes a Ph.D. in physics, along with his significant operational experience as the Chief Executive Officer of Ciena, give him a unique perspective that enables him to make significant and distinct contributions to our Board. In addition, his past experience as a chief financial officer enables him to add great value to the Audit Committee as the Committee Chairman and an Audit Committee Financial Expert. Dr. Nettles’s service as a director at other public companies also factored into the decision to select him to serve on our Board of Directors.		Current: Axcelis Technologies, Inc. and Ciena Corporation   Former: None

 

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Name (Age)		Principal Occupation, Last Five Years Business Experience, and Qualifications		Last Five Years Other Directorships
Glenn M. Renwick (58)   Director since: 1999 Term expires: 2014 (2015 if re-elected)		Chairman of the Board, The Progressive Corporation, Mayfield Village, Ohio (auto insurance) since November 2013; President and Chief Executive Officer, The Progressive Corporation; officer and director of various other subsidiaries and of an affiliate of Progressive   Mr. Renwick has over 25 years of experience working in significant management positions at Progressive. He served as Chief Executive Officer of insurance operations in 2000 and has served as the Chief Executive Officer of the company since 2001. Mr. Renwick has served in a variety of operating roles during his tenure at Progressive, including product manager, the head of the company’s marketing organization, and business technology leader. This experience enables him to provide unparalleled insight on the company’s operations and the property and casualty insurance industry. Mr. Renwick also has gained significant experience working in an oversight role through his service as an independent director of other corporate boards.		Current: Fiserv, Inc. and UnitedHealth Group Incorporated   Former: None

The Board of Directors recommends that shareholders vote FOR the election of each nominee.

Directors Whose Terms will Continue after the Annual Meeting

 

Name (Age)		Principal Occupation, Last Five Years Business Experience, and Qualifications		Last Five Years Other Directorships
Roger N. Farah (61)   Director since: 2008 Term expires: 2015		Executive Vice Chairman, Ralph Lauren Corporation, New York, New York (lifestyle products) since November 2013; President and Chief Operating Officer, Ralph Lauren Corporation prior to November 2013   Mr. Farah was chosen to serve as a director principally due to his experience serving in various executive officer positions, and as a director, of Ralph Lauren Corporation. The executive management and operational experience Mr. Farah has attained enables him to add significant value to the Board, particularly in the area of brand development and management. He brings a unique retail perspective to the Board as a result of his experience working in an executive management role in a consumer-focused industry that is different than the property and casualty insurance industry.		Current: Aetna, Inc. and Ralph Lauren Corporation   Former: None
Stephen R. Hardis (78)   Director since: 1988 Term expires: 2015		Lead Independent Director, The Progressive Corporation, Mayfield Village, Ohio (auto insurance) since November 2013; Non-Executive Chairman of the Board, Marsh & McLennan Companies, Inc., New York, New York (financial services) prior to May 2011; Retired Chairman and Chief Executive Officer, Eaton Corporation, Cleveland, Ohio (manufacturing)   Mr. Hardis was chosen to serve as a director of the company primarily because of his leadership experience at Eaton Corporation, where he served as both Chief Executive Officer and Chief Financial Officer, and because of his extensive experience managing, or serving as a director of, various other large companies in a variety of industries. These experiences allowed him to develop the skills and insights necessary to add significant value to the Board. Mr. Hardis has also served as a director of the company since 1988, which makes him an especially valuable resource to the Board.		Current: Axcelis Technologies, Inc. and Lexmark International, Inc.   Former: Marsh & McLennan Companies, Inc. and Nordson Corporation

 

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Name (Age)		Principal Occupation, Last Five Years Business Experience, and Qualifications		Last Five Years Other Directorships
Bradley T. Sheares, Ph.D. (57)   Director since: 2003 Term expires: 2015		Corporate Director; Former Chief Executive Officer, Reliant Pharmaceuticals, Inc., Liberty Corner, New Jersey (pharmaceutical products)   Dr. Sheares has substantial executive management experience he attained in his tenure as President of the U.S. Human Health Division of Merck & Co., Inc. and as Chief Executive Officer of Reliant Pharmaceuticals, Inc. These roles enabled Dr. Sheares to gain valuable sales, marketing, advertising, brand management, healthcare, mergers and acquisitions, research and development, and risk management experience. The Board also benefits from the technical perspective Dr. Sheares brings, due in part to his having earned a Ph.D. in biochemistry and his background in the sciences. In addition, the Board values the significant experience Dr. Sheares has gained through his service on the boards of a diverse set of public companies.		Current: Covance Inc., Henry Schein, Inc., and Honeywell International, Inc.   Former: IMS Health Incorporated

OTHER BOARD OF DIRECTORS INFORMATION

Board of Directors Independence Determinations

We are required to have a majority of independent directors under the NYSE Listing Standards. The NYSE’s standards prescribe specific independence tests and require the Board to make affirmative independence determinations regarding our directors. At its meeting in January 2014, the Board considered the independence of each of the Board members, taking into account relevant facts and circumstances of each director’s relationships (if any) with the company and its subsidiaries described below under “Certain Relationships and Related Transactions.” Based on this review, the Board determined that each of our current directors is independent under the NYSE Listing Standards, with the exception of Glenn M. Renwick. Mr. Renwick is not independent due to his status as an executive officer of the company.

Leadership Structure

Glenn M. Renwick serves as the company’s Chairman of the Board, President, and Chief Executive Officer. At the recommendation of the Nominating and Governance Committee, the Board appointed Mr. Renwick to the position of Chairman in November 2013, after the death of our prior non-executive Chairman, Peter B. Lewis. The Board of Directors had been engaged in succession planning for the Chairman role in anticipation of the impending retirement of Mr. Lewis, which was scheduled to occur in May 2014. Mr. Lewis’s unexpected death accelerated the Board’s decision.

The Board unanimously determined that Mr. Renwick is the best person to serve as our Chairman, due to his strong leadership of the company as CEO, his in-depth understanding of the company’s operations and the operating environment, and his vision for the company’s future. Mr. Renwick has worked for the company since 1986 in a variety of leadership roles, including the president of a number of our operating units, the head of our consumer marketing group, and our Chief Information Officer. He was appointed CEO of Insurance Operations in 2000 and then named President and CEO in 2001. His operational history and hands-on leadership of the company provide him a unique perspective to consider and develop responses to the challenges facing the company.

Just as importantly, the Board has had the opportunity to view Mr. Renwick’s performance as CEO for the past 13 years and the way in which he handles his relationships with the Board and individual directors. Mr. Renwick has shown that he respects the oversight and advisory roles of the Board, and he has actively engaged the Board to consider and act on significant strategic and governance matters. Further, Mr. Renwick has sought to ensure that the Board has the appropriate information upon which Board action is to be based, and he has ensured that follow-up on issues raised by Board members has been prompt and responsive. The Board fully expects that this effective working relationship between Mr. Renwick and the other directors will continue as he leads the Board as its Chairman.

In deciding to combine the roles of CEO and Chairman, the Board was also keenly aware of the need to continue the strong voice of independent directors that has historically existed on this Board. To that end, as recommended by the

 

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Nominating and Governance Committee, the Board also created a new position of Lead Independent Director, and our independent directors elected director Stephen R. Hardis to that position. Pursuant to our Corporate Governance Guidelines (the “Guidelines”), Mr. Hardis, as the Lead Independent Director, is expected to work collaboratively with the Chairman and management on Board governance, process, and communication matters. The Lead Independent Director’s responsibilities specifically include:

 

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presiding at all meetings of the Board at which the Chairman is not present or from which the Chairman is excused;

 

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having the authority to call meetings of the Board or of the independent directors;

 

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presiding at all meetings and executive sessions of the independent or non-management directors;

 

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serving as the principal liaison to facilitate communications between the Chairman and the independent directors on Board-related issues, without inhibiting direct communications between the Chairman and other directors;

 

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working with the Chairman to establish Board meeting schedules to ensure that there is sufficient time to discuss all agenda items;

 

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consulting with the Chairman on the matters to be included on the Board’s meeting agendas and approving those agendas;

 

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approving the type of information to be provided to directors for Board meetings, and advising the Chairman and management of any director concerns regarding the information provided; and

 

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being available to serve as a liaison to major stockholders where appropriate, upon reasonable request, with prior notice to the CEO that a meeting will take place.

In addition, the Lead Independent Director will consult periodically with the Chairs of the various Board Committees to keep apprised of critical issues facing the company as they develop, and he will carry out other appropriate duties as may be requested by the independent directors, the Board, or any of the Board Committees. The Lead Independent Director will be elected annually by, and will serve at the discretion of, the independent directors. The Guidelines also provide that the Lead Independent Director will typically be a member of the Board’s Nominating and Governance Committee, which Mr. Hardis satisfies (along with his ongoing roles as a member of the Board’s Executive Committee and Chairman of its Investment and Capital Committee).

The independent directors concluded that Mr. Hardis was the best candidate to serve as the Lead Independent Director due to his extensive leadership experience on boards of directors over many years and his long history of representing shareholders’ interests as an independent director. Mr. Hardis served as Chairman and CEO of Eaton Corporation, and as Chairman of the Boards of Axcelis Technologies, Inc. and Marsh & McLennan Companies, Inc. In addition, he has served as the Lead Director at Axcelis and as an independent outside director at a number of other companies. Mr. Hardis’s knowledge of our businesses acquired as a Board and Committee member over many years, his demonstrated willingness to challenge management and the status quo, and his effective working relationship with Mr. Renwick, also contributed to the decision. The independent directors believe that Mr. Hardis, acting as the Lead Independent Director, along with the active participation of the other directors, will maintain a strong independent presence on this Board.

Risk Oversight

The Board assigns the bulk of its risk oversight responsibilities to the Audit Committee, which oversees our Enterprise Risk Management (ERM) program. The Audit Committee’s responsibilities with respect to risk oversight include the review of the guidelines, policies, and procedures that govern how we assess and manage our exposure to risk, and meeting periodically with management – including leaders and other representatives of the risk management department, compliance & ethics group, law department, control & analysis (internal audit), security and information technology groups, external auditors, and other business units as necessary – to review our major operational, financial, reputational, and other risk exposures, as well as the steps management has taken to identify, monitor, assess, and manage or avoid such exposures. Our Management Risk Committee (MRC), which comprises members of management representing a cross-section of business units and functions, regularly performs an enterprise risk assessment and, with input from executive management, identifies the most critical risks facing the company. The MRC then formulates recommendations for managing those risks, which it presents to the Audit Committee for review. The Audit Committee reports to the full Board of Directors on our ERM program and MRC risk assessment.

The Board also assigns some risk oversight responsibilities to the Investment and Capital Committee and the Compensation Committee. The Investment and Capital Committee oversees our investment policy, which is designed to

 

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enable us to meet our business and financial objectives with a reasonable balance among risk, return, and cost. The Investment and Capital Committee also is responsible for ensuring that we have a capital plan that takes risk factors into consideration. The Compensation Committee regularly reviews the risks of our compensation plans and programs. Both of these committees regularly report to the full Board.

The assignment of the Board’s risk oversight function as described above enables the Board to function more effectively because the whole Board is required to focus only on those risk issues deemed most critical by the Audit Committee or the other Committees. On the other hand, the Committees provide a deeper focus on overseeing management with respect to the full range of risks we confront. As mentioned above, the Lead Independent Director will consult with the Committee Chairs as necessary to ensure that significant issues are brought to the attention of the independent directors. Otherwise, the Board’s administration of its risk oversight function has not affected the Board’s leadership structure.

Meetings of the Board of Directors and Attendance

The Board of Directors held eleven meetings during 2013, six of which were held by conference call.

All of the current directors were on the Board throughout 2013 and attended at least 75% of their scheduled Board and Committee meetings.

Pursuant to our Corporate Governance Guidelines, directors are expected to attend our Annual Meeting of Shareholders whenever possible. Normally, a meeting of the Board is scheduled on the date of the Annual Meeting. Progressive’s 2013 Annual Meeting was attended by all of the then current directors, except for Roger N. Farah, who had a prior commitment.

A full copy of our Corporate Governance Guidelines can be found on our website 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, OH 44143.

Meetings of the Non-Management and Independent Directors

Our non-management directors meet in executive session periodically throughout the year, typically at the conclusion of regularly scheduled Board meetings. Each such meeting also constitutes a meeting of our independent directors. Mr. Lewis, our former non-executive Chairman of the Board, presided at these meetings until November 2013, and Stephen R. Hardis, our current Lead Independent Director, has presided over these meetings since December 2013. In the event that Mr. Hardis is not available to lead these meetings, the presiding director would be chosen by the non-management directors in attendance. In 2013, the non-management directors met in executive session five times.

Board Committees

The Board has named an Executive Committee, an Audit Committee, a Compensation Committee, an Investment and Capital Committee, and a Nominating and Governance Committee, as described below. The complete written charters for each of the Committees (other than the Executive Committee, which does not have a charter) can be found on our website 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, OH 44143.

 

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The following table summarizes the Board’s current Committee assignments:

 

Name		Executive		Audit		Compensation		Investment and Capital		Nominating and Governance
Stuart B. Burgdoerfer				ü*
Charles A. Davis								ü		C
Roger N. Farah						ü
Lawton W. Fitt		ü						ü		ü
Stephen R. Hardis		ü						C		ü
Jeffrey D. Kelly						ü
Heidi G. Miller, Ph.D.				ü*
Patrick H. Nettles, Ph.D.				C*
Glenn M. Renwick		C
Bradley T. Sheares, Ph.D.						C
ü Member of the Committee
C Chairman of the Committee
* Audit Committee Financial Expert

Executive Committee. The Executive Committee exercises all powers of the Board between Board meetings, except the power to fill vacancies on the Board or its Committees and the power to adopt amendments to our Code of Regulations. During 2013, the Executive Committee adopted resolutions by written action pursuant to Ohio corporation law on nine occasions.

Audit Committee. The Audit Committee is responsible for ensuring that the organizational structure, policies, controls, and systems are in place to monitor and accurately report performance. The Audit Committee monitors the integrity of Progressive’s financial statements, our financial reporting processes, internal control over financial reporting, and the public release of financial information, and oversees our compliance and ethics and risk management programs. The Committee also is responsible for confirming the independence of, and the selection, appointment, compensation, retention, and oversight of the work of, our independent registered public accounting firm. The Committee provides an independent channel to receive appropriate communications from employees, shareholders, auditors, legal counsel, bankers, consultants, and other interested parties. The Board of Directors has determined that each of the members of the Audit Committee has no relationship to Progressive that may interfere with the exercise of his or her independence from management and Progressive, and is independent as defined in the applicable SEC rules and NYSE Listing Standards. During 2013, the Audit Committee met in person five times and participated in four conference calls to review our financial and operating results.

Audit Committee Financial Experts The Board of Directors has determined that each of Patrick H. Nettles, Ph.D., Stuart B. Burgdoerfer, and Heidi G. Miller, Ph.D., is an audit committee financial expert, as that term is defined in the applicable SEC regulations, and that each has accounting or related financial management expertise, as required by the NYSE Listing Standards. Dr. Nettles is the current Executive Chairman of the Board of Ciena Corporation and its former Chief Executive Officer, and has been a member of our Audit Committee since 2005. Dr. Miller is the retired President of International at JPMorgan, was formerly the CEO of J.P. Morgan Treasury & Securities Services, and had previously served as the chief financial officer at three major financial institutions. Dr. Miller is also a trustee of The IFRS Foundation, which is responsible for the governance and oversight of the International Accounting Standards Board. Mr. Burgdoerfer is the Chief Financial Officer of L Brands, Inc. and was formerly the Senior Vice President of Finance of The Home Depot, Inc. The Board has determined that through appropriate education and experience, Drs. Nettles and Miller and Mr. Burgdoerfer each has demonstrated that they possess the following attributes:

 

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an understanding of accounting principles generally accepted in the United States of America and financial statements;

 

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the ability to assess the general application of such principles in connection with the accounting for estimates, accruals, and reserves;

 

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experience preparing, auditing, analyzing, or evaluating financial statements that present a breadth and level of complexity of accounting issues that are generally comparable to the breadth and level of complexity that can reasonably be expected to be raised by our financial statements, or experience actively supervising one or more persons engaged in such activities;

 

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an understanding of internal control over financial reporting; and

 

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an understanding of audit committee functions.

Compensation Committee. The Compensation Committee is composed entirely of independent directors, each of whom the Board has determined, also satisfies the additional requirements for independence of a compensation committee member under NYSE rules. The Compensation Committee makes all final determinations regarding executive compensation, including salary, equity-based awards, and non-equity incentive compensation (cash bonus) targets, and related performance goals, formulae, and procedures. The Committee (or in certain circumstances, the full Board of Directors, based on the Committee’s recommendation) also approves the terms of the various compensation and benefit plans in which executive officers and other employees may participate. Committee decisions are made after considering third-party compensation data for comparable companies, internal analyses, and recommendations presented by management. The executive compensation decisions represent the culmination of extensive analysis and discussion, which typically take place over the course of multiple Committee meetings and in meetings between the Committee and management, including our Chief Executive Officer, our Chief Human Resource Officer, members of our compensation and law departments, and other Progressive personnel. In addition, the Committee frequently reports to the full Board of Directors on executive compensation matters.

The Committee’s determinations regarding incentive compensation for executive level employees (for example, performance criteria and standards relating to “Gainsharing,” our annual cash bonus program) also apply to incentive plans covering non-executive employees. Under this arrangement, executives and non-executives alike are motivated to achieve the same performance objectives. The Committee has delegated to management the authority to implement such plans, and make other compensation-related decisions (such as salary and equity-based awards), for non-executive level employees. During 2013, the Compensation Committee met in person five times, and adopted resolutions by written action pursuant to Ohio corporation law on six occasions.

Compensation Consultants The Committee has the authority under its charter to hire its own compensation consultants, at Progressive’s expense. The Committee did not retain a consultant during 2013.

During 2013, management retained the services of Pearl Meyer & Partners, which provided comparative compensation information and analyses for our executive officers and directors, among other assignments. In early 2013 and 2014, the Committee reviewed the independence of Pearl Meyer and reviewed this relationship for potential conflicts of interest. In 2013, Pearl Meyer did not provide us or the Committee with any services other than their consulting on executive and director compensation matters. In addition, based on information provided by the consultants, the company, and our executives and directors, the Committee found no other facts or circumstances that raised any concerns regarding this relationship. Accordingly, the Committee determined that Pearl Meyer & Partners was independent from Progressive and that no conflict of interest concerns had been raised.

Investment and Capital Committee. The Investment and Capital Committee’s responsibilities include monitoring: whether the company has adopted and adheres to rational and prudent investment and capital management policies; whether management’s investment and capital management actions are consistent with our investment policy, financial objectives, and business goals; our compliance with legal and regulatory requirements, as well as internal guidelines, pertaining to investment and capital management; the competence, performance, and compensation of the company’s internal and external money managers; and such other matters as the Board or the Committee deems appropriate. The Committee, which is currently composed of independent directors, does not make operating decisions about money manager selection or compensation, asset allocation, market timing, sector rotation, or security selection, which are the responsibilities of management. The full Board of Directors must approve significant changes to the company’s capital structure, dividend policy, or portfolio asset allocation. During 2013, the Investment and Capital Committee met in person five times and participated in one conference call.

Nominating and Governance Committee. The Nominating and Governance Committee is composed entirely of independent directors. Among other responsibilities, the Committee considers the qualifications of individuals who are proposed as possible nominees for election to the Board and makes recommendations to the Board with respect to such potential candidates.

 

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The Committee also is responsible for monitoring corporate governance matters as they affect the Board and the company. The Committee regularly reviews Progressive’s Corporate Governance Guidelines and related matters to ensure that they continue to correspond to and support the Board’s governance philosophy. The Committee considers and, where appropriate, recommends to the Board for approval, changes to the Corporate Governance Guidelines based on suggestions from its members, other Board members, or management. During 2013, the Nominating and Governance Committee met in person five times and participated in one conference call.

Shareholder-Proposed Candidate Procedures Pursuant to the Nominating and Governance Committee’s charter, the Board has adopted a policy of considering director candidates who are recommended by Progressive’s shareholders. In addition, the Committee has adopted procedures for shareholders to propose candidates for positions on our Board.

Any shareholder desiring to propose a candidate for election to the Board under these procedures may do so by mailing to Progressive’s Secretary a written notice identifying the candidate. The written notice must also include the supporting information required by the shareholder-proposed candidate procedures, the complete text of which can be found on our website at progressive.com/governance. The notice and supporting information should be sent to the Secretary at the following address: Charles E. Jarrett, Secretary, The Progressive Corporation, 6300 Wilson Mills Road, Mayfield Village, OH 44143. Upon receipt, the Secretary will forward the notice, and the other information provided, to the Committee.

If a shareholder proposes a candidate without submitting all of the foregoing items, the Committee, in its discretion, may reject the proposed candidate, request more information from the nominating shareholder, or consider the proposed candidate while reserving the right to request more information. In addition, the Committee may limit a shareholder and its affiliates to one proposed candidate in any calendar year.

Shareholders may propose candidates to the Committee pursuant to the shareholder-proposed candidate procedures at any time. However, to be considered by the Committee in connection with Progressive’s next Annual Meeting of Shareholders, the Secretary must receive the shareholder’s proposal, and the required information described above, on or before November 30^th of the year immediately preceding such Annual Meeting.

It is the Committee’s policy to review and evaluate each candidate for nomination submitted by shareholders in accordance with the shareholder-proposed candidate procedures on the same basis as all other candidates, as previously discussed on page 6. Other candidates may be suggested by our Board members, executive officers, or other sources, which may include professional search firms retained by the Committee. The Committee will give strong preference to candidates who are likely to be deemed independent from Progressive under SEC and NYSE rules. As to shareholder-proposed candidates, the Committee may give more weight to candidates who are unaffiliated with the shareholder proposing their nomination and to candidates who are proposed by long-standing shareholders with significant share ownership (i.e., greater than 1% of Progressive’s common shares that have been owned for more than two years). Upon the expiration of a director’s term on the Board, that director will be given preference for nomination when the director indicates his or her willingness to continue serving and, in the Committee’s judgment, the director has made, and is likely to continue to make, significant contributions to the Board and Progressive.

The Committee may choose, in individual cases, to conduct interviews with the candidate and/or contact references, business associates, other members of boards on which the candidate serves, or other appropriate persons to obtain additional information. Such background inquiries also may be conducted, in whole or in part, on the Committee’s behalf by third parties, such as professional search firms. The Committee will make its determinations on whether to nominate an individual candidate based on the Board’s then-current needs, the merits of that candidate, and the qualifications of other available candidates. If a candidate is not nominated, the Committee will have the discretion to reconsider his or her candidacy in connection with future vacancies on the Board.

The Committee’s decision not to nominate a particular individual for election to the Board will not be publicized by Progressive, unless required by applicable laws or NYSE rules. The Committee will have no obligation to respond to shareholders who propose candidates that the Committee has determined not to nominate for election to the Board, but the Committee may choose to do so in its sole discretion.

Our shareholder-proposed candidate procedures are in addition to any rights that a shareholder may have under our Code of Regulations or under any applicable laws or regulations in connection with the nomination of directors for our Board.

 

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Communications with the Board of Directors

The Board of Directors has adopted procedures for shareholders or other interested parties to send written communications to the entire Board or to the non-management directors. Such communications must be clearly addressed to the Board or the non-management directors, as appropriate, and sent to either of the following:

 

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Stephen R. Hardis, Lead Independent Director, email: stephen_hardis@progressive.com.

 

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Charles E. Jarrett, Secretary, The Progressive Corporation, 6300 Wilson Mills Road, Mayfield Village, OH 44143 or email: chuck_jarrett@progressive.com.

The recipient will promptly forward communications so received to the full Board of Directors or to the non-management directors, as specified by the sending party.

Certain Relationships and Related Transactions

Transactions between The Progressive Corporation or its subsidiaries and any director or executive officer, certain of his or her relatives, or any entity in which one or more of our directors or executive officers is a substantial owner, director, or executive officer, must be disclosed to and, if required, approved by our Board of Directors under our Code of Business Conduct and Ethics. This policy is carried out by the Secretary of the company as transactions with such persons or entities, or proposals for such transactions, are identified by management or disclosed by members of the Board. The Board reviews these transactions on an annual basis and as they are identified.

In addition, if such relationships or transactions exceed $120,000 per year, the Board of Directors takes them into account in determining whether the director in question is independent under applicable rules and regulations. The following discussion sets forth those relationships and transactions considered by the Board in January 2014 when determining the independence of the applicable directors. Each of these relationships and transactions was approved by the Board.

 

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Lawton W. Fitt, our director, is also a director of Thomson Reuters Corporation (“Thomson”). Progressive purchases tax compliance and other software products, periodicals, and research products from subsidiaries of Thomson. In 2013, we paid $1,687,421 for such products and services at customary rates for the products purchased or services rendered.

 

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Glenn M. Renwick, Chairman of the Board, President, Chief Executive Officer, and a director of Progressive, is also a director of Fiserv, Inc. (“Fiserv”). We paid $134,910 to Fiserv, or its subsidiaries, for e-bill, check-clearing, and claims processing services during 2013, representing the customary rates for the products purchased.

 

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Charles A. Davis, our director, is also a director of AXIS Capital Holdings Limited (“AXIS”). Prior to July 31, 2009, AXIS reinsured part of our directors’ and officers’ liability insurance, trust errors and omissions insurance, and bond products. This business is currently in run-off and no new policies are being reinsured under the arrangement. During 2013, we ceded $28,770 in premiums to AXIS and collected $2,608,985 on paid losses related to this coverage. At December 31, 2013, we had $12,919,525 of reinsurance recoverables under this arrangement.

 

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Roger N. Farah, our director, is also a director of Aetna, Inc. (“Aetna”). Aetna is the principal administrator of the health and welfare plans that we provide to our employees. In 2013, we paid $14,469,366 to Aetna for its plan administration services, and for related products and services, in each case at rates that are customary. In addition, we paid a total of $8,546,546 to two subsidiaries of Aetna to access voluntary network provider pricing for certain claims related payments.

John W. Domeck, the brother of Brian C. Domeck, our CFO, works as an attorney in our Law Department. In determining the dollar value of this relationship for 2013, we used the same methodology that is used to determine compensation for named executive officers in the Summary Compensation Table below, under which total compensation includes salary paid in 2013, Gainsharing and other cash bonuses earned in 2013, grant date fair value of restricted stock unit awards, company-matching contributions to our 401(k) plan, and other compensation, but excludes health and welfare benefits that are available generally to all salaried employees. The dollar value of the employment relationship for 2013 was less than $195,000. We believe that this level of compensation is appropriate in view of the individual’s position, responsibilities, and experience and is consistent with our companywide compensation structure.

 

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A company owned by Peter B. Lewis (the “Lewis Company”), our former non-executive Chairman of the Board until his death in November 2013, subleases space at an airplane hangar leased by one of our subsidiaries, to house the airplane owned by the Lewis Company and related personnel and equipment. The sublease has an expiration date of September 30, 2016, although the Lewis Company has the right to terminate the sublease on September 30^th of each year by providing the appropriate written notice and paying a required termination fee. If the sublease has not been terminated, the Lewis Company has options to extend the sublease for two additional 5-year terms. Under the sublease, the Lewis Company rents approximately two-thirds of the hangar space and one-half of the office space at the facility, and it further reimburses one-half of other occupancy costs (such as common area maintenance, insurance, taxes, etc.) and one-half of certain construction and capital expenses. In addition, the Lewis Company reimburses Progressive for fuel for its aircraft, based on actual fuel used, plus one-half of the fuel flow fee incurred by us under our lease for the hangar. During 2013, the Lewis Company paid our subsidiary a total of $392,895 for fuel and $120,728 for rent and other occupancy expenses in accordance with the terms of the sublease.

During December 2013, the company repurchased 4,000,000 common shares from a trust established by Peter B. Lewis prior to his death (the “Peter B. Lewis Trust”) that held over 5% of our outstanding common shares at the time of the repurchase. We paid the Peter B. Lewis Trust $25.50 per common share, or $102 million in the aggregate. On December 16, 2013, the day before we agreed to purchase the shares, the closing price of our common shares was $26.32.

Compensation Committee Interlocks and Insider Participation

Bradley T. Sheares, Ph.D., Roger N. Farah, and Jeffrey D. Kelly served as members of the Board’s Compensation Committee during 2013. There are no Compensation Committee interlocks.

 

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SECURITY OWNERSHIP OF CERTAIN

BENEFICIAL OWNERS AND MANAGEMENT

Security Ownership of Certain Beneficial Owners

The following information is set forth with respect to persons known to management to be the beneficial owners of more than 5% of Progressive’s common shares, $1.00 par value, as of December 31, 2013.

 

Name and Address of Beneficial Owner		Amount and Nature of Beneficial Ownership1				Percent of Class
Daniel R. Lewis     4000 Ponce de Leon Boulevard, Suite 510     Coral Gables, Florida 33146			48,552,301	2			8.1%
Davis Selected Advisers, L.P.     2949 East Elvira Road, Suite 101     Tucson, Arizona 85756			36,423,950	3			6.1%
Capital Research Global Investors, a division     of Capital Research and Management Company     333 South Hope Street     Los Angeles, California 90071			32,091,990	4			5.4%
BlackRock, Inc. and subsidiaries     40 East 52nd Street     New York, New York 10022			30,854,461	5			5.2%

 

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Except as otherwise indicated, the persons listed as beneficial owners of the common shares have sole voting and investment power with respect to those shares. Certain of the information contained in this table, including related footnotes, is based on the Schedule 13G filings made by the beneficial owners identified herein.

 

2

Mr. Lewis reports that he has sole voting and dispositive power over these shares, which include 36,482,184 shares held by the Peter B. Lewis Trust and additional shares held by Mr. Lewis, his family members, entities he owns, and charitable entities and family trusts for which Mr. Lewis or his wife acts as trustee or director. The company was informed by Mr. Lewis in January 2014 that 16 million of the shares held by the Peter B. Lewis Trust were sold after year end.

 

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The common shares are owned by Davis Selected Advisers, L.P.’s investment advisory clients and none are owned directly or indirectly by Davis Selected Advisers, L.P., which states that its filing of the Schedule 13G should not be construed as an admission that it is the beneficial owner of any of the common shares. Davis Selected Advisers, L.P. has sole voting power over 34,856,034 shares, no voting power with respect to 1,567,916 shares, sole dispositive power over 32,423,950 shares and shared dispositive power over 4,000,000 shares. Charles A. Davis, our director, has no affiliation with Davis Selected Advisers, L.P.

 

4	Capital Research Global Investors, an investment advisor to registered investment companies, disclaims beneficial ownership of these shares.

 

5	BlackRock, Inc. and its subsidiaries have sole dispositive power over these shares and sole voting power over 25,919,930 shares. On February 7, 2014, BlackRock, Inc. filed an amendment to its Schedule 13G indicating that its beneficial ownership of Progressive common shares had dropped below 5%.

 

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Security Ownership of Directors and Executive Officers

The following information summarizes the beneficial ownership of Progressive’s common shares as of January 31, 2014, by each director and nominee for election as a director of Progressive, each of the named executive officers (as identified on page 40) and all directors and executive officers as a group. In addition, to provide a more complete picture of the financial interests of certain individuals in Progressive shares, the final two columns include certain units held in our benefit and equity incentive plans that are equal in value to a share of our stock, but do not technically qualify as “beneficially owned” under the applicable regulations, also as of January 31, 2014.

 

Name		Common Shares Subject to Restricted Stock Awards1				Beneficially Owned Common Share Equivalent Units2				Other Common Shares Beneficially Owned3				Total Common Shares Beneficially Owned				Percent of Class4				Units Equivalent to Common Shares5				Total Interest in Common Shares and Unit Equivalents
Stuart B. Burgdoerfer			8,782				—				31,188				39,970				*				—				39,970
William M. Cody			45,030				34,080				137,944				217,054				*				73,788				290,842
Charles A. Davis			9,355				13,990				270,243				293,588				*				3,411				296,999
Brian C. Domeck			20,405				9,555				171,184				201,144				*				55,628				256,772
Roger N. Farah			8,592				48,100				7,500				64,192				*				—				64,192
Lawton W. Fitt			9,164				28,163				9,389				46,716				*				—				46,716
Susan Patricia Griffith			43,095				—				223,497				266,592				*				62,911				329,503
Stephen R. Hardis			9,822				22,520				256,635				288,977				*				197,990				486,967
Jeffrey D. Kelly			8,592				—				44,280				52,872				*				—				52,872
Heidi G. Miller, Ph.D.			8,782				9,359				8,187				26,328				*				—				26,328
Patrick H. Nettles, Ph.D.			9,546				75,709				—				85,255				*				—				85,255
Glenn M. Renwick			486,575				—				1,707,324				2,193,899				*				2,239,696				4,433,595
John P. Sauerland			21,185				—				246,580				267,765				*				62,910				330,675
Bradley T. Sheares, Ph.D.			9,164				39,304				—				48,468				*				39,715				88,183
All 21 Executive Officers and Directors as a Group			816,965				391,885				3,630,086				4,838,936				*				3,311,393				8,150,329

 

*	Less than 1% of Progressive’s outstanding common shares.

 

1	Represents common shares held pursuant to unvested restricted share awards issued under various incentive plans we maintain. The beneficial owner has sole voting power and no investment power with respect to these shares during the restriction period.

 

2

These units have been credited to the individual’s accounts under our 2003 Equity Incentive Plan and the 2010 Equity Incentive Plan or certain of our deferred compensation plans and are included in shares beneficially owned due to the plan features described below. Each unit is equal in value to one Progressive common share.

 

•

For non-employee directors, the number represents units that have been credited to his or her account under The Progressive Corporation Directors Restricted Stock Deferral Plan, as amended and restated (the “Directors Restricted Stock Deferral Plan”), under which each director has the right to defer restricted stock awards. Distributions from the Directors Restricted Stock Deferral Plan will be made in Progressive common shares at the expiration of the deferral period under the plan. The plan provides that, upon the termination of a director’s service as a director, certain shares will be distributed promptly to the director. As to the number of shares that will be so distributed, the director is considered to have investment power (although not voting power) over those shares, and those shares are deemed “beneficially owned.” See page 59 for a description of the Directors Restricted Stock Deferral Plan.

 

•

For executive officers, the number represents units, if any: that have been credited to the participant’s account under our 2003 Equity Incentive Plan and 2010 Equity Incentive Plan and are scheduled to vest within 60 days of January 31, 2014; or that have been credited to the participant’s account under The Progressive Corporation Executive Deferred Compensation Plan, as amended and restated (the “EDCP”), upon the deferral of cash bonus awards and restricted stock awards granted prior to March 2005. As to the EDCP units, the participant has no voting power but sole investment power, due to his or her ability to instruct the plan trustee to liquidate his or her deemed investment in Progressive stock and re-allocate those amounts to other deemed investments that are available under the plan. See a description of the EDCP beginning on page 51.

 

3	Includes commons shares held directly by the individual, holdings in our 401(k) plan, and shares held by, or for the benefit of, immediate family members.

 

4	Percentage based solely on “Total Common Shares Beneficially Owned.”

 

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5

The units disclosed are in addition to common shares beneficially owned and have been credited to the individual’s account under one or more of our deferred compensation plans or equity incentive plans, as discussed below, as to which the holder has neither voting nor investment power. Each unit is equal in value to one Progressive common share.

 

•

For non-employee directors, the number represents units that have been credited under The Progressive Corporation Directors Deferral Plan, as amended and restated (“Directors Deferral Plan”), described in more detail on page 59, and amounts credited under the Directors Restricted Stock Deferral Plan that are not distributed promptly upon the director’s termination of service.

 

•

For executive officers, the number includes units that have been credited to the executive officer under the EDCP that are not included in “Beneficially Owned Common Share Equivalent Units,” and unvested time-based restricted stock unit awards, including reinvested dividend equivalents. For additional information on our restricted stock unit awards, see the “Outstanding Equity Awards” table beginning on page 48.

The balance in this column excludes outstanding performance-based restricted stock unit awards, due to the variable nature of such awards. See “Outstanding Equity Awards at Fiscal Year-End,” beginning on page 48, for additional information on these awards.

Section 16(a) Beneficial Ownership Reporting Compliance

None.

 

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COMPENSATION DISCUSSION AND ANALYSIS

HIGHLIGHTS FOR 2013

Consistent with prior years, the awards made in 2013 to our Chief Executive Officer and the other “named executive officers” (identified in the Summary Compensation Table on page 40) were weighted heavily towards performance-based annual cash bonuses and longer-term equity awards. We believe that these awards support a strong pay-for-performance linkage in our executive compensation program and appropriately align the interests of our named executive officers with those of our shareholders. In this section, we provide a brief summary of our 2013 pay decisions, as well as information concerning our performance results and pay outcomes for the year.

2013 Pay Decisions

CEO Compensation

 

•

Performance-based, at-risk bonus and equity awards represented over 95% of maximum potential compensation and over 90% of target compensation

 

•

Salary has not been increased for over a decade and is well below market

 

•

Annual Bonus (Gainsharing):

 

•

Potential payout range unchanged for over a decade

 

•

Payout could range from 0% to 300% of salary, with a 150% target

 

•

Actual payout was 181.5% of salary

 

•

No time-based equity awards

 

•

Performance-based equity awards represented over 85% of maximum potential compensation:

 

•

Core insurance operations: 85% of equity award

 

•

Investment results: 15% of equity award

 

•

CEO’s equity ownership at January 31, 2014:

 

•

Value of shares owned directly, in 401(k) plan and in deferral plan = almost 140 times base salary

 

•

Once unvested equity awards (at target) are included, equity ownership = almost 170 times base salary

Other Named Executive Officers

 

•

Average salary increase of approximately 5.5% from the prior year

 

•

Annual Cash Bonus:

 

•

Opportunities remained unchanged from between 0% to 250% of salary, with a 125% target

 

•

With the exception of our Chief Investment Officer, actual payout was 151.25% of salary

 

•

For our Chief Investment Officer, actual payout was 210.5% of salary

 

•

Equity awards divided between time-based and performance-based

 

•

Time-based = 100% of base salary

 

•

Performance-based target = 177.5% of base salary (average), up from 168.75% average for 2012

 

•

Equity ownership requirements:

 

•

Expected to hold equity (including unvested equity awards) having a value of at least 3 times base salary

 

•

All named executive officers are in compliance with requirement

Annual Financial Results and Shareholder Return

Key performance outcomes for 2013 include:

 

•

Net premiums written of $17.3 billion

 

•

6% increase in net premiums written

 

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•

2% increase in policies in force

 

•

An overall combined ratio of 93.5, or a 6.5% pretax profit on our insurance operations

 

•

Returns on average shareholders’ equity:

 

•

17.7%, based on net income

 

•

19.0%, based on comprehensive income

 

•

Net income of $1.2 billion, or $1.93 per share

Significant Changes to Terms of Awards During 2013

Performance-Based Restricted Stock Unit Awards

 

•

Performance-based restricted stock unit awards granted in 2013 and tied to our insurance results have a maximum vesting value of 250% of the target number of units awarded, instead of the 200% maximum that applied to such awards in prior years. Consistent with prior awards, the vesting event will occur only if, prior to expiration of the award, the company achieves a 96 or better combined ratio for the 12-month period preceding the Committee’s certification of the performance results.

 

•

Maximum vesting will occur if the company achieves growth in direct premiums written that is 3.5 percentage points or more higher than the overall auto insurance market for the three-year performance period (2013 through 2015).

 

•

A 3.0 percentage point spread over the market continues to be the threshold for a 200% vesting value, as under prior awards of this type.

Other Equity Plan Changes

 

•

For 2013 time-based awards, 50% of each unvested award will vest when the individual first satisfies the eligibility requirements for a qualified retirement (discussed in more detail below under “Retirement”) and, thereafter, promptly after the grant of each new award to the participant.

 

•

This change did not result in accelerated vesting during 2013 of any awards held by our named executive officers; however, during 2014, 9,555 restricted stock units held by our Chief Financial Officer at December 31, 2013 will vest under these provisions.

2013 Say-on-Pay Vote

At our 2013 Annual Meeting of Shareholders, shareholders cast advisory votes on our executive compensation program, sometimes referred to as the “say-on-pay” vote. In that vote, shareholders approved our executive compensation program, with almost 99% of the voted shares supporting our program. During 2013, the Compensation Committee reviewed these results with management and with the full Board of Directors. Due to the strong level of shareholder support and the absence of specific shareholder concerns, the Committee determined that no specific actions with respect to 2014 compensation should be taken as a result of the say-on-pay vote.

OUR EXECUTIVE COMPENSATION PROGRAM

Our executive compensation program is designed and implemented under the direction and guidance of the Compensation Committee. Broadly stated, we seek to maintain a consistent executive compensation program with the following objectives:

 

•

Attract and retain outstanding executives with the leadership skills and expertise necessary to drive results and build an increasingly strong business and long-term shareholder value;

 

•

Motivate executives to achieve the short- and long-term strategic goals of Progressive and their assigned business units;

 

•

Reward and differentiate executive performance based on the achievement of challenging performance goals; and

 

•

Align the interests of our executives with those of shareholders.

Our executive compensation program is designed to serve the shareholders’ interests by strongly tying our executives’ potential compensation to our satisfaction of important strategic goals and the value of our common shares. As a result, while we seek to offer competitive salaries to our executives, the more significant aspects of our executive compensation program are annual cash bonus opportunities and longer-term equity awards. Details about the various elements of our compensation program and 2013 awards to our named executive officers are discussed in the following sections.

 

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ELEMENTS OF COMPENSATION – ANNUAL DECISIONS AND AWARDS

Salaries

Executive salaries are designed to attract and retain executive talent and to reward individual performance. As a general matter, executive salaries are intended to be competitive with amounts paid to executives who have similar responsibilities at comparable companies, with the potential to earn above average total compensation being provided by the variable compensation elements discussed below. Variations from market medians can occur for a number of reasons, including the nature of a specific executive’s position and responsibilities, individual performance, the experience of an executive in his or her current position, the executive’s future potential, and our business needs and culture. For 2013, salaries for our named executive officers were as follows:

 

Name		2013 Salary1				Change From Prior Year
Glenn M. Renwick		$	750,000				—	%
Brian C. Domeck			485,000				5.4
Susan Patricia Griffith			465,000				5.7
John P. Sauerland			465,000				5.7
William M. Cody			420,000				5.0

 

1	Salary changes are typically implemented in February of each year, so the annual number listed in the table may vary from the salary amounts shown on the Summary Compensation Table.

These salary increases were necessary to improve the competitive nature of our compensation for senior management given current market conditions. Even after taking into account these increases, the 2013 base salary for Mr. Renwick and three of the other named executives was well below the median for similar executives at comparable companies, while the salary for one of the executives exceeded the median, based on the comparison data reviewed by the Compensation Committee in late 2012 and early 2013 (see “Procedures and Policies – Compensation Comparisons” below for further information on our market comparison process).

Annual Cash Bonuses

With the exception of Mr. Cody, our Chief Investment Officer, all of the named executive officers can receive an annual cash bonus only under our Gainsharing program. Mr. Cody can receive a bonus under the Gainsharing program and also under a program that measures the relative performance of our fixed-income investment portfolio. Therefore, Mr. Cody’s target bonus under the Gainsharing program is significantly less than those of the other named executive officers. Both of these bonus programs are described below.

Gainsharing. Gainsharing is designed to reward our executives based on the annual operating performance of our insurance businesses as compared with objective growth and profitability criteria approved by the Compensation Committee at the beginning of the year. Gainsharing does not take into account the performance results of our investment portfolio. The purpose of this cash bonus program is to motivate executives to achieve and surpass annual operating performance goals in our insurance businesses, which we believe will benefit shareholders over time.

Bonuses for named executive officers are determined using the same performance criteria for the Gainsharing bonuses that may be earned by virtually all of our other employees, resulting in a consistent set of goals across our employee population. Gainsharing bonuses are determined using the following formula:

 

Paid Salary

X

Target Percentage

X

Gainshare (i.e., Performance) Factor

=

Annual Bonus

For each executive, his or her salary and bonus target percentage are established by the Committee each year during the first calendar quarter. When the participant’s paid salary (which includes salary payments, holiday and vacation time, and sick time, among other items) is multiplied by his or her assigned target percentage, the product is referred to as the participant’s “target bonus” for the year. The Gainshare Factor can range from 0.0 to 2.0 each year, and cash bonuses, therefore, can vary between zero and two times the target bonus amount, depending on our actual performance results for the year.

 

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The objective performance goals applicable to the Gainsharing program are established by the Compensation Committee each year in the first quarter and are not modified thereafter. The Gainshare Factor for our core business (defined below) is then calculated on a monthly basis, using year-to-date results, and published in our monthly earnings releases. The Gainshare Factor is also used to calculate the dividend that may be paid to shareholders each year under our variable dividend policy. In this way, the annual performance of our core insurance businesses also can translate into a direct benefit to shareholders. For 2013, our variable dividend policy generated a dividend of $.4929 per share, which was paid to shareholders, together with a $1.00 per share special dividend, in February 2014.

Historical Gainsharing Experience. Throughout the 20-year history of our companywide Gainsharing program (including 2013), the Gainshare Factor achieved for the core business has ranged from 0.0 to 2.0 and has averaged 1.26. These results confirm management’s view that our Gainsharing plans have operated to provide annual cash bonus rewards to our employees, including our executive officers, commensurate with our level of achievement as compared with the annual predefined goals.

2013 Gainsharing Bonuses. For 2013, each named executive officer’s cash bonus was determined under the Gainsharing program based on the performance of our “core business,” except as noted. The Compensation Committee determined that the named executive officers’ Gainsharing target percentages would be as follows:

 

Name		2013 Target (% of Salary)
Glenn M. Renwick			150	%
Brian C. Domeck			125
Susan Patricia Griffith			125
John P. Sauerland			125
William M. Cody			50	1

 

1 Mr. Cody also earned a separate bonus relating to investment performance, as described below.

For all of the executives, these values remained unchanged from 2012. All Gainsharing payments for the named executive officers are reported on the Summary Compensation Table as “Non-Equity Incentive Plan Compensation.”

The “core business” for 2013 was defined to include our Agency auto, Direct auto, special lines, and Commercial Lines business units. This focus on performance at the business unit level was consistent with management’s approach to evaluating our operations. We used the number of “policies in force” to measure growth for each of those businesses, which aligns our Gainsharing program with our companywide strategic goal of growing policies in force as fast as possible at a 96 or better combined ratio. This strategic goal, which is applicable to all employees through the Gainsharing plan, allows employees to observe and understand how their day-to-day efforts to bring new customers on board and retain existing customers (i.e., increase policies in force), while at the same time controlling costs, can enhance company performance and increase the Gainsharing scores.

Under the Gainsharing program, we evaluated the performance of each business unit separately and determined a score for the business unit of between 0.0 and 2.0, based on one or more growth and profitability matrices that had been approved for each business unit by the Compensation Committee. For each matrix, a 1.0 score was established at a targeted profitability level together with a growth component that management believed, based on internal projections, to be challenging yet achievable (although it should be noted that a score at or near 1.0 could also be generated by a variety of other growth and profitability combinations; that is, if growth is below expectations, a 1.0 might still be achieved if profitability increases and, likewise, a moderate decrease in profitability might be offset by higher growth levels to generate a score around 1.0). Thus, assuming that targeted profitability levels could be achieved for a particular business unit (an assumption that was considered reasonable at the beginning of 2013 and consistent with our recent performance), the potential for that business unit to achieve the targeted 1.0 score was viewed as a reasonably challenging goal when these goals were established in early 2013.

An aggregate Gainshare Factor of 1.0 or higher for the core business as a whole, however, would require targeted performance or higher by all four business units, or outperformance by one or more units to make up for underperformance by another unit. Such a result was very uncertain at the beginning of the year when these goals were set in view of the very competitive nature of the insurance markets in which we operate and the overall economic outlook for the U.S. As a result, achieving an aggregate 1.0 score for the core business as a whole was viewed as being a more difficult feat than achieving

 

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a 1.0 score on any of the individual matrices. See “Narrative Disclosure to Summary Compensation Table and Grants of Plan-Based Awards Table,” beginning on page 43, for a more detailed discussion of the Gainsharing matrices and the calculation of performance scores.

For 2013, we achieved a Gainshare Factor of 1.21 for our core business, out of a possible 2.0 score. The following table presents the overall 2013 growth and profitability data for the individual business units that comprised our core business, and for our insurance operations on a companywide basis. The growth figures in the table below were determined by the year-over-year change in policies in force, which is management’s preferred measure for evaluating growth. Profitability was measured by the combined ratio calculated using GAAP financial information.

 

Business Unit		GAAP Combined Ratio1				Increase in Policies in Force
Agency			93.7				1%	2
Direct			93.0				6%	2
Special lines			—				1%
Commercial Lines			93.5				(1)%
Companywide insurance operations3			93.5				2%

 

1

Consistent with the presentation of the combined ratio of our Personal Lines segment in our public reports, the combined ratio results for our special lines business are not presented separately and, instead, are included in either the Agency or Direct results, depending on whether the underlying policy was written through agents/brokers or directly by Progressive.

 

2	Includes only auto policies in force.

 

3	Includes certain operations (principally, businesses that are currently in run-off) that are excluded from the definition of “core business” under the plan and represent less than 1% of our premium volume.

Using the actual performance results for the year and the Gainsharing matrices discussed above, we determined the performance score for each business unit comprising the core business, weighted those scores based on each business unit’s relative contribution to overall net premiums earned, and then added the weighted scores to determine the Gainshare Factor, as follows:

 

Business Unit		Business Unit Performance Score				Weighting Factor				Weighted Performance Score
Agency auto			.87				45%				.39
Direct auto			1.62				37%				.60
Special lines			1.55				8%				.12
Commercial Lines			.98				10%				.10
Gainshare Factor											1.21

As can be seen from this table, each of the business units contributed to the final Gainshare Factor for 2013. Direct auto and special lines units each exceeded a 1.0 score by a significant measure, while the Commercial Lines business finished just under 1.0. While the specific story varied for each business unit, these scores generally reflect modest growth in policies in force, notwithstanding the increases in our insurance rates in most markets during 2012 that continued to affect our rate of renewals during 2013, and strong profitability levels. Companywide performance was comparable: policies in force grew by about 2% and net premiums written and earned grew by 6% and 7%, respectively, at a profitable 93.5 combined ratio. Overall, we believe that the resulting 1.21 Gainshare Factor was a reasonable outcome based on these performance figures for the year.

2013 Investment Related Bonus. In addition to bonuses earned under our Gainsharing program, Mr. Cody, our Chief Investment Officer, and the other investment professionals who work in his group were eligible for a separate bonus under our 2013 Progressive Capital Management Bonus Plan (“PCM Bonus Plan”). Mr. Cody had a target bonus equal to 75% of his 2013 salary under this bonus plan; his bonus under this plan for 2013 could range from 0.0 to 2.0 times the target amount, or from 0% to 150% of his salary.

Under the PCM Bonus Plan, we determine the performance of our fixed-income portfolio for the current year and over the trailing three-year period, on a total return basis, including the benefit of state premium tax abatements associated with

 

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certain municipal securities held in our portfolio. We then compare those results against the total return results achieved by a benchmark group of comparable firms for the same time periods. After the end of the year, using performance data supplied by an independent third party, separate performance scores are determined based on our percentile ranking in the benchmark group for the one- and three-year periods, as follows:

 

Period

Score=0 Rank at or below

Score=1.0 Rank equal to

Score=2.0 Rank at or above

One year

15th percentile

50th percentile

85th percentile

Three year

25th percentile

50th percentile

75th percentile

Percentile rankings between the ranks that will earn a score of 0 and a score of 2.0 as shown above would receive an interpolated score based on the percentile ranking of our investment portfolio (e.g., a rank at the 40^th percentile would receive a score between 0 and 1.0). The two scores are then averaged to determine an indicated performance score for the year, and this score is communicated to the Compensation Committee. The Committee then evaluates the indicated score in the context of our investment results and other factors relevant to our investment performance for the year. The Committee may consult with other Board members or others, as it deems appropriate, for additional perspectives. Based on its evaluation, the Committee has the discretion to accept the indicated performance score, decrease it by an appropriate amount (including to “0”), or increase it up to the maximum allowed factor of 2.0, and to adjust the bonuses paid to Mr. Cody and our other investment professionals accordingly.

The fixed-income portfolio was chosen for the PCM Bonus Plan because it represents a substantial portion of our investment portfolio (roughly 80% at year-end) and Mr. Cody and the investment professionals in his group actively manage the fixed-income portfolio. To the extent that our equity investments are managed, they are managed by third parties. The use of the 15^th and 25^th percentiles as the minimum performance level, and of the 75^th and 85^th percentiles as the maximum performance levels, reflects the Committee’s decision that our investment constraints and guidelines differ from other firms included in the benchmark group. The Committee felt that requiring “average” performance prior to payout of bonuses, or rewarding performance above the 75^th or 85^th percentile, as applicable, might create an incentive to increase investment risks to a level that would exceed the company’s overall risk tolerance, and that below target payouts for performance between the 15^th or 25^th percentile, as applicable, and the 50^th percentiles was, on balance, fair compensation for results achieved.

For 2013, we achieved a total return in our fixed-income portfolio of 1.88% (including the benefit of state premium tax abatements associated with certain municipal securities held in our portfolio), which ranked us in the top position of the benchmark group of 131 comparable investment firms. For the three years ending on December 31, 2013, our fixed-income portfolio earned a cumulative return of 11.63%, ranking us in the 81^st percentile of the comparable firms. Using the methodology described above, we computed an indicated performance score of 2.0 under the plan for the year, which was communicated to the Compensation Committee. After reviewing the calculation and our investment results, and consulting with management and members of the Board’s Investment and Capital Committee, the Committee decided to pay the 2013 bonuses under the PCM Bonus Plan using a 2.0 performance factor, consistent with the calculated score. The Committee viewed this factor as a reasonable outcome under the plan for the year, given the relative performance of the portfolio. Mr. Cody’s bonus under the PCM Bonus Plan is reported on the Summary Compensation Table as part of “Non-Equity Incentive Plan Compensation.”

Equity Awards

Our executive compensation program also provides longer-term incentives through an annual grant of equity-based awards, currently in the form of restricted stock units. Under a restricted stock unit grant, the executive receives an award of a specified number of units; upon vesting of the award, the executive is entitled to receive one Progressive common share for each unit vested. Annual awards of restricted stock units are made in the form of time-based awards and performance-based awards. These awards are intended to encourage our senior executives to stay with Progressive, to drive longer-term performance, and to tie the amount of compensation ultimately earned by the executives to the market value of our common shares.

Time-Based Awards. In 2013, time-based restricted stock unit awards were granted to all named executive officers (other than Mr. Renwick) and approximately 675 other senior level employees, comprising approximately 2.6% of our entire employee population. These awards will vest in three equal annual installments, on January 1 of 2016, 2017, and 2018, subject to the vesting and forfeiture provisions in the applicable plan and grant agreement.

 

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Performance-Based Awards – Insurance Results. In addition, each of the named executive officers and 39 other senior managers received performance-based restricted stock unit grants. Mr. Renwick received his entire equity award in the form of performance-based restricted stock units.

For these awards, the Committee approved a performance goal that is based on our growth over a three-year period as compared with the growth of the U.S. auto insurance industry as a whole, while maintaining a profitability goal of a combined ratio of 96 or better over the most recent 12-month period when the vesting is determined. Specifically, the awards will vest, if at all, only if the compounded annual growth rate of our direct auto premiums written for 2013 through 2015 exceeds the growth rate of the auto insurance market as a whole (excluding our results) over that same period. In each case, we will use A.M. Best data to make these calculations. The award is made to each executive in a target amount of units based on a percentage of salary and the value of our common shares on the grant date. The ultimate payout (if any) is determined at the end of the three-year period, as follows:

 

Performance vs. Market		Number of Units Vesting
If our growth rate exceeds the market growth rate by three and a half percentage points or more		250% of the target number of units will vest; this is the maximum possible award value
If our growth rate exceeds the market growth rate by more than three percentage points but less than three and a half percentage points		Between 200% and 250% of the target number of units will vest, in proportion to the extent to which our growth rate exceeds the market’s growth rate above three percentage points (e.g., if our growth rate exceeds the market growth rate by 3.3 percentage points, then 230% of the award will vest)
If our growth rate exceeds the market growth rate by more than two but less than three percentage points		Between 100% and 200% of the target number of units will vest, in proportion to the extent to which our growth rate exceeds the market’s growth rate above two percentage points (e.g., if our growth rate exceeds the market growth rate by 2.4 percentage points, then 140% of the award will vest)
If our growth rate exceeds the market growth rate by up to two percentage points		Up to 100% of the target number of units will vest, in proportion to the extent to which our growth rate exceeds the market’s growth rate (e.g., if our growth rate exceeds the market growth rate by 1.4 percentage points, then 70% of the award will vest)
If our growth rate is equal to or less than the market growth rate		The award will not vest and is forfeited

If the growth goal is achieved for the three-year period, but the 12-month profitability goal is not satisfied when the initial vesting determinations are made, the award will remain open until January 31, 2018, in order to allow the opportunity to satisfy the profitability goal; if the profitability goal is not satisfied by that date, the awards will not vest and will expire. The Committee and management believe that this approach, with a potential upside for outperformance as compared with the auto insurance market as a whole, provides appropriate focus on our full competitor set, consistent with our long-standing financial objective to grow as fast as possible constrained only by our profitability objective and our ability to provide high-quality service to our customers.

Performance-Based Equity Awards – Investment Results. In 2013, the Committee also awarded performance-based restricted stock units to our CEO, CFO, and Chief Investment Officer with a performance goal relating to investment performance. These awards measure the performance of our fixed-income portfolio over a three-year period (2013 through 2015) against the performance results of a benchmark of comparable investment firms meeting a series of objective criteria. A target number of restricted stock units was awarded to each executive, and the number of units that ultimately will vest can vary from 0% of the target award (if our performance is at or below the 25^th percentile of the benchmark firms) to 200% of the target (for performance at or above the 75^th percentile of the benchmark). These awards did not increase the aggregate size of the equity awards to these executives, but represented a portion of the total performance-based awards that otherwise would have been granted to them for the year. The Committee implemented these performance-based awards to better align the compensation of these executives with their responsibilities in connection with the longer-term performance of our fixed-income portfolio. As with the PCM Bonus Plan, the use of the 25^th percentile as the minimum performance level, and of the 75^th percentile as the maximum performance level, reflects the Committee’s decision that our

 

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investment constraints and guidelines differ from other firms included in the comparison. The Committee felt that requiring “average” performance prior to vesting and/or rewarding performance above the 75^th percentile might create an incentive to increase investment risks to a level that would exceed the Company’s overall risk tolerance, and that below target payouts for performance between the 25^th and 50^th percentiles was, on balance, fair compensation for the results achieved.

2013 Equity Awards. For 2013, the aggregate dollar value (fair value on the date of grant) of equity awards made to the five named executive officers was approximately $1.8 million in time-based awards and $10.8 million in performance-based awards (at target value). Those awards were determined based on the following target levels:

 

		Time-Based  Award Value (% of Salary)								Performance-Based Award Target Value (% of Salary)1
Name		2012				2013				2012				2013
Glenn M. Renwick			0	%			0	%			1000	%			1000	%2
Brian C. Domeck			100				100				195				205	2
Susan Patricia Griffith			100				100				180				190
John P. Sauerland			100				100				180				190
William M. Cody			100				100				120				125	2

 

1	Pursuant to performance-based awards, between 0-250% (0-200% for investment-based awards) of the number of units awarded can vest. See discussion above.

 

2	For the following executives, investment-based awards (as described above) represented the indicated percentage of his total performance-based award for the year: Mr. Renwick, 15%; Mr. Domeck, 10%; and Mr. Cody, 60%.

As mentioned, Mr. Renwick’s award was entirely performance-based in 2013. His equity award was proportionally larger in the aggregate than other executives’ awards due to the level of responsibilities inherent in the CEO position and to the substantially below-market level of his base salary. As a result, more of his compensation is at risk and dependent on our operating and investment performance and stock price over the next several years. Increases in the target value for the named executive officers were designed to bring their potential compensation more in line with comparable executives at other companies, while strengthening the performance-based nature of their overall compensation packages.

Additional Comments Regarding 2013 Compensation Decisions

Chief Executive Officer. Mr. Renwick’s salary level has been maintained at $750,000 for over a decade. This amount is well below the 50^th percentile of approximately $1.18 million for CEO salaries at comparable companies. Mr. Renwick’s cash bonus (Gainsharing) potential has also remained at the same level for over a decade. The Compensation Committee determined in 2004 that Mr. Renwick should receive, instead of additional cash compensation, a larger proportion of his potential compensation in the form of equity-based awards and the overall target value of his equity awards have remained at the same level since that time. Since 2011, Mr. Renwick has received all of his equity awards in the form of performance-based equity. Depending on the level of our performance, his 2013 awards can vest from 0% to 250% (or, with respect to his investment-related award, 200%) of the units awarded. In this way, we have kept Mr. Renwick’s overall compensation at a competitive level, while maintaining a very high portion of his potential compensation at risk and dependent on our performance and our stock price, increasing his equity participation and aligning his interests with those of shareholders.

Based on the Board of Directors’ annual review of Mr. Renwick’s performance, the Compensation Committee determined that his performance as CEO clearly justified the continuation of the pay package for 2013, with the same target award levels as in prior years. The Committee determined that these awards would present appropriate incentives to drive our performance and maximize the extent to which his interests are aligned with the interests of shareholders. The Committee believes that this program presents a rational and strongly performance-based pay package for an outstanding CEO.

The result of these determinations for 2013 was that, despite his below median salary and target bonus, Mr. Renwick had the potential to earn total compensation that was ranked at roughly the 50^th percentile of his comparison group if he were to receive a cash bonus based on a 1.0 Gainshare Factor and his performance-based restricted stock unit awards were to vest at their target amounts. His compensation could significantly exceed the 75^th percentile of comparable CEO compensation if all performance-based compensation were to be maximized – that is, if the cash bonus for 2013 were to be paid based on a 2.0 performance factor and all restricted stock unit awards ultimately vest, including the vesting of

 

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insurance-related performance-based units at 250% of the target amount and the vesting of investment-related performance-based units at 200% of the target amount. The value of these awards to Mr. Renwick, and the eventual ranking of his compensation for 2013 in his comparison group, depends on his 2013 cash bonus payment (which paid out above the target value at a 1.21 factor for the year), the extent to which the restricted stock unit awards ultimately will vest, and the value of our common shares at that time.

After Mr. Renwick was appointed Chairman of the Board, in addition to President and Chief Executive Officer, in November 2013, the Compensation Committee reviewed his compensation to determine whether additional compensation should be provided to him. Consistent with market comparisons, the Committee decided not to increase Mr. Renwick’s compensation as a result of his taking on additional duties as Chairman of the Board.

Other Named Executive Officers. The combination of annual salaries and variable compensation (i.e., the potential for cash bonuses and the possibility of restricted stock unit awards vesting in future years) is expected to allow our executives the opportunity to earn above average compensation if and when justified by the company’s performance and our stock price. Comparison information is only one of a number of factors considered by the Committee in setting compensation each year, along with other factors such as the length of the executive’s experience in the specific job, the nature of the job held and related responsibilities, individual performance, expected future contributions, the reliability of the comparison data, our business needs, and the variable nature of significant portions of each executive’s pay package. However, we present comparison data here for the shareholders’ information (see “Procedures and Policies – Compensation Comparisons” below for further information on our market comparison process).

Assuming that cash bonuses paid out at a 1.0 performance factor for the year and performance-based equity also vested at the target 1.0 factor, each of Mr. Domeck, Mrs. Griffith, and Mr. Sauerland would receive total compensation for 2013 below the 50^th percentile level for comparable jobs. Under the same circumstances, Mr. Cody would receive total compensation for 2013 between the 50^th and 75^th percentiles compared to data for chief investment officers at insurance companies but below the 50^th percentile compared to data for investment management and advisory firms. In the event that we were to earn a 2.0 payout under our cash bonus plans and the 2013 equity awards vest at their maximum level (including insurance-based performance-based restricted stock unit awards vesting at 250% of target and investment-based performance-based restricted stock units awards vesting at 200% of target) the total compensation for each of Mr. Domeck, Mrs. Griffith, and Mr. Sauerland for 2013 would be slightly in excess of the 75^th percentile for comparable positions. Under the same circumstances, Mr. Cody would receive total compensation for 2013 substantially in excess of the 75^th percentile compared to data for chief investment officers at insurance companies but below the 50^th percentile compared to data for investment management and advisory firms.

It should be noted, however, that the ultimate value of these awards (if any) remains dependent on the executive remaining with the company for the required time period, our achieving the applicable performance goals, and the value of our common shares at the time of vesting. Thus, for each named executive officer, a substantial portion of the compensation used to establish his or her potential percentile rank, and the value of those awards, will remain at risk for years before it is earned by the executive, and some of the restricted stock unit awards in fact may never vest.

No Significant Changes for 2014

Our executive officers (other than Mr. Renwick) received salary raises for 2014, and three of them received an increased performance-based equity award (as a percentage of their salary) compared to 2013. However, the structure and terms of the compensation program for the named executive officers for 2014 do not include any significant changes from 2013.

OTHER ELEMENTS OF COMPENSATION

Perquisites

We provide perquisites to our executives only when the Board or the Compensation Committee determines that such benefits are in the interests of Progressive and our shareholders. We own an aircraft that is used primarily for the CEO’s business travel. At the request of the Board of Directors, Mr. Renwick also uses the company aircraft for his personal travel and that of his spouse when she accompanies him. Such personal use of the aircraft constitutes a perquisite and is provided to enhance the CEO’s and his family’s personal security and the confidentiality of their travel. During 2013, we incurred approximately $107,000 in incremental costs as a result of Mr. Renwick’s personal use of the aircraft. Such

 

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personal trips by the CEO also result in taxable income being imputed to him as required under IRS regulations, and he is responsible for paying the taxes on such income without further contribution or reimbursement from us. Other executives and guests may occasionally accompany the CEO on personal trips, at the CEO’s discretion.

Mr. Renwick is also provided with a company car and driver for his business needs to facilitate his transportation to and among our headquarters and many other local facilities, and to allow him to use that travel time for work purposes. To the extent that the CEO uses the company car for personal matters, he receives a perquisite.

In addition, during 2013, we reimbursed Mr. Renwick for a $45,000 filing fee associated with a filing made to the Federal Trade Commission under the Hart-Scott-Rodino (HSR) Act’s pre-merger notification requirements. These filings are required prior to the acquisition of a company’s common shares when a shareholder’s ownership levels will exceed certain dollar thresholds and are subject to certain exceptions. Often, significant shareholders are exempt from these filing requirements because they hold the shares on an “investment only” basis (i.e., as a passive investor); under the HSR rules, however, Mr. Renwick was required to file only because, at the time of his acquisition, he was a director and executive officer of Progressive and, therefore, the passive investor exception was not available. In addition, the filing was triggered by acquisitions of common shares under our equity compensation plans. Under these circumstances, the Board determined that the filing fee was an expense that was properly paid by the Company.

See the “All Other Compensation” column of the “Summary Compensation Table” on page 40 for additional information concerning perquisites.

Deferral Arrangements

The named executive officers and certain other senior level employees are given the opportunity to defer the receipt of annual cash bonus awards and equity-based awards under our Executive Deferred Compensation Plan (EDCP). This deferral mechanism allows the executive to delay receipt of bonus income or the vesting of restricted shares or restricted stock unit awards that he or she has earned in full and otherwise would have received as of a specific date. We do not contribute additional amounts to an executive’s deferral account, either in the year of deferral or in future years. We also do not guarantee a specific investment return to executives who elect to participate in the deferral plan.

Deferred amounts are deemed to be invested in specific investments selected by the executive, including an option to invest in Progressive common shares. Deferrals of restricted shares or restricted stock unit awards made in or after March 2005 are required to be invested in Progressive common shares throughout the deferral period. The value of each executive’s deferred account thus varies based on the executive’s investment choices and market factors; these deferred amounts are at risk and may decrease in value if the investments selected by the executive do not perform well during the deferral period. Additional details concerning this plan, including the named executive officers’ respective holdings in the plan, can be found under the “Nonqualified Deferred Compensation” table and related disclosures, beginning on page 51.

The EDCP is made available to executives in order to keep our executive compensation program competitive and to allow executives to manage their receipt of compensation to better fit their life circumstances and to manage their tax obligations. Moreover, the plan allows the executive to arrange for a portion of his or her income to be paid in post-employment years, which can be important because we do not offer a pension plan or supplemental retirement benefits to executives. Finally, if top executives elect to defer time-based equity awards until after they leave Progressive, this program is advantageous to the company to the extent that a tax deduction might have been disallowed under Internal Revenue Code Section 162(m) upon the vesting of those awards (see related discussion under “Section 162(m) of the Internal Revenue Code” below).

Retirement

Executives are eligible to participate in our 401(k) plan on the same terms and conditions as are available to all other regular employees, subject to limitations under applicable law, and upon leaving the company, he or she may receive a payout of unused vacation and personal time (which we call “earned time benefit”), subject to limitations applicable to all employees. We do not provide other post-retirement payments or benefits to executives, such as a pension program or supplemental executive retirement plan, other than the following:

 

•

As discussed in the preceding section, an executive who chose to participate in our deferral program may be entitled to receive post-employment payments of sums that he or she had previously earned (as increased or decreased by investment results), if he or she elected to receive such payments after leaving Progressive.

 

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•

Our named executive officers, along with all other equity award recipients, are eligible for “qualified retirement” treatment under our equity compensation plans.

 

•

Under this arrangement, an equity award holder who reaches age 55 having satisfied certain years-of-service and other requirements is entitled to (i) have 50% of his or her outstanding time-based equity awards vest upon termination (except as described in the following bullet), and (ii) if applicable, retain rights to 50% (and in some cases 100%) of his or her outstanding performance-based awards, which remain at risk and will vest (if at all) only to the extent that the applicable performance criteria are achieved prior to expiration of the award.

 

•

With respect to the time-based equity awards granted in 2013, once an executive is eligible for a qualified retirement, 50% of his or her time-based restricted stock unit awards vest. The remaining 50% will vest only if the equity award holder remains with the company for the required time period(s). Should the executive leave the company after being eligible for a qualified retirement but before a subsequent time-based vesting date, any unvested units would be forfeited.

The qualified retirement provisions are intended to provide a benefit for long-tenured employees who retire from Progressive after satisfying the age and service requirements. Currently, Mr. Renwick, our CEO, is our only named executive officer who has satisfied the requirements for a qualified retirement; however, he no longer receives time-based restricted stock unit awards. Mr. Domeck is expected to satisfy these requirements in 2014. For more information about the qualified retirement benefits, see “Qualified Retirement Provisions Under Equity Plans” beginning on page 56.

Severance and Change-in-Control Arrangements

Severance and change-in-control arrangements are intended to provide compensation and a fair financial transition for an executive when an adverse change in his or her employment situation is required due to our company needs or results from certain unexpected corporate events, and to recognize past contributions by such executives who are typically long-tenured employees. These arrangements allow the executive to focus on performance, and not his or her personal financial situation, in the face of uncertain or difficult times or events beyond his or her control. Each of these programs is discussed in more detail here and under “Potential Payments Upon Termination or Change in Control” beginning on page 53.

Severance. Our executive separation allowance plan is designed to provide executives with well-defined financial payments if the executive’s employment is terminated for any reason other than resignation (including retirement), death, disability, leave of absence, or discharge for cause, if certain conditions are satisfied. For our senior executives, including the named executive officers, the severance payment would not exceed three years of the executive’s base salary only (i.e., excluding cash bonuses and equity awards) at the time of termination, plus medical, dental, and vision benefits for up to 18 months at regular employee costs. These benefits are payable to the named executive officers upon any qualifying separation from Progressive, whether in a change-in-control situation or otherwise.

We believe that this level of severance payment (a maximum of three times the executive’s base salary) is reasonable based on available market data. The severance payments do not take into account or include the value of cash bonuses or equity-based awards in determining the executive’s severance payment, which substantially limits the amount of the severance payment when compared with severance plans offered by many other companies. In addition, an executive who qualifies for a severance payment under this plan does not receive accelerated vesting of equity awards (although those awards may vest (or partially vest) separately under our equity incentive plans if the executive is eligible for a qualified retirement, discussed above, or in a change-in-control scenario, as discussed immediately below). Finally, the executive will receive no tax “gross-up” payment to compensate him or her for any taxes which he or she may be required to pay in connection with a severance payment. Management and the Committee accordingly believe that such severance rights provide executives with a fair, but not excessive, financial transition when an executive is asked to leave the company.

The dollar values of benefits that would be payable to named executive officers upon a qualifying termination under our severance plan are summarized under “Severance” beginning on page 53.

Change-in-Control Benefits under Equity Plans. Beginning with the awards of restricted stock units in March 2010, we modified the rights of recipients in the event of a change in control of the company. Prior awards of restricted shares are still controlled by the change-in-control provisions that we have previously discussed, and a description of those provisions can be found under “Change-in-Control Provisions Under Equity Plans” beginning on page 54.

 

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Under the provisions applicable to restricted stock unit awards, a “change in control” is only deemed to occur upon a change in ownership of the company, a change in the effective control of the company, or a change in the ownership of a substantial portion of our assets, each as further defined in Section 409A of the Internal Revenue Code and related regulations. Upon the occurrence of any change in control, outstanding restricted stock units may vest immediately or they may vest only after the executive is terminated or leaves our employ for “good reason,” depending on the type of award and the nature of the change-in-control transaction. “Good reason” is defined by the plan to include various adverse employment decisions, such as a significant change in duties, position, or responsibilities; a decrease in pay, bonus opportunity, or equity awards; a required relocation; and the denial of the right to participate in health and welfare plans on the same basis available to other employees, in each case occurring within 24 months after the change in control.

In the following circumstances, even though a change of control has occurred, outstanding restricted stock unit awards will not vest as a result of the change of control, and will continue to vest according to the terms of the applicable award agreement (unless the executive is terminated or leaves our employ for good reason as described above):

 

•

If the change of control is solely a result of an investor purchasing the necessary portion of our common shares or a result of a turnover of our Board of Directors;

 

•

If the event does not result in the liquidation or cancellation of, or other change to, the company’s equity (e.g., where our common shares are the surviving security in a corporate transaction); and

 

•

For time-based awards, if in a corporate transaction the other company’s stock is the surviving security.

In the last event listed above, all outstanding time-based awards will be converted into a new equity award with a value calculated according to the terms of the transaction, and otherwise on terms and conditions substantially similar to the outstanding award, including vesting requirements.

On the other hand, immediate vesting upon a change in control and a cash payout will occur under the following limited circumstances:

 

•

A transaction that results in the payment of cash for each outstanding Progressive common share, with the payout being based on the cash compensation being paid to shareholders; and

 

•

With respect to performance-based awards, if in a corporate transaction the other company’s stock is the surviving security, with the payout being based on the fair market value of common shares immediately prior to the change in control event.

In the event of an immediate vesting relating to performance-based awards, the cash paid will be based on the target number of units comprising the award.

We have adopted these rules based on our assessment of the interplay between the potential outcomes of the various scenarios and the application of Section 409A of the Internal Revenue Code (for additional information about Section 409A, see page 37) as it applies to awards of restricted stock units. We started with a bias to create “double trigger” vesting where appropriate. In the context of cash transactions and performance-based awards, however, it was not possible to impose the double-trigger requirement (i.e., leaving our employ) while also ensuring compliance with Section 409A and maintaining the integrity of the underlying award. In those cases, therefore, we adopted a payout upon the occurrence of a change in control.

The dollar values of benefits that would be payable to the named executive officers upon a change in control under our equity plans are summarized under “Change-in-Control Provisions Under Equity Plans,” beginning on page 54.

Death or Disability

With certain exceptions (including those described below), upon the death or, as to certain equity awards, permanent disability, of a named executive officer, he or she (or his or her estate) (i) will retain rights to outstanding performance-based restricted equity awards to the extent the awards vest during the 12 months immediately following death or disability, (ii) will vest immediately with respect to outstanding time-based awards to the extent the award would have vested during that same 12-month period, and (iii) all other restricted shares and restricted stock unit awards are forfeited. For awards made in or after March 2013, once an executive has reached his or her qualified retirement eligibility date (described above), all time-based unit awards that have not vested prior to his or her death will be forfeited and his or her death will be treated as a qualified retirement with respect to performance-based awards. These provisions apply equally to all participants in our equity incentive awards.

 

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If the executive had elected to defer bonuses or equity-based awards, he or she (or the estate) would also be entitled to receive distributions from our deferral plan in accordance with the executive’s prior elections and the terms of that plan. The executive (or upon death, his or her estate) could also be entitled to receive a payout of unused vacation and personal time (earned time benefit), subject to limitations applicable to all employees, and to receive certain health and welfare benefits as prescribed for all employees by federal COBRA laws. No other post-employment payments would be made to the executives or his or her estate under these circumstances.

Health and Welfare Benefits

Named executive officers are also eligible to participate in our health and welfare plans, including medical and dental benefits, a 401(k) savings plan (with matching contributions by the company up to a specified annual limit), and a limited life insurance benefit (with the ability to purchase additional coverage without company contribution), among other benefits. These plans are available on the same basis to all of our regular employees who satisfy minimum eligibility requirements.

PROCEDURES AND POLICIES

Compensation Committee Decisions

The Compensation Committee makes all final determinations regarding executive compensation, including salary and equity and non-equity incentive compensation targets and performance goals. Committee decisions on executive compensation are made after considering each executive’s role and responsibilities, performance evaluations, recommendations presented by management, compensation data from comparable companies obtained from our compensation consultants and other third parties, and analyses performed by our Compensation Department and consultants. Our CEO participates in certain Committee meetings to discuss significant compensation issues with the Committee or to provide recommendations to the Committee regarding the compensation of executive officers. The Committee’s executive compensation decisions thus represent the culmination of extensive analysis and discussion between the Committee and management, including our CEO, our Chief Human Resource Officer, members of the Compensation Department and Law Department, and other Progressive personnel. The Committee routinely reports to the full Board of Directors on compensation matters, generally after each regularly scheduled Committee meeting.

The Committee delegates to management the day-to-day implementation of compensation programs for employees below the level of executive management, subject to the terms of plans approved by the Committee. Generally, however, we seek to offer a consistent compensation program across our company, and as a result, determinations made by the Committee on executive compensation, such as performance goals under our Gainsharing program, generally apply to other employees as well.

The Committee has the authority under its charter to hire its own compensation consultants, at our expense. The Committee did not retain a compensation consultant during 2013.

Compensation Comparisons

Our executive compensation program is market-based and is designed to be competitive with other compensation opportunities available to executives. However, compensation comparisons alone do not drive the Committee’s decisions, which result from a number of factors that are reviewed and evaluated by the Committee. These factors can be different for individual executives, can vary from year to year, and can include a number of qualitative and quantitative judgments, including the nature of a specific executive’s position and responsibilities, our business needs and culture, the experience of an executive in his or her position, past compensation history, individual performance, and the executive’s future potential, among other matters. Compensation comparisons are another factor that enter into this analysis.

For 2013, executive compensation survey data and statistical analyses that we used for our named executive officers (other than our Chief Investment Officer) were provided by management’s compensation consultant, Pearl Meyer & Partners, as follows:

 

•

Proxy statement data for 13 publicly held insurance companies;

 

•

Survey data published by Towers Watson and Aon Hewitt of public companies in the $10 billion to $25 billion revenue range; and

 

•

Proxy statement data for 40 public companies within close proximity to Progressive on the Fortune 500 list.

 

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The first category included publicly held insurance companies, which represent potential competitors for our executive talent. We included companies with comparable total revenues, rather than total assets, due to significant asset size differences between insurance companies writing different types of insurance products. The companies in this category were:

 

Aflac Inc.		Allstate Corp.		Assurant Inc.
Chubb Corp.		CNA Financial Group		Genworth Financial Inc.
Hartford Financial Services Group Inc.		Lincoln National Corp.		Metlife Inc.
Principal Financial Group Inc.		Prudential Financial Inc.		Travelers Companies, Inc.
Unum Group

The remaining two categories included a large number of companies from many industries. These companies were also selected based on company revenues and not total assets, given significant differences in asset requirements across various industries. Further, this choice reflects that we do not generally recruit senior management level talent from other insurance companies, and that our executives have employment opportunities with companies doing business in a variety of industries. As a result, we view the broad range of companies to be an appropriate reflection of the marketplace for the services of our executives. The comparison data for our Chief Investment Officer was obtained from survey data published by McLagan, which included comparisons to chief investment officers at other insurance companies and comparable positions at investment management and advisory firms.

In evaluating the data from these groups, we do not focus on the identity of any individual company, but are interested in the aggregate data and the range of pay. All compensation comparisons referred to in this report are based on the data for these comparison groups. The comparisons were provided to the Compensation Committee in late 2012 or early 2013, at the time that the Committee was considering 2013 compensation decisions for the named executive officers.

Use of “Tally Sheets”

When the Compensation Committee is considering annual compensation decisions for executives, the Committee is provided with information showing, for each executive, the total aggregate compensation (salary, target cash bonus potential, and equity-based award values) proposed to be awarded to such executive for the upcoming year. These tally sheets are used by the Committee to review each executive’s current compensation level and to enable meaningful comparisons to the compensation paid to similar executives at comparable companies. This is one way that the Committee monitors and assesses the reasonableness of its annual compensation decisions for each executive.

In addition, at least annually, the Committee reviews summaries of the payments that would be made to each executive upon the occurrence of various events, such as termination, retirement, or a change in control. These tally sheets allow the Committee to see, in one place, all of the potential payouts that an executive can receive in addition to annual compensation awards. Such payouts may arise from a number of sources, depending on the event triggering the payments, including: the executive’s prior service and earnings (such as distributions from deferral accounts); payments triggered by an employment termination (severance); or an acceleration of a vesting event that otherwise would not have occurred, if at all, until a future date (for example, vesting of equity-based awards upon a “qualifying retirement” or a “change in control”). The Committee thus is able to understand and monitor the amount of such potential payouts in each scenario, and to distinguish the source of individual components of such payouts.

To the extent that these payments arise from an executive’s prior earnings (such as distributions from deferral accounts), the Committee generally does not view such payments negatively, since those amounts were previously earned in full by the executive, the value of the account has increased (or decreased) over time based on the executive’s investment elections (which can include investments in Progressive common shares), and we have made no subsequent contributions to increase the value of these accounts. To the extent that these payments arise from performance measures established in prior years, the Committee generally does not view such payments negatively either, since the amount and timing is dependent on whether and when the Company achieves the stated performance goals and the executive’s services that helped lead to the achievements. Potential severance payments and acceleration events, on the other hand, are monitored by the Committee to ensure that they are reasonable and appropriate in the applicable scenarios.

Internal Pay Equity; Wealth Accumulation

We do not use “internal pay equity” or “wealth accumulation” analyses to limit compensation paid to the CEO or other executives. Such systems typically put a ceiling on part or all of an executive’s compensation based on considerations such

 

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as the amount of compensation paid to another executive or employee or the value of awards previously made to the executive in question. Management and the Committee believe that such limitations are not an appropriate way to make compensation decisions for our executives and that such procedures would be contrary to the interests of the company and our shareholders. Instead, our focus is to make appropriate executive compensation decisions annually, so that executives are paid at competitive levels with a significant “at risk,” performance-based component that is commensurate with the executive’s responsibilities. We rely on the judgment of the Committee, after considering recommendations from management, including the CEO, available market data, and evaluations of executive performance, in making these decisions.

No Tax “Gross-Up” Payments

We do not provide tax gross-up payments in connection with an executive officer’s compensation, severance, change-in-control payments, perquisites, or other benefits provided by us. Minor exceptions to this rule may arise under terms that apply to all of our employees; for example, any employee, including an executive officer, who receives taxable benefits from us under our relocation program is entitled to receive payments to defray the related tax obligation.

Effect of Any Future Financial Restatement; Recoupment

The current terms of our cash bonus programs and performance-based equity awards allow us to recoup payments and vested awards from executive officers, if the applicable operating or financial results triggering such payment or the vesting of such award are later restated, to the extent that such bonuses or awards would not have been paid out based on the revised operating or financial results. For additional information concerning these recoupment or “clawback” rights, including the limitation thereon, see “Narrative Disclosure to Summary Compensation Table and Grants of Plan-Based Awards Table” beginning on page 43.

Equity Ownership Guidelines for Executives

Within five years after becoming our CEO and at all times while serving as CEO thereafter, the CEO must acquire and hold Progressive common shares (or equivalent vested interests, such as shares held on his behalf in our 401(k) plan or equivalent units held in our executive deferred compensation plan, but excluding unvested restricted shares and restricted stock units) with a minimum value of five times the CEO’s base salary. Executive officers who report directly to the CEO are expected to hold meaningful amounts of Progressive equity at levels that their respective compensation and financial circumstances permit. To support this goal, each executive’s annual compensation is heavily weighted towards equity compensation. As a result, within three years of becoming an executive, each executive is expected to hold restricted or unrestricted equity with a value of at least three times his or her base salary. Management and the Committee believe that equity holdings under these guidelines, as well as additional, voluntary holdings by executives in our equity, 401(k), and deferral plans, or in their personal accounts, appropriately ensure that the interests of management will be aligned with those of our shareholders. As of December 31, 2013, each of the named executive officers satisfied the applicable guideline.

Limitations on Pledges

Our executive officers and directors are prohibited from pledging their Progressive common shares as collateral for any loan unless they receive advance approval. The prohibition includes margin loans. Officers must receive approval from two of the following: CEO, CFO, and Chief Legal Officer. Directors (including our CEO) must receive approval from two disinterested members of the Executive Committee. Any request for approval, and the determination, is reported to the Nominating and Governance Committee. We are not aware of any pledge of Progressive common shares by a director or executive officer.

Prohibitions on Derivatives and Hedging Transactions

Our executive officers and directors are prohibited from entering into any transaction in derivatives or other instruments that are based on or relate to our common shares or any other Progressive security. In addition, directors and executive officers are prohibited from buying, selling, or trading any financial instrument (such as a variable forward contract, equity swap, credit default swap, option, collar, or exchange fund), or initiating or participating in any other transaction, that is designed or intended to hedge against, or profit from, a decrease in the market value of our common shares or any other Progressive security.

Timing of Equity Awards

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such awards because it follows shortly after annual performance evaluations and salary adjustments for executives and other equity eligible employees, thus providing an administratively convenient time to calculate the awards and communicate them to the recipients. In addition, the timing in mid-March also follows the publication of our annual report for the prior year and, typically, the publication of our financial results for the first two months of the year, ensuring that up-to-date public information concerning the company is available in the marketplace at that time. Historically, interim awards have been made to an executive officer only at the time of his or her appointment to or promotion within the executive team; any such interim award to an executive officer would require the approval of the Compensation Committee.

RELATED CONSIDERATIONS

Section 162(m) of the Internal Revenue Code

Section 162(m) of the Internal Revenue Code limits to $1 million per year (“deduction limit”) the deduction allowed for federal income tax purposes for compensation paid to each of the chief executive officer and the three other most highly compensated executives of a public company other than the chief financial officer (“covered employees”). This deduction limit does not apply to compensation paid under a plan that meets certain requirements for “performance-based compensation.” Generally, to qualify for this exception: (a) the compensation must be payable solely on account of the attainment of one or more pre-established objective performance goals; (b) the performance goals must be established by a compensation committee of the board of directors that is comprised solely of two or more “outside directors”; (c) the material terms of the performance goals must be disclosed to and approved by shareholders before payment; and (d) the compensation committee must certify in writing prior to payment that the performance goals and any other material terms have been satisfied.

Our policy is to structure incentive compensation programs for covered employees to satisfy the requirements for the “performance-based compensation” exception to the deduction limit and, thus, to preserve the deductibility of compensation paid to covered employees, to the extent consistent with our compensation practices and programs. Accordingly, our equity plans and our 2007 Executive Bonus Plan (the formal plan through which Gainsharing bonuses for the CEO and the other named executive officers is administered) have been approved by shareholders, and we intend to operate these plans in compliance with the requirements of Section 162(m). Several elements of our compensation program, however, constitute income that is not considered “performance-based” under Section 162(m), including: base salary; the income recognized upon the vesting of time-based restricted shares or restricted stock unit awards; cash bonuses paid under our PCM Bonus Plan; income arising from perquisites; dividends paid on unvested restricted equity awards; deferred dividends paid out when underlying time-based awards vest; and certain distributions made to a covered employee under our executive deferral plan.

If the total of any covered employee’s compensation that does not satisfy the “performance-based compensation” exception exceeds $1 million in any year, Progressive will not be entitled to a federal income tax deduction for the amount that exceeds $1 million. Management and the Committee will continue to monitor the actual tax impact of such compensation strategies each year and consider such impact in making compensation decisions. We will not necessarily discontinue or decline to adopt a compensation plan, however, that has a potential negative tax impact under Section 162(m), if we believe that the program in question is appropriate and in the interest of shareholders, including the non-performance-based elements of compensation referred to in the prior paragraph.

In 2013, non-performance-based compensation earned by Mr. Renwick exceeded the $1 million threshold by approximately $1.1 million. In addition to his salary, this excess was due to his receipt of dividends on outstanding restricted shares, his receipt of deferred dividends upon the vesting of other time-based awards, a distribution from our executive deferral plan, and certain expense reimbursements. In addition, the non-performance-based compensation earned by each of Mr. Cody, Mrs. Griffith, and Mr. Sauerland exceeded the threshold by approximately $353,000, $111,000, and $101,000, respectively, principally arising from salary, dividends on equity awards, the vesting of time-based equity awards, and, in the case of Mr. Cody, his bonus earned under our PCM Bonus Plan and a distribution from our executive deferral plan.

Section 409A of the Internal Revenue Code

Section 409A of the Internal Revenue Code sets forth requirements for non-qualified deferred compensation arrangements. These requirements apply to deferrals of compensation earned or vested after 2004. If deferrals do not comply with the requirements, the amount deferred is immediately includable in the individual’s taxable income, and the individual is subject to an additional 20% tax plus interest, even if the actual payment of value to the individual might be delayed for years under the applicable plan or award. We believe that our current plans and programs either qualify for exemption from Section 409A or have been amended or designed to comply with Section 409A requirements.

 

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COMPENSATION PROGRAMS AND RISK MANAGEMENT

We believe that our compensation plans and incentives are designed so that employees are not encouraged to take inappropriate risks. Our compensation plans include appropriate risk control mechanisms, along with the applicable profit margin, growth, or other performance goals. The criteria used to calculate cash bonuses under our Gainsharing program, as well as the goals under our performance-based equity awards that measure insurance results, reward the achievement of challenging growth goals, but only if our profitability is within specified levels. Under our Gainsharing program, moreover, these performance measures are applied on a companywide basis, ensuring that all of our employees are motivated to pursue the same strategic goals, and individual employees do not have incentives to focus on other priorities to the potential detriment of the organization.

In addition, we have an annual cash incentive program for our investment professionals, who actively manage our fixed-income portfolio, which represented approximately 80% of our invested assets at year end. The primary constraints on the risks inherent in our fixed-income portfolio are our internal investment guidelines relating to credit quality, duration, issuer concentration, and other parameters, which are approved by the Board’s Investment and Capital Committee. Within this framework, our bonus plan compares the total return of our fixed-income portfolio against the results achieved by comparable firms in an investment benchmark for the current year and over the trailing three-year period to determine an indicated performance score. The Compensation Committee, in its discretion, can accept the indicated performance factor, or increase or decrease it, based on its evaluation of our fixed-income investment performance for the year; bonuses for our investment professionals are then adjusted accordingly. We believe that this combination of investment guidelines and one-year and three-year performance comparisons, with an overlay of Committee discretion to monitor performance and bonus results, appropriately addresses the risks attendant to the work of our investment professionals.

In 2013, we also awarded performance-based equity awards tied to the relative performance of our fixed-income portfolio to our CEO, CFO, and Chief Investment Officer. Under these awards, our portfolio’s 3-year performance is evaluated against the total returns of comparable firms over the same periods, similar to the cash bonus plan for our investment professionals described above. Maximum payout under these awards occurs at performance at the 75^th percentile of comparable firms to mitigate any incentive to increase investment risks to a level that would exceed the company’s overall risk tolerance. We believe that the focus on the three-year results, along with the investment constraints mentioned above and the use of the 75^th percentile as the maximum payout measure, provides appropriate incentives for these executives without creating inappropriate risks.

In addition, our current cash bonus programs and performance-based equity awards allow us to recoup payments and vested awards from executive officers, if the applicable operating or financial results triggering payments or vesting of the award are later restated, to the extent that such bonuses or awards would not have been paid out based on the revised operating or financial results. For additional information concerning these recoupment or “clawback” rights and the limitation thereon, see “Narrative Disclosure to Summary Compensation Table and Grants of Plan-Based Awards Table” beginning on page 43.

Based on these considerations, among others, we do not believe that our compensation policies and practices create risks that are likely to have a material adverse effect on the company.

 

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EXECUTIVE COMPENSATION

The following information is set forth with respect to the total compensation of our named executive officers (NEOs) for 2013, who include the Chief Executive Officer (CEO), the Chief Financial Officer (CFO), and our three other most highly compensated executive officers. The titles set forth below reflect positions held at December 31, 2013.

SUMMARY COMPENSATION TABLE

 

Name and Principal Position		Year				Salary ($)				Bonus ($)				Stock  Awards1 ($)				Non-Equity Incentive Plan Compensation2 ($)				All Other Compensation3 ($)				Total ($)
Glenn M. Renwick			2013			$	750,000			$	—			$	7,500,044			$	1,361,250			$	173,480			$	9,784,774
Chairman, President, and			2012				750,000				—				7,500,020				1,260,000				140,519				9,650,539
Chief Executive Officer			2011				750,000				—				7,500,007				1,237,500				128,260				9,615,767
Brian C. Domeck			2013				482,115				—				1,479,274				729,199				12,000				2,702,588
Vice President and Chief			2012				458,846				—				1,357,024				642,385				12,000				2,470,255
Financial Officer			2011				443,461				—				1,223,768				609,759				12,750				2,289,738
Susan Patricia Griffith			2013				462,115				—				1,348,566				698,950				12,750				2,522,381
Claims Group President			2012				439,615				—				1,232,065				615,462				12,000				2,299,142
			2011				433,462				—				1,131,067				596,010				12,042				2,172,581
John P. Sauerland			2013				462,115				—				1,348,566				698,950				12,000				2,521,631
Personal Lines Group President			2012				439,615				—				1,232,065				615,462				12,000				2,299,142
			2011				433,462				—				1,131,067				596,010				12,000				2,172,539
William M. Cody			2013				417,692				—				945,100				879,241				12,000				2,254,033
Chief Investment Officer			2012				399,230				—				880,082				594,853				12,000				1,886,165
			2011				389,230				268,569	4			858,048				214,077				12,350				1,742,274

 

1	Represents grant date fair value of restricted stock unit awards for each year. Grant date fair value is measured using the closing price of our stock on the date of grant.

 

With regard to performance-based awards, the grant date fair value represents the target value; however, the ultimate value to the NEO can range from 0-250% of the target amount for 2013 insurance-related awards, and from 0-200% for all other awards, depending on performance. The following table represents the value of performance-based awards at grant date assuming the maximum level of performance conditions will be achieved.

 

Name		Grant Year				Grant Date Fair Value (Maximum Performance)
Glenn M. Renwick			2013			$	18,187,600
			2012				15,000,040
			2011				15,000,014
Brian C. Domeck			2013				2,437,153
			2012				1,794,040
			2011				1,557,508
Susan Patricia Griffith			2013				2,208,758
			2012				1,584,001
			2011				1,392,032
John P. Sauerland			2013				2,208,758
			2012				1,584,001
			2011				1,392,032
William M. Cody			2013				1,155,082
			2012				960,073
			2011				936,030

 

For the terms of awards granted in 2013, see the “Grants of Plan-Based Awards” table below and “Narrative Disclosure to Summary Compensation Table and Grants of Plan-Based Awards Table,” beginning on page 43. Also, see the “Compensation Discussion and Analysis,” beginning on page 22, as well as Note 9 – Employee Benefit Plans in Progressive’s 2013 Annual Report to Shareholders, which is included as an appendix to this Proxy Statement, for further discussion of the restricted stock unit awards and our recognition of expense relating to such awards.

 

2

Amounts were earned under The Progressive Corporation 2007 Executive Bonus Plan, which is part of the overall Gainsharing program, for all NEOs and, for Mr. Cody, an additional amount under our 2013 Progressive Capital Management Bonus Plan (“PCM Bonus Plan”). Non-equity plan compensation earned by our executives in 2013 was paid (if not deferred) in early 2014. Amounts reported include, if applicable, compensation

 

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that was deferred in early 2014 under our Executive Deferred Compensation Plan (“EDCP”). Further discussion of these plans is included in “Compensation Discussion and Analysis,” beginning on page 22, “Narrative Disclosure to Summary Compensation Table and Grants of Plan-Based Awards Table,” beginning on page 43, and “Nonqualified Deferred Compensation,” beginning on page 51.

 

3	All Other Compensation for 2013 comprises the following:

 

Name		401(k)  Employer Contributionsa				Perquisites				Other				Total All Other Compensation
Glenn M. Renwick		$	12,000			$	161,480	b		$	—			$	173,480
Brian C. Domeck			12,000				—				—				12,000
Susan Patricia Griffith			12,000				—				750	c			12,750
John P. Sauerland			12,000				—				—				12,000
William M. Cody			12,000				—				—				12,000

 

a

Represents employer matching contributions made during 2013 under our 401(k) plan. Amounts contributed are based on level of employee contribution, with a maximum annual employer contribution of $12,000.

 

b

Includes $106,895 in incremental costs for Mr. Renwick’s personal use of our company airplane. We calculate incremental costs to include the cost of fuel and oil per flight; trip related inspections, repairs, and maintenance; crew travel expenses; on-board catering; trip related flight planning services; landing, parking, and hangar fees; supplies; passenger ground transportation; and other variable costs. Since the airplane is used primarily for business travel, we do not include the fixed costs that do not change based on personal usage, such as pilots’ salaries, the depreciation of the airplane, and the cost of maintenance not related to personal trips. In addition, the perquisite amount includes the incremental costs attributable to Mr. Renwick’s personal use of a company car, which is primarily limited to commuting to and from work. Also includes a $45,000 reimbursement of regulatory filing fees paid with respect to a pre-merger notification filing required by the Hart-Scott-Rodino Act. For more information, see the “perquisites” discussion in “Compensation Discussion and Analysis,” beginning on page 22.

 

c

Represents a service anniversary award paid for each five-year anniversary of employment with the company, under a program applicable to all employees.

 

4	Represents a non-plan cash bonus based on the performance of our fixed-income investment portfolio.

 

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Grants of Plan-Based Awards

The following table summarizes awards that were eligible to be earned by our NEOs during 2013 under the 2007 Executive Bonus Plan, which is part of the overall Gainsharing program, and, for Mr. Cody, under the PCM Bonus Plan (non-equity incentive plan awards), as well as restricted stock units awarded in 2013 under The Progressive Corporation 2010 Equity Incentive Plan, including both time-based and performance-based awards (equity incentive plan awards). Each unit is equivalent in value to one common share.

GRANTS OF PLAN-BASED AWARDS IN 2013

 

						Estimated Future Payouts Under Non-Equity Incentive Plan Awards1												Estimated Future Payouts Under Equity Incentive Plan Awards												Grant Date Fair Value of Equity Awards2
Name		Grant Date				Threshold ($)				Target ($)				Maximum ($)				Threshold (#)				Target (#)				Maximum (#)
Glenn M. Renwick			N/A			$	0			$	1,125,000			$	2,250,000
			03/14/2013																03				295,5103				716,6123			$	7,500,044
Brian C. Domeck			N/A				0				602,644				1,205,288
			03/14/2013																				19,1104								485,012
			03/14/2013																03				39,1753				96,0273				994,262
Susan Patricia Griffith			N/A				0				577,644				1,155,288
			03/14/2013																				18,3244								465,063
			03/14/2013																03				34,8113				87,0283				883,503
John P. Sauerland			N/A				0				577,644				1,155,288
			03/14/2013																				18,3244								465,063
			03/14/2013																03				34,8113				87,0283				883,503
William M. Cody			N/A				0				522,115				1,044,230
			03/14/2013																				16,5514								420,064
			03/14/2013																03				20,6873				45,5123				525,036

 

N/A=	Not Applicable

 

1	The amount of non-equity incentive plan compensation earned by the NEOs during 2013 is included in the “Summary Compensation Table” on page 40. Further description of these plans is provided in “Compensation Discussion and Analysis” beginning on page 22 and in the following narrative disclosure.

 

2	Awards are valued at the closing price of our common shares on the date of grant, March 14, 2013, of $25.38 per share. The target amount of performance-based restricted stock unit awards granted is used to determine grant date fair value.

 

3

Represents the number of shares covered by performance-based restricted stock unit awards. Except as otherwise noted in this footnote 3, these awards measure growth of our insurance group against insurance industry growth and will vest from 0-250% of the target award, only if and when pre-established performance goals are attained. Messrs. Cody, Domeck, and Renwick received a portion of their awards in the form of awards that measure the performance of our fixed-income portfolio returns against a benchmark. These awards can vest from 0-200% of the target award only if and when pre-established performance goals are attained. For 2013, Mr. Renwick received 44,327 units, Mr. Domeck received 3,822 units, and Mr. Cody received 12,412 units in performance-based awards tied to investment results. See the following narrative disclosure for further details.

 

4	Represents the number of shares covered by time-based restricted stock unit awards. In 2013, Mr. Renwick did not receive a time-based restricted stock unit award.

 

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Narrative Disclosure to Summary Compensation Table and Grants of Plan-Based Awards Table

Employment Agreements. As of December 31, 2013, none of the named executive officers had an employment agreement with Progressive.

Salary. For 2013, salary comprised approximately 8% of total compensation for Mr. Renwick, 18% for Messrs. Domeck and Sauerland and Mrs. Griffith, and 19% for Mr. Cody.

Non-Equity Incentive Compensation – Insurance Performance. Non-equity incentive compensation for the named executive officers is available under our 2007 Executive Bonus Plan and is determined using the following formula:

 

Paid Salary

X

Target Percentage

X

Gainshare (i.e., Performance) Factor

=

Annual Bonus

For each named executive officer, the salary and the target percentage (as a percent of salary) are established by the Compensation Committee on an annual basis during the first quarter of the year. When the participant’s paid salary for the year is multiplied by his or her assigned target percentage, the product is referred to as the participant’s “target bonus” or “target bonus amount” for the year. For 2013, Mr. Renwick’s target percentage for non-equity incentive compensation was 150% of salary; the target percentage was 125% of salary for Messrs. Domeck and Sauerland and Mrs. Griffith; and Mr. Cody’s target percentage was 50% of his salary under this plan (as discussed below, Mr. Cody received an additional target of 75% of salary under our PCM Bonus Plan).

Under the 2007 Executive Bonus Plan, the Gainshare Factor is determined for all named executive officers after the end of each year based on our actual operating performance for that year, when compared to objective criteria previously established by the Compensation Committee early in the year. The Gainshare Factor can range from 0.0 to 2.0 each year, depending on the extent to which our results meet, exceed, or fall short of the objective performance goals established by the Committee. As a result, each participant can earn an annual cash bonus of between 0.0 and 2.0 times his or her target bonus, with the amount equal to 2.0 times an executive’s target bonus thus being the executive’s maximum potential bonus. The executive’s annual cash bonus would equal the target bonus amount if the applicable Gainshare Factor equals a 1.0 for the year. Each executive must be employed on November 30^th of the plan year to be eligible to receive the bonus for that year. Bonuses are paid in early February of the following year, after the appropriate approvals and certifications are received from the Compensation Committee.

For 2013, each of the named executive officers other than Mr. Cody earned his or her bonus solely under the 2007 Executive Bonus Plan using performance criteria designed to evaluate the growth and profitability of our core insurance businesses, excluding our investment results (the “core business”). Mr. Cody received an additional bonus opportunity relating to the performance of our fixed-income investment portfolio, as discussed below. The core business was defined to include the Agency auto business, the Direct auto business, the special lines business, and the Commercial Lines business.

The Gainshare Factor for the core business for 2013 was calculated as follows:

 

•

A separate “Gainsharing matrix” was established by the Committee for each of the Agency auto, Direct auto, special lines, and Commercial Lines business units. Each matrix assigned a performance score between 0.0 and 2.0 to various combinations of growth and profitability for the applicable business unit.

 

•

In each case, profitability was measured by the calendar year combined ratio determined by reference to financial statements prepared in accordance with accounting principles generally accepted in the United States of America (GAAP), and growth was measured by reference to “policies in force” for each business unit.

 

•

Actual growth and profitability performance results for each of the Agency auto, Direct auto, special lines, and Commercial Lines business units were determined after year end and compared to the appropriate matrix to produce a performance score for each business unit.

 

•

The performance scores achieved by each of the business units were weighted, based on the percentage of net premiums earned in the respective business unit during the year as compared to the core business as a whole. The weighted scores for the business units were then added together to produce the Gainshare Factor.

 

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In 2013, the final Gainshare Factor determined according to these criteria was 1.21. The following table presents the overall 2013 growth and profitability data for the business units that comprised our core business, and for our insurance operations on a companywide basis.

 

Business Unit		GAAP Combined Ratio1				Increase in Policies in Force
Agency			93.7				1%2
Direct			93.0				6%2
Special lines			—				1%
Commercial Lines			93.5				(1)%
Companywide insurance operations3			93.5				2%

 

1

Consistent with the presentation of the combined ratio of our Personal Lines segment in our public reports, the combined ratio results for our special lines business are not presented separately and, instead, are included in either the Agency or Direct results, depending on whether the underlying policy was written through agents/brokers or directly by Progressive.

 

2	Includes only auto policies in force.

 

3	Includes certain operations (principally, businesses that are currently in run-off) that are excluded from the definition of “core business” under the plan and represent less than 1% of our premium volume.

Using actual performance results for the year and the Gainsharing matrices discussed above, we determined the performance score for each business unit comprising the core business, weighted those scores based on each business unit’s relative contribution to overall net premiums earned, and then added the weighted scores to determine the Gainshare Factor, as follows:

 

Business Unit		Business Unit Performance Score				Weighting Factor				Weighted Performance Score
Agency auto			.87				45%				.39
Direct auto			1.62				37%				.60
Special lines			1.55				8%				.12
Commercial Lines			.98				10%				.10
Gainshare Factor											1.21

The 2013 Gainsharing bonuses for each of the named executive officers were calculated using the 1.21 Gainshare Factor. The amounts of those payments are included in the Summary Compensation Table under the heading “Non-Equity Incentive Plan Compensation.” Mr. Cody also received a bonus under the PCM Bonus Plan described below.

Under our 2007 Executive Bonus Plan, bonuses paid to executives are subject to recoupment by Progressive if operating or financial results that are used in the bonus calculation are later restated. If an executive engages in fraud or other misconduct leading to the restatement, we can require him or her to repay the entire bonus paid for the year(s) in question, plus interest and the costs of collection, and there is no time limit on our ability to recover these amounts other than limits imposed by law. In addition, we would have the right to require repayment of any excess bonus resulting from the calculation from an executive who did not engage in misconduct, but nonetheless received a bonus that was artificially high due to the use of incorrect financial results, but only if the potential recovery would exceed the lesser of 5% of the bonus paid or $20,000 and the restatement occurs within three years after the bonus is paid.

 

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Non-Equity Incentive Compensation — Investment Performance. In addition to his bonus earned under the 2007 Executive Bonus Plan in 2013, Mr. Cody was eligible to earn a separate bonus under our PCM Bonus Plan with a target bonus equal to 75% of his 2013 salary. His bonus under this plan for 2013 could range from 0 to 2.0 times the target amount, or from 0% to 150% of his salary. Under the PCM Bonus Plan, we determine the performance of our fixed-income portfolio for 2013 and over the trailing three-year period, on a total return basis, including the benefit of state premium tax abatements associated with certain municipal securities held in our portfolio. We then compare those results against the total return results achieved by a benchmark group of comparable firms for the same time periods. After the end of the year, using performance data supplied by an independent third party, separate performance scores are determined based on our percentile ranking in the benchmark group for the one- and three-year periods as follows:

 

Period

Score=0 Rank at or below

Score=1.0 Rank equal to

Score=2.0 Rank at or above

One year

15th percentile

50th percentile

85th percentile

Three year

25th percentile

50th percentile

75th percentile

Percentile rankings between the ranks that will earn a score of 0 and a score of 2.0 as shown above would receive an interpolated score based on the percentile ranking of our investment portfolio (e.g., a rank at the 40^th percentile would receive a score between 0 and 1.0). The two scores are then averaged to determine an indicated performance score for the year, and this score is communicated to the Compensation Committee. The Committee then evaluates the indicated score in the context of our investment results and other factors relevant to our investment performance for the year. The Committee may consult with other Board members or others, as it deems appropriate, for additional perspectives. Based on its evaluation, the Committee has the discretion to accept the indicated performance score, decrease it by an appropriate amount (including to “0”), or increase it up to the maximum allowed factor of 2.0, and to adjust the bonuses paid to Mr. Cody and our other investment professionals accordingly.

For 2013, we achieved a total return in our fixed-income portfolio of 1.88% (including the benefit of state premium tax abatements associated with certain municipal securities held in our portfolio), which ranked us in the top position of the benchmark group of 131 comparable investment firms. For the three years ended December 31, 2013, our fixed-income portfolio earned a cumulative return of 11.63%, ranking us in the 81^st percentile of the comparable firms. Using the methodology described above, we computed an indicated performance score of 2.0 under the plan for the year, which was communicated to the Compensation Committee. After reviewing the calculation and our investment results, and consulting with management and members of the Board’s Investment and Capital Committee, the Committee decided to pay the 2013 bonuses under the PCM Bonus Plan using a 2.0 performance factor, consistent with the calculated score. The Committee viewed this factor as a reasonable outcome under the plan for the year, given the relative performance of the portfolio. Mr. Cody’s bonus under the PCM Bonus Plan is reported on the Summary Compensation Table as part of “Non-Equity Incentive Plan Compensation.”

The 2013 PCM Bonus Plan has recoupment provisions applicable to Mr. Cody and similar to the 2007 Executive Bonus Plan recoupment provisions described above. PCM bonuses paid to Mr. Cody in prior years do not include such a provision, and our ability to recoup any bonuses paid under the prior plans if such a restatement were to occur would depend on the availability of general legal and equitable remedies under state or federal law.

Equity Incentive Plan Awards. In 2013, all of the equity incentive plan awards were granted pursuant to our 2010 Incentive Plan. We granted both time-based and performance-based restricted stock unit awards to the named executive officers, other than Mr. Renwick who received only performance-based restricted stock unit awards. Restricted stock unit awards entitle the holder to receive, upon the satisfaction of all requirements for vesting, one Progressive common share in exchange for each unit vesting. Unit awards do not have voting rights, but are entitled to dividend equivalent payments at the time dividends are paid to holders of our common shares; those dividend equivalent payments are reinvested into additional restricted stock units, which will be paid to the named executive officers (and other recipients) only if and when the underlying restricted stock unit award vests.

The named executive officers, other than Mr. Renwick, were awarded time-based restricted stock unit awards with a value equal to 100% of their respective salaries. Those awards are scheduled to vest in equal installments on January 1^st of 2016, 2017, and 2018, provided that the executive continues to satisfy the vesting requirements at that time. For certain of the NEOs, 50% of their respective time-based awards will vest earlier upon their satisfying the age and years of service requirements for a “qualified retirement,” as discussed below in more detail under “Qualified Retirement Provisions under Equity Plans” at page 56.

 

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We also granted performance-based restricted stock unit awards to the named executive officers in 2013. The value of the performance-based awards was determined by the Compensation Committee, based on a percentage of each individual’s salary and the value of our common shares at the time of grant. Mr. Renwick received awards with a value equal to 1,000% of his salary, while Mr. Domeck received awards with a value equal to 205% of his salary, Mrs. Griffith and Mr. Sauerland received awards with a value equal to 190% of his or her respective salary, and Mr. Cody received awards with a value equal to 125% of his salary. For Messrs. Renwick, Domeck, and Cody a portion of their awards is tied to the performance of our fixed-income investment portfolio, as further described below.

As to 85% of Mr. Renwick’s performance-based awards (representing 850% of his salary), 90% of Mr. Domeck’s award (185% of his salary), and 40% of Mr. Cody’s award (50% of his salary) and the entire performance-based award to each other NEO, the awards will vest (i) if and to the extent that the compounded annualized growth of our personal and commercial auto insurance businesses, measured in terms of direct premiums written, for the three-year period ending December 31, 2015 (whether positive or negative) exceeds the aggregate personal and commercial auto insurance market’s growth rate (excluding Progressive) over that period (in each case, determined using A.M. Best data), and (ii) if our combined ratio is 96 or lower for the 12-month period preceding the Committee’s required certification of those performance results. More specifically, the ultimate payout (if any) at the end of the three-year period is determined by the performance of the company, as follows:

 

Performance vs. Market		Number of Units Vesting
If our growth rate exceeds the market growth rate by three and a half percentage points or more		250% of the target number of units will vest; this is the maximum possible award value
If our growth rate exceeds the market growth rate by more than three percentage points but less than three and a half percentage points		Between 200% and 250% of the target number of units will vest, in proportion to the extent to which our growth rate exceeds the market’s growth rate above three percentage points (e.g., if our growth rate exceeds the market growth rate by 3.3 percentage points, then 230% of the award will vest)
If our growth rate exceeds the market growth rate by more than two but less than three percentage points		Between 100% and 200% of the target number of units will vest, in proportion to the extent to which our growth rate exceeds the market’s growth rate above two percentage points (e.g., if our growth rate exceeds the market growth rate by 2.4 percentage points, then 140% of the award will vest)
If our growth rate exceeds the market growth rate by up to two percentage points		Up to 100% of the target number of units will vest, in proportion to the extent to which our growth rate exceeds the market’s growth rate (e.g., if our growth rate exceeds the market growth rate by 1.4 percentage points, then 70% of the award will vest)
If our growth rate is equal to or less than the market growth rate		The award will not vest and is forfeited

In the event that the growth goal is satisfied for the three-year period but the profitability goal is not satisfied when the Committee is in a position to certify the growth results, the awards will remain open for vesting until January 31, 2018, in order to allow the opportunity to satisfy the profitability goal; the awards will expire and be forfeited if vesting does not occur before that date. Satisfaction of this goal of market outperformance would result in an increase in our market share, which, together with the profitability goal, we believe will benefit all Progressive shareholders over time.

 

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As mentioned, a portion of the 2013 performance-based restricted stock unit awards to Messrs. Renwick, Domeck, and Cody have a performance goal which measures the annualized total return of our fixed-income portfolio over a three-year period (2013 through 2015) against the returns of a set of comparable investment firms. A target number of restricted stock units was awarded to Mr. Renwick (valued at 150% of salary), Mr. Domeck (20% of salary), and Mr. Cody (75% of salary), and the number of units that ultimately will vest can vary from 0% to 200% of the target amount, as described in the table below. These awards did not increase the size of the executives’ respective equity awards, but were a portion of the total performance-based awards that otherwise would have been granted to them in 2013.

 

Investment Returns vs. Comparable Investment Firms		Number of Units Vesting
If our ranking is at or above the 75th percentile		200% of the target number of units will vest; this is the maximum possible award value
If our ranking is between the 25th and 75th percentile		The target number of units will vest proportionately (e.g., if our investment return is ranked at the 56th percentile, then 124% of the award will vest)
If our ranking is at or below the 25th percentile		The award will not vest and is forfeited

All restricted stock unit awards are made subject to accelerated vesting pursuant to the “qualified retirement” and “change in control” provisions in our equity incentive plans. Mr. Renwick is the only NEO who has met all of the requirements for qualified retirement benefits under the plans. Mr. Domeck will meet the requirements for qualified retirement benefits under the plans during 2014. See “Potential Payments Upon Termination or Change in Control” beginning on page 53 for further discussion of these plan provisions.

The performance-based restricted stock unit awards granted since 2010 are subject to recoupment by Progressive in the event of a financial restatement of the operating or financial results that caused those performance-based shares to vest, in certain circumstances. An executive who engages in fraud or other misconduct leading to the restatement would be required to repay all such shares or an equivalent dollar amount, at our election, plus interest and the costs of collection, and there would be no time limit on our ability to recover those amounts other than limits imposed by law. In addition, we would have the right to require repayment from an executive who does not engage in misconduct, but nonetheless has his or her shares vest due to the use of incorrect financial results, but only to the extent the incorrect results caused a vesting, without interest and only if the restatement occurs within three years after the vesting date.

Further discussion of our compensation strategy and plans can be found in “Compensation Discussion and Analysis,” beginning on page 22.

 

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Outstanding Equity Awards at Fiscal Year-End

The following table summarizes the unvested restricted equity awards outstanding under our 2003 and 2010 Incentive Plans. The value of the equity awards is calculated using $27.27 per share, the closing price of Progressive shares on the last business day of 2013.

OUTSTANDING EQUITY AWARDS AT DECEMBER 31, 2013

 

		Stock or Unit Awards1
Name		Number of Shares or Units That Have Not Vested (#)				Market Value of Shares or Units That Have Not Vested  ($)				Equity Incentive Plan Awards: Number of Unearned Shares or Units That Have Not Vested (#)				Equity Incentive Plan Awards: Market Value of Unearned Shares or Units That Have Not Vested ($)
Glenn M. Renwick			52,084	2		$	1,420,331	2			52,083	3		$	1,420,303
			—				—				2,265,885	4			61,790,684
Brian C. Domeck			—				—				93,787	3			2,557,571
			—				—				224,584	4			6,124,406
Susan Patricia Griffith			—				—				91,122	3			2,484,897
			—				—				224,481	4			6,121,597
John P. Sauerland			—				—				91,122	3			2,484,897
			—				—				202,571	4			5,524,111
William M. Cody			—				—				82,560	3			2,251,411
			—				—				159,421	4			4,347,411

 

1	Amounts include restricted share awards and restricted stock unit awards, including additional units credited upon the reinvestment of dividend equivalents for awards made in 2010 through 2013.

 

2	Represents time-based restricted equity awards that have been earned by Mr. Renwick under the “qualified retirement” provisions of the 2003 Incentive Plan (see “Qualified Retirement Provisions under Equity Plans” below); these awards vested on January 1, 2014.

 

3	Represents time-based restricted share awards or restricted stock unit awards. Following are the applicable vesting dates for those awards:

 

Name		1/1/2014				4/1/2014a				1/1/2015				1/1/2016				1/1/2017				6/1/2017b				1/1/2018				Total
Glenn M. Renwickc
Earned awards (see note 2 above)			52,084				—				—				—				—				—				—				52,084
Unearned awards			52,083				—				—				—				—				—				—				52,083
Brian C. Domeck			28,603				9,555				24,080				18,090				10,274				—				3,185				93,787
Susan Patricia Griffith			28,212				—				23,382				20,530				12,890				—				6,108				91,122
John P. Sauerland			28,212				—				23,382				20,530				12,890				—				6,108				91,122
William M. Cody			25,610				—				21,219				18,532				11,681				2,759				2,759				82,560

 

a

Mr. Domeck is expected to satisfy the qualified retirement provision of the 2010 Equity Incentive Plan on April 1, 2014.

 

b

Mr. Cody is expected to satisfy the qualified retirement provision of the 2010 Equity Incentive Plan on June 1, 2017.

 

c

Mr. Renwick has not received a time-based award since 2010.

 

4

The following table presents, as of December 31, 2013, the number of unvested performance-based restricted shares or restricted stock units, including reinvested dividend units, if applicable, for each of the NEOs, by year of grant. The number of shares shown for awards made in 2011 through 2013 reflect the company’s expectation of the number of units that will vest, as described in the applicable note below. For years not shown, the performance-based award have previously vested.

 

		Grant Year
Name		2005				2006				2007				2011				2012				2013				Total
Glenn M. Renwick			166,280				141,640				178,655				790,290				693,510				295,510				2,265,885
Brian C. Domeck			2,800				2,360				15,245				82,059				82,945				39,175				224,584
Susan Patricia Griffith			13,960				12,460				16,675				73,341				73,234				34,811				224,481
John P. Sauerland			3,100				2,840				15,245				73,341				73,234				34,811				202,571
William M. Cody			14,420				13,220				17,390				49,316				44,388				20,687				159,421

 

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Following are the performance criteria that must be achieved to enable the performance-based restricted equity awards to vest for the year of grant indicated (NPE=Net Premiums Earned; DPW=Direct Premiums Written; CR=Combined Ratio; FTE=Fully Taxable Equivalent):

 

		Target				Expiration Datea
Grant Year		Growth ($ in billions)		CR
2005		NPE of $17.5		96			12/31/2014
2006		NPE of $20.0b		96			12/31/2015
2007		NPE of $19.0		96			12/31/2016
2011		DPW 2% > market (over a 3-year period)c		96			01/31/2016
2012		DPW 2% > market (over a 3-year period)d		96			01/31/2017
2012		Fixed-income portfolio FTE Total Return (over a 3-year period)e		N/A			03/15/2015
2013		DPW 2% > market (over a 3-year period)f		96			01/31/2018
2013		Fixed-income portfolio FTE Total Return (over a 3-year period)g		N/A			03/15/2016

 

N/A=

Not Applicable

 

a

If these objectives are not achieved prior to the applicable expiration date, the awards will be forfeited.

 

b

In 2009, the company determined it was unlikely this target would be met before award expiration. As such, all previously recognized expense was reversed; however, the shares will not be forfeited by the employee until expiration.

 

c

Performance-based restricted stock unit awards with insurance results criteria granted in 2011 will fully vest, if at all, only if the company’s annualized direct premiums written growth rate between December 31, 2010 and December 31, 2013 exceeds the growth rate of the auto insurance market as a whole (excluding Progressive’s results) over that same period, with a CR of 96 or less over the most recent 12 months, based on A.M. Best data. At the target performance levels set forth in the table above, 100% of the original award value (and associated dividend equivalents reinvested under the plan over time) will vest. If the company’s compounded growth rate exceeds the market’s growth by less than two percentage points, a ratable portion of the award will vest. These awards can vest ratably from between 100% and 200% of the initial award value if the company’s compounded annual growth rate exceeds the market’s growth rate by between two percentage points and three percentage points. In the event that the growth goal is satisfied for the 3-year period, but the 12-month profitability goal is not satisfied when the initial vesting determinations are made, the award will remain open until January 31, 2016 in order to allow the opportunity to satisfy the profitability goal. At December 31, 2013, the company expects this award to fully vest at 200% of the target value, based on our performance through 2013 and our estimate of industry growth rates over the performance period. Accordingly, the number of units shown in the first chart of this footnote 4 represents the maximum award value.

 

d

Performance-based restricted stock unit awards with insurance results criteria granted in 2012 have the same award terms as the 2011 awards except the measurement period for growth is 2012 through 2014. The award will remain open until January 31, 2017 in order to allow the opportunity to satisfy the profitability goal. At December 31, 2013, the company expects this award to vest above the target amount awarded, and pursuant to the applicable regulations, the number of units shown in the first chart of this footnote 4 represents the maximum award value.

 

e

Performance-based restricted stock unit awards with investment results criteria granted in 2012 will vest, if at all, only if the company’s fixed-income investment portfolio’s performance for the years 2012 through 2014 is at or above the 25th percentile of a group of comparable investment firms; vesting at the maximum 200% of the award value will occur if our portfolio ranks at or above the 75th percentile. The expiration date of the award is March 15, 2015. At December 31, 2013, the company expects this award to vest above the target amount awarded, and pursuant to the applicable regulations, the number of units shown in the first chart of this footnote 4 represents the maximum award value.

 

f

Performance-based restricted stock unit awards with insurance results criteria granted in 2013 have similar award terms as the 2011 awards except the measurement period for growth is 2013 through 2015 and awards may vest above the 200% level with the maximum award value at 250% of target for performance exceeding the market by 3.5 percentage points or more. The award will remain open until January 31, 2018 in order to allow the opportunity to satisfy the profitability goal. For additional information on the 2013 awards, see “Narrative Disclosure to Summary Compensation Table and Grants of Plan-Based Awards Table,” beginning on page 43. At December 31, 2013, the company expects this award to vest at the target value, and, pursuant to the applicable regulations, the number of units shown in the first chart of this footnote 4 represents the target award value.

 

g

Performance-based restricted stock unit awards with investment results criteria granted in 2013 have similar award terms as the 2012 awards except that the measurement period is the years 2013 through 2015 and the expiration date of the award is March 15, 2016. For additional information on the 2013 awards, see the “Narrative Disclosure to Summary Compensation Table and Grants of Plan-Based Awards Table,” beginning on page 43. At December 31, 2013, the company expects this award to vest at the target value and the target value is accordingly shown in the first chart of this footnote 4.

 

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Option Exercises and Stock Vested

The following table summarizes the vesting of restricted equity awards during 2013.

 

OPTION EXERCISES AND STOCK VESTED DURING 2013
		Restricted Stock Awards
		Number of Shares Acquired on Vesting1				Value Realized on Vesting
Name		(#)				($)
Glenn M. Renwick			1,041,393			$	24,832,199
Brian C. Domeck			135,235				3,321,743
Susan Patricia Griffith			132,078				3,242,558
John P. Sauerland			133,078				3,267,295
William M. Cody			112,110				2,735,907

 

1	The following table summarizes the number of restricted shares or restricted stock units that vested on various dates during the year:

 

Name		2008 Time- Baseda				2009 Time- Baseda				2010 Time- Basedb				2008 Performance- Basedc				2010 Performance- Basedd				Total
Glenn M. Renwick			78,915				104,167				205,470				236,740				416,101				1,041,393
Brian C. Domeck			7,997				11,612				9,061				23,990				82,575				135,235
Susan Patricia Griffith			7,942				11,612				8,849				23,045				80,630				132,078
John P. Sauerland			7,997				11,612				8,849				23,990				80,630				133,078
William M. Cody			7,997				10,556				8,102				26,390				59,065				112,110

 

a

Time-based restricted share awards vested on January 1, 2013 with a value of $20.90 per share, the average of the high and low sales prices on December 31, 2013 (the immediately preceding business day), in accordance with the terms of the applicable plan.

 

b

Time-based restricted stock unit awards vested on January 1, 2013 with a value of $21.53 per share, the average of the high and low sales prices on January 2, 2014 (the next business day), in accordance with the terms of the applicable plan.

 

c

2008 Performance-based restricted share awards vested on June 12, 2013 with a value of $24.96 per share.

 

d

2010 Performance-based restricted units vested with a value of $25.65 per share on July 11, 2013 at the maximum award value of two times the target award value.

 

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Nonqualified Deferred Compensation

The following table summarizes amounts contributed to, earned within, and distributed from The Progressive Corporation Executive Deferred Compensation Plan (EDCP) during 2013, as well as each NEO’s aggregate ending balance in the EDCP at December 31, 2013. Participation in the EDCP is voluntary; all NEOs have elected to participate in the EDCP at various times. Deferral elections are made annually for both non-equity incentive compensation and restricted equity awards. Non-equity incentive compensation can be deferred in whole or in part at the executive’s discretion. Non-equity incentive compensation is credited to the EDCP when the applicable bonus has been earned and otherwise would have been paid. Deferral elections for both time-based and performance-based restricted equity awards pertain to the award made in that year and partial deferrals are not allowed; credits are made to the EDCP at each vesting date.

NONQUALIFIED DEFERRED COMPENSATION DURING 2013

 

		Executive Contributions in Last Fiscal Year1				Registrant Contributions in Last Fiscal Year2				Aggregate Earnings in Last Fiscal Year				Aggregate Withdrawals/ Distributions3				Aggregate Balance at Last Fiscal Year-end4
Name		($)				($)				($)				($)				($)
Glenn M. Renwick		$	24,088,093			$	—			$	24,947,818			$	163,426			$	112,756,053
Brian C. Domeck			—				—				374,615				—				2,119,827
Susan Patricia Griffith			—				—				137,535				—				636,941
John P. Sauerland			—				—				158,576				—				799,944
William M. Cody			—				—				964,374				19,848				4,356,069

 

1

Amounts contributed in the last fiscal year are not included in the 2013 information reported in the Summary Compensation Table on page 40, since these contributions resulted from: (i) time-based restricted stock awards that vested on January 1, 2013 from awards that were originally granted in 2008, 2009, and 2010; (ii) performance-based awards granted in 2008 and 2010; and (iii) non-equity incentive compensation earned in 2012 but paid in 2013.

 

2	Progressive makes no supplemental contributions to the EDCP in the year of deferral or in subsequent years.

 

3	Represents scheduled distributions based on the applicable executive’s elections made in prior years.

 

4

Amounts represent the accumulation of previously deferred non-equity incentive compensation awards or restricted equity awards, either time-based or performance-based, together with earnings on deemed investments. For Messrs. Renwick, Domeck, and Cody the amounts previously reported in our Summary Compensation Table from 2006 through 2013 were $34,385,793, $520,975, and $219,201, respectively. No other NEO had deferred amounts reported in the Summary Compensation Tables during this period.

The named executive officers are eligible to defer all or part of the non-equity incentive compensation earned under the 2007 Executive Bonus Plan, as well as all of their restricted equity awards (but not dividend equivalent units) that were granted under our incentive plans. The plan has 17 mutual funds, as well as Progressive common shares, as deemed investment choices. The participant selects the deemed investment choices for contributions and transfers. Fund transfers are limited to twice per quarter. All deferrals are eligible for transfer, except that deferrals of restricted equity awarded in March 2005 or thereafter are automatically deemed invested in Progressive common shares until the date of distribution under the plan. We have established an irrevocable grantor trust to provide a source of funds to assist us in meeting our liabilities under the EDCP.

 

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Amounts equal to the deferred cash bonuses or restricted equity awards are credited under the plan at the time that the bonus otherwise would be paid to the participant or the restricted equity awards would vest. We make no matching contributions or additional deposits on behalf of any participant. Any earnings are a result of an executive’s deemed investment choices. To secure our future payment obligations to participants, we deposit amounts equal to deferred cash bonuses or restricted equity awards into the trust and the trust holds investments equivalent in kind and number to the aggregate deemed investment elections selected by participants. The rights of participants and their beneficiaries under the EDCP are merely unsecured contractual rights against us. Participants have no proprietary rights or interests in the trust’s assets, including any securities that are held by the trust, all of which remain subject to the claims of our general creditors. We do not guarantee any specific rate of return to participants who defer amounts into the EDCP. Following is a listing of deemed investment choices including the annual rate of return on each investment alternative during 2013:

 

Fund		One-Year Performance As of 12/31/2013
American Beacon Small Cap Value Fund—Institutional Class			40.06	%
Fidelity Diversified International Fund—Class K			25.34
Fidelity Low Priced Stock Fund—Class K			34.45
Fidelity Mid-Cap Stock Fund—Class K			39.20
Fidelity Retirement Money Market Fund			0.01
John Hancock Small Company Fund—Class A			34.74
Oakmark Equity and Income Fund—Institutional Class			24.25
PIMCO Total Return Institutional Fund			(1.92	)
Templeton World Fund—Class A			29.89
The Progressive Corporation Stock Fund			30.87
Vanguard Growth Index Fund—Institutional Class			32.41
Vanguard Institutional Index Fund			32.37
Vanguard Mid-Cap Index Fund—Institutional Class			35.17
Vanguard Small-Cap Index Fund—Institutional Class			37.80
Vanguard Total Bond Market Institution Fund			(2.14	)
Vanguard Total International Stock Fund			15.15
Vanguard Value Index Fund—Institutional Class			33.07
Wasatch Small Cap Growth Fund			31.17

Distributions from the EDCP are made in accordance with an election made by the participant prior to earning the deferred award. Distributions are made in a lump-sum or in three, five, or ten annual installments, beginning at the earlier of the date selected by the participant or upon his or her termination from Progressive. For deferrals made after 2004, distributions resulting from termination of employment will be made six months after the participant leaves the company. In addition, distributions may be triggered by certain “change in control” events. For deferrals occurring in and prior to 2004, the events triggering such distributions would be the same as the events triggering change-in-control payments for restricted stock awards under our 2003 Equity Incentive Plan, as described in the next section. For post-2004 deferrals, the plan has been revised to reflect the change-in-control definition required by Section 409A of the Internal Revenue Code.

Participants are permitted to change the schedule for certain distributions if they give at least 12 months advance notice and, with respect to post-2004 deferrals, they delay those distributions by at least five years. All distributions are made in cash, with the exception of deferred restricted equity awards granted in or after March 2005, which deferrals are deemed invested in Progressive common shares for the entire deferral period and distributed in common shares. The participant’s respective rights and interests under the plan may not be assigned or transferred under any circumstances.

 

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Potential Payments Upon Termination or Change In Control

The following table highlights the benefits that may be received by our executive officers, as well as other employees who participate in the applicable benefit plans, when certain events occur that result either in the termination of the employee’s employment or a change in control of the company.

 

		Is the Executive Eligible to Receive1:
				Under Equity Plans
If This Triggering Event Occurs:		Severance Benefits?		Change in Control Benefits2?		Qualified Retirement Benefits?		Other Termination Provisions?		Payments under EDCP3?
Involuntary termination (without cause)		ü		—		—		—		ü
Voluntary separation (excluding retirement)		—		—		—		—		ü
Retirement – qualified (as defined in the plan)4		—		—		ü		—		ü
Retirement – nonqualified		—		—		—		—		ü
Termination for cause		—		—		—		—		ü
Change in control, no loss of employment		—		ü		—		—		ü
Change in control and involuntary termination (without cause) or resignation due to a significant job change		ü		ü		—		—		ü
Death or disability		—		—		—		ü		ü

 

1

This table is intended as a general summary only. An executive’s eligibility to receive any of the benefits outlined in this table may be subject to certain criteria, conditions, or other requirements as set forth in the applicable plan documents or related agreements. See below for additional discussions.

 

2

Depending on the type of the award and nature of the change-in-control event, these awards either vest immediately upon occurrence of the change-in-control event or will vest only if, within 24 months after the change in control event takes place, the award recipient is terminated or leaves the company’s employ for “good reason”. See “Change-in-Control Provisions Under Equity Plans” below for additional information.

 

3

An executive will be entitled to receive payments under the EDCP only if he or she elected to participate in the plan and deferred annual non-equity incentive compensation or equity-based awards during the course of his or her employment. See the “Nonqualified Deferred Compensation” discussion above for additional information.

 

4

Under our equity plans, as discussed below, a “qualified retirement” excludes any termination of employment for cause (as defined in the plans) or by reason of the participant’s death or, in certain cases, disability. A “qualified retirement” and an involuntary termination without cause may occur at the same time.

The significant provisions of our executive separation allowance (severance) plan, as well as the provisions of our equity plans involving “change in control,” “qualified retirement,” and death and disability benefits, are discussed in more detail below. Payments to be made under our EDCP upon an executive’s termination of employment or a “change in control” are discussed under the “Nonqualified Deferred Compensation” section above. We do not provide other benefits that are triggered by an employee’s termination or retirement or by a change in control, except for our 401(k) plan (which is available to all employees) or those required by law (such as postemployment medical insurance coverage under COBRA).

Severance. Our executive separation allowance plan is designed to provide executives with defined financial payments if we ask the executive to leave under certain circumstances. The plan covers our named executive officers, other executive officers, and all other equity-eligible employees of Progressive. Among other terms and conditions, we will pay a separation allowance (severance) payment to an executive if:

 

•

his or her employment terminates for reasons other than resignation (including retirement), death, disability, leave of absence, or discharge for cause (as defined in the plan) or he or she resigns within a specific period of time following any change in his or her job duties that is deemed significant by Progressive; and

 

•

the employee signs a termination and release agreement as required by the plan.

The amount of the severance payment will vary among employees based on position and years of service. For the NEOs, the severance payment would equal three times the executive’s annual base salary only at the time of termination. Cash bonuses, equity awards, perquisites, and other compensation are excluded from the severance calculation. In addition, under the plan, the executive would be entitled to continue medical, dental, and vision benefits for a period not to exceed 18 months at our cost, except that the terminated executive would be required to make contributions to the cost of those benefits to the same extent as he or she did prior to termination.

 

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In addition, the plan provides that executives and certain other covered employees will have the right to receive a severance payment in accordance with the formula described above, if during the three-year period after any change in control of Progressive, either:

 

•

the participant’s employment is terminated for reasons other than resignation (including retirement), death, disability, leave of absence, or discharge for cause, as defined in the plan; or

 

•

the participant resigns due to a job change (defined below).

For purposes of this plan, the definition of “change in control” incorporates the definition from our equity incentive plans for employees (described below). The term “job change” is defined as either a decrease in the individual’s total pay package, whether in the same job or after a job transfer, or the imposition of significantly different job duties, shift, work location, or number of scheduled work hours.

The following table summarizes the severance payments that would have been made to the NEOs, and the estimated value of health and welfare benefits for which the executive would have been eligible, if the executive had separated from Progressive at December 31, 2013, under circumstances requiring payments from the executive separation plan:

 

Name		Amount of Severance Payment				Estimated Value of Health Benefits
Glenn M. Renwick		$	2,250,000			$	17,212
Brian C. Domeck			1,455,000				21,082
Susan Patricia Griffith			1,395,000				20,340
John P. Sauerland			1,395,000				21,384
William M. Cody			1,260,000				20,340

In the event of a termination of employment of our CEO, any other NEO, or another executive officer due to a resignation (including retirement), death, disability, leave of absence, or discharge for cause (as defined in the plan), no separation allowance would be payable under the executive separation allowance plan.

Change-in-Control Provisions Under Equity Plans. Benefits also are provided to NEOs and other holders of equity awards under our equity plans upon the occurrence of a change in control or, in the case of previously granted restricted stock awards only, a potential change in control, as defined in the applicable plans.

Restricted Stock Under our 2003 Incentive Plan, the Board of Directors has the authority to “override” change-in-control benefits applicable to awards of restricted shares made prior to March 2010, if the Board has given its prior approval to a transaction that would otherwise trigger the benefits to be paid. If the Board’s prior consent is not obtained, the 2003 Incentive Plan includes provisions providing for the immediate vesting of, and payments to the holders of restricted share awards in an amount equal to the value of, the outstanding award upon the occurrence of any change in control or a potential change in control, as described below. These provisions apply to unvested restricted share awards, including both time-based and performance-based awards. The last time-based awards under the 2003 Incentive Plan vested on January 1, 2014.

A change in control would be deemed to occur upon the occurrence of any of the following events, unless the Board approves the change prior to either (i) the commencement of the applicable event, or (ii) the commencement of a tender offer for our stock:

 

•

acquisition of 20% or more of the voting power of our outstanding shares, with certain exceptions including acquisitions by a passive investor with only an investment intent;

 

•

turnover of a majority of the Board of Directors during a 24-month period, without the approval of the prior Board members; or

 

•

occurrence of a transaction requiring shareholder approval for the acquisition of Progressive, or any portion of our shares, through purchase of shares or assets, by merger or otherwise.

 

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For restricted share awards made in or after March 2007 (one of the three remaining performance-based restricted share awards), a potential change in control would be deemed to occur upon the acquisition of 5% or more of Progressive’s voting power, together with a resolution by the Board of Directors that a potential change in control has occurred.

For restricted stock awards made prior to March 2007 (two of the remaining performance-based restricted share awards), a potential change in control would include, in addition to an event described in the immediately preceding paragraph, the approval by shareholders of an agreement, the consummation of which would constitute a change in control (as described above), unless the Board approved such change prior to its commencement.

Restricted Stock Units Beginning with awards of restricted stock units in March 2010, we modified the rights of award recipients in the event of a change in control of the company. For such awards, the definition of “change in control” has been revised to reflect a narrower range of triggering events (and a “potential change in control” will no longer trigger benefits), and we have introduced the requirements of a loss of job or other adverse employment action in many circumstances before benefits are triggered.

Under the new provisions, a “change in control” is only deemed to occur upon a change in ownership of the company, a change in the effective control of the company, or a change in the ownership of a substantial portion of our assets, each as further defined in Section 409A of the Internal Revenue Code and related regulations. Upon the occurrence of any change in control, outstanding restricted stock units may vest immediately or they may vest only after the executive is terminated or leaves our employ for “good reason,” depending on the type of award and the nature of the change-in-control transaction. “Good reason” is defined by the plan to include various adverse employment decisions, such as a significant change in duties, position, or responsibilities; a decrease in pay, bonus opportunity, or equity awards; a required relocation; and the denial of the right to participate in health and welfare plans on the same basis available to other employees, in each case occurring within 24 months after the change in control.

In the following circumstances, even though a change of control has occurred, outstanding restricted stock unit awards will not vest as a result of the change of control, and will continue to vest according to the terms of the applicable award agreement (unless the executive is terminated or leaves our employ for good reason as described above):

 

•

If the change of control is solely a result of an investor purchasing the necessary portion of our common shares or a result of a turnover of our Board of Directors;

 

•

If the event does not result in the liquidation or cancellation of, or other change to, the company’s equity (e.g., where our common shares are the surviving security in a corporate transaction); and

 

•

For time-based awards, if in a corporate transaction the other company’s stock is the surviving security.

In the last event listed above, all outstanding time-based awards will be converted into a new equity award with a value calculated according to the terms of the transaction, and otherwise on terms and conditions substantially similar to the outstanding award, including vesting requirements.

On the other hand, immediate vesting upon a change in control and a cash payout will occur under the following limited circumstances:

 

•

A transaction that results in the payment of cash for each outstanding Progressive common share, with the payout being based on the cash compensation being paid to shareholders; and

 

•

With respect to performance-based awards, if in a corporate transaction the other company’s stock is the surviving security, with the payout being based on the fair market value of common shares immediately prior to the change in control event.

In the event of an immediate vesting event relating to performance-based awards, the cash payment will be based on the target number of units comprising the award.

 

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The following table quantifies each NEO’s benefits under our equity incentive plans, if a change in control had occurred and vesting of all outstanding equity awards and payments had been required under the applicable plan on December 31, 2013:

 

Name		Payments on Unvested Restricted Stock Unit Awards1				Payments on Unvested Restricted Stock Awards2				Total Payments
Glenn M. Renwick		$	28,290,173			$	17,439,330			$	45,729,503
Brian C. Domeck			5,559,024				995,475				6,554,499
Susan Patricia Griffith			5,116,106				1,622,151				6,738,257
John P. Sauerland			5,116,106				1,016,745				6,132,851
William M. Cody			3,805,340				1,646,631				5,451,971

 

1	Includes time-based and performance-based restricted stock units, plus reinvested dividend equivalents. Performance-based awards are valued at their target amount, as required by the plan.

 

2	Includes, with respect to restricted share awards made in or after March 2007, amounts equal to dividends paid on common shares, plus accrued interest, which amounts will be paid under the plan only upon the vesting of the underlying restricted share awards.

Qualified Retirement Provisions under Equity Plans. Executive officers, along with other equity award recipients, are eligible for the “qualified retirement” treatment under our incentive compensation plans, upon satisfying the following eligibility criteria. For all awards made prior to March 2008 (of which three performance-based awards remain outstanding), a “qualified retirement” requires the equity award holder to be age 55 or older, and the total of his or her age plus years of service with Progressive must be at least 70, at the time of retirement. For awards made in or after March 2008, the qualification standard was changed to require the employee to be age 55 or older and have at least 15 years of service with Progressive at the time of retirement. In addition, for restricted stock units issued on or after March 2010, to be eligible, the participant must have received an acceptable evaluation in his or her most recent performance evaluation.

For awards made in or after March 2013:

 

•

For time-based awards, 50% of each unvested award will vest when the individual first satisfies the eligibility requirements for a qualified retirement and, thereafter, promptly after the grant of each new award to the participant. The remaining half of each award would then vest only when the time-based vesting provisions set forth in the applicable award agreement are satisfied, and not upon the participant’s retirement or death.

 

•

For performance-based awards, upon achieving eligibility for a qualified retirement, the plan’s provisions relating to the death of a participant will no longer apply. As a result, upon the death of the participant, the participant’s estate will be entitled to retain the then-unvested performance-based awards (subject to the satisfaction of the performance criteria that are a condition to the vesting of the awards) to the same extent as if the employee had voluntarily retired in accordance with the plan provisions. Under earlier awards, the estate is entitled to benefit from vesting events that occur during the 12 months immediately following the individual’s death, and all other awards are forfeited.

For awards issued prior to March 2013, executives who leave their employment after satisfying the applicable age and years-of-service requirements generally:

 

•

receive 50% of unvested time-based restricted stock and restricted stock unit awards then outstanding (with the remaining 50% being forfeited); and

 

•

retain 50% of unvested performance-based restricted stock and restricted stock unit awards that will vest, if at all, only upon satisfaction of the performance objectives associated with those awards (and the other 50% are forfeited).

Generally, an executive who has satisfied the requirements for a qualified retirement participates on the same terms and conditions as are available to other equity award participants, except that if the CEO or one of the executives who directly reports to him, a group that includes the other four NEOs, provides from 12 to 14 months of advanced written notice of his or her intention to leave employment, the executive will retain 100% of his or her unvested performance-based restricted equity awards (not just 50% as stated above), although such performance-based equity awards will vest only to the extent and when the applicable performance goals are achieved prior to expiration.

 

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The rights conferred by these provisions may be limited or forfeited if the Compensation Committee determines that prior to vesting the executive has engaged in any “disqualifying activity,” which is defined to include, among other activities, the following:

 

•

directly or indirectly being an owner, officer, employee, advisor, or consultant to a company that competes with Progressive, its subsidiaries, or affiliates to an extent deemed material by the Committee;

 

•

disclosure to third parties or misuse of any confidential information or trade secrets of Progressive, its subsidiaries, or affiliates;

 

•

any material violation of Progressive’s Code of Business Conduct and Ethics or any agreement between Progressive and the executive; or

 

•

failing in any material respect to perform the executive’s assigned responsibilities as an employee of Progressive or any of its subsidiaries or affiliates, as determined by the Committee, in its sole judgment, after consulting with the Chief Executive Officer.

The ownership of less than 2% of the outstanding voting securities of a publicly traded corporation which competes with Progressive or any of its subsidiaries or affiliates will not constitute a disqualifying activity.

As of December 31, 2013, the only NEO who was eligible for qualified retirement treatment was Mr. Renwick. The table below shows the value of his qualified retirement benefits, if he had retired on December 31, 2013 and assuming that he had provided the 12 to 14 month notice of his intended retirement as described above, valued using our closing stock price on December 31, 2013.

 

		Value of Qualified Retirement Benefits1 (As of 12/31/2013)
		Time-Based   Equity Awards3		Performance-Based Equity Awards2
Name				Minimum		Maximum4
Glenn M. Renwick		$1,590,464		$0		$74,263,603

 

1	Includes deferred dividends and reinvested dividend equivalent units, which will vest and be paid out at the time of vesting in the same proportion that the underlying awards vest.

 

2

Value depends on whether, and for awards made in 2010 and after the extent to which, the company achieves the applicable performance goals established at the time each award was made, within the time periods permitted by the award. See the “Outstanding Equity Awards” table beginning on page 48 for more information.

 

3	These awards vested on January 1, 2014.

 

4	Assumes all outstanding awards vest in full. As discussed above, we have determined that the 2006 performance-based restricted share award is not likely to vest prior to its expiration; if this award does not vest, the maximum value would be $70,401,081.

Mr. Domeck is expected to become eligible for qualified retirement during 2014; Mr. Cody during 2017; and Mrs. Griffith and Mr. Sauerland during 2019.

Other Termination Provisions Under Equity Plans. Under our equity plans, if an equity award recipient, including the executive officers, resigns (including retirement, other than a “qualified retirement” as discussed above), is discharged without cause (as defined in the plan), or is involuntarily terminated (e.g., reduction in force), the employee generally would forfeit any unvested restricted stock and restricted stock unit awards, both time-based and performance-based. A limited exception permits an executive whose employment is terminated in such manner after the end of an applicable performance period but before the award vests to retain the award but only until the first opportunity for the award to vest. If, however, the award does not vest at that time (either because the performance measures are not achieved or the profitability requirement is not satisfied), the award is forfeited. Termination of the executive for cause would result in the forfeiture of all unvested restricted stock and restricted stock units.

Death, and in some cases, permanent disability, will result in vesting or termination of an equity award held by an executive officer. See “Compensation Discussion and Analysis – Other Elements of Compensation – Death or Disability.”

 

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Compensation of Directors

Total compensation of our non-employee directors for the year ended December 31, 2013, was as follows:

DIRECTOR COMPENSATION

YEAR ENDED DECEMBER 31, 2013

 

Name		Restricted Share Awards1 ($)				All Other Compensation ($)				Total ($)
Stuart B. Burgdoerfer		$	230,001			$	—			$	230,001
Charles A. Davis			245,007				—				245,007
Roger N. Farah			225,024				—				225,024
Lawton W. Fitt			240,005				—				240,005
Stephen R. Hardis			257,532				—				257,532
Jeffrey D. Kelly			225,024				—				225,024
Peter B. Lewis			300,006				620,000	2			920,006
Heidi G. Miller, Ph.D.			230,001				—				230,001
Patrick H. Nettles, Ph.D.			250,010				—				250,010
Bradley T. Sheares, Ph.D.			240,005				—				240,005

 

1

Represents grant date fair value of restricted share awards. The following table presents the aggregate unvested time-based restricted share awards held by each non-employee director at December 31, 2013, which in each case equals the number of time-based restricted shares granted to the director in 2013. Except as noted, all awards were made on May 17, 2013 and valued based on that day’s closing price of $26.19.

 

		Aggregate Number of Restricted Share Awards   Outstanding at December 31, 2013
Name		(#)
Stuart B. Burgdoerfer			8,782
Charles A. Davis			9,355
Roger N. Farah			8,592
Lawton W. Fitt			9,164
Stephen R. Hardis			9,822	a
Jeffrey D. Kelly			8,592
Peter B. Lewis			11,455
Heidi G. Miller, Ph.D.			8,782
Patrick H. Nettles, Ph.D.			9,546
Bradley T. Sheares, Ph.D.			9,164

 

a

Mr. Hardis received a restricted share award for 467 shares on December 20, 2013, valued on that day’s closing price of $26.82, which represents prorated compensation for his additional duties related to his assignment as Lead Independent Director from November 2013 until the 2014 Annual Meeting. This award will vest on June 21, 2014.

 

2

Represents a reimbursement of fees associated with filings made to the Federal Trade Commission under the Hart-Scott-Rodino (HSR) Act’s pre-merger notification requirements. These filings are required prior to the acquisition of a company’s common shares when a shareholder’s ownership levels will exceed certain dollar thresholds, subject to certain exceptions. Often, large shareholders are exempt from these filing requirements because they hold the shares on an “investment only” basis (i.e., as a passive investor); under the HSR rules, however, Mr. Lewis was required to file only because, at the time of his acquisitions, he was an executive officer and/or director of Progressive. In addition, the filings were triggered by acquisitions of common shares under our equity compensation plans. Under these circumstances, the Board determined that the filing fees were an expense that was properly paid by the Company, and we reimbursed Mr. Lewis for his filing fees.

Narrative Disclosure to Director Compensation Table

Equity-Based Awards. Each non-employee director is eligible to receive awards under The Progressive Corporation 2003 Directors Equity Incentive Plan (the “Directors Equity Plan”), as the principal method of director compensation. We do not pay cash retainers or meeting fees in addition to the equity awards. Each non-employee director receives an annual award of restricted stock having a value equal to the annual compensation established by the Board for the Committee assignments held by the director. Mr. Lewis received a lump sum restricted stock award as compensation for his service as Chairman. Mr. Hardis receives additional incremental compensation above his committee assignments during his service as Lead Independent Director. The other non-employee directors’ annual awards of restricted stock are determined based on their respective Committee assignments. Restricted stock awards to directors are made under the Directors Equity Plan

 

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and, beginning in 2013, are expected to be made in May of each year with an 11-month vesting period. If a new director is appointed to the Board or a director changes Committee assignments during the year, appropriate adjustments to his or her award may be made. Upon the death of a participating director, his or her estate will be entitled to receive any unvested restricted stock held by such director at the time of his or her death, which stock will vest on the vesting dates specified in the related agreements. The following table sets forth annual compensation levels for 2013:

 

Non-Executive Chairman of the Board		$	300,000
Lead Independent Director			25,000
Audit Committee Chair			250,000
Audit Committee Member			230,000
Compensation Committee Chair			240,000
Compensation Committee Member			225,000
Investment and Capital Committee Chair			230,000
Investment and Capital Committee Member			225,000
Additional Committee Chair1			20,000
Additional Committee Assignment1			15,000

 

1	Excludes Executive Committee.

Directors Restricted Stock Deferral Plan. Directors receiving awards of restricted stock under the Directors Equity Plan have the right to defer the receipt of the common shares covered by each such award under The Progressive Corporation Directors Restricted Stock Deferral Plan, as amended and restated (the “Directors Restricted Stock Deferral Plan”). If a director elects to defer a restricted stock award under this plan, immediately prior to vesting of the applicable award, the restricted shares are converted to units equivalent in value to Progressive common shares and credited to the participating director’s plan account. The participating director’s plan account will further be credited with amounts equal to dividends and other distributions, if and when authorized by the Board, which are paid on Progressive common shares. There are no other investment options under the Directors Restricted Stock Deferral Plan. All such accounts will be distributed in common shares, except amounts attributable to dividend equivalent payments, which will be distributed in cash, in a lump sum or installments, at the time(s) designated by the participating director at the time of election; distributions may be accelerated, however, in the event of the participant’s death, the participant leaving our Board of Directors, or a change in control of Progressive. Participating directors are permitted to change the schedule for certain distributions if they give at least 12 months’ advance notice and they delay those distributions by at least five years.

Directors Deferral Plan. Under The Progressive Corporation Directors Deferral Plan, as amended and restated (the “Directors Deferral Plan”), directors were able to elect to defer retainer and meeting fees earned prior to April 2006. Deferred fees were credited into a stock unit account under which the units are equivalent in value and dividend rights to Progressive common shares. All such accounts will be distributed in cash, in a lump sum, or installments, when and as designated by the participating director at the time of election or, if earlier, upon the death of the director or upon a change in control of the company. Participating directors are permitted to change the schedule for certain distributions if they give at least 12 months’ advance notice and they delay those distributions by at least five years.

Each participating director’s unit holdings in the Directors Deferral Plan and the Directors Restricted Stock Deferral Plan are included in the “Security Ownership of Directors and Executive Officers” table beginning on page 20, under the headings Beneficially Owned Common Share Equivalent Units and Units Equivalent to Common Shares.

Perquisites. During 2013, Mr. Lewis was reimbursed for certain fees paid in connection with filings under the Hart-Scott-Rodino Act (see note 2 to the director compensation table). Otherwise, we do not provide perquisites to our non-employee directors in excess of $10,000.

 

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ITEM 2: ADVISORY VOTE TO APPROVE OUR EXECUTIVE COMPENSATION PROGRAM

This proposal presents shareholders with the opportunity to cast a non-binding, advisory vote to approve our compensation program for our executive officers. We currently conduct non-binding, advisory shareholder votes on our executive compensation program annually. Our executive compensation philosophy, and our compensation program, plans, and awards for 2013 for our named executive officers, are described above in Compensation Discussion and Analysis, beginning on page 22, and in the accompanying compensation tables and narrative discussions, beginning on page 40.

Our executive compensation program is intended to attract and retain qualified executives, and motivate them to achieve both short-term and longer-term business results that management and the Compensation Committee believe will drive shareholder returns over time. While we seek to maintain a consistent compensation program from year to year (comprised principally of salary, annual cash bonus potential, and annual time-based and performance-based equity awards), the Compensation Committee annually sets the details of the applicable compensation awards, including performance goals and the potential compensation levels that may be attained. Our named executive officers’ pay is heavily weighted toward performance-based compensation and equity-based awards, resulting in the alignment of our executives’ interests with those of our shareholders. We believe that the amount of compensation paid to our executives is reasonable and competitive with similarly sized public companies, although above median compensation can be earned when aggressive performance goals are achieved under our various incentive plans. We provide limited perquisites to executives, while including competitive health and welfare benefits and limited income-deferral and severance rights.

Our Board recognizes the fundamental interest you, our shareholders, have in our executive compensation practices. We value your input on these matters and encourage you to contact the Board through one of the methods outlined above under “Communications with the Board of Directors” on page 16 should you have specific points of view or concerns that you would like the Board or the Compensation Committee to consider. Although this is an advisory vote, and the result accordingly will not be binding on the Board, our Compensation Committee will consider the outcome of the vote and any related communications from shareholders when evaluating the effectiveness of our compensation program and determining future plans and awards.

Based on the foregoing, the Board is seeking shareholder approval of the following:

RESOLVED, that the compensation paid to the company’s named executive officers, as disclosed in the company’s Proxy Statement dated March 21, 2014, pursuant to Item 402 of Regulation S-K, including Compensation Discussion and Analysis, compensation tables, and narrative discussions, is hereby APPROVED.

Vote Required for Approval

If a majority of the votes cast are cast “FOR” the proposal, shareholders will have approved our current executive compensation program as described in Compensation Discussion and Analysis and the accompanying tables and narrative discussions in this Proxy Statement. Abstentions and unvoted shares will not be taken into account.

The Board of Directors recommends that you vote FOR this proposal.

 

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ITEM 3: PROPOSAL TO RATIFY THE APPOINTMENT OF PRICEWATERHOUSECOOPERS LLP AS OUR INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FOR 2014

On March 7, 2014, the Audit Committee of the Board of Directors appointed PricewaterhouseCoopers LLP (PwC) as the independent registered public accounting firm to perform an integrated audit of the consolidated financial statements of The Progressive Corporation and its subsidiaries for the year ending December 31, 2014 and the effectiveness of the company’s internal control over financial reporting as of December 31, 2014. Pursuant to this proposal, we are asking shareholders to ratify the Audit Committee’s selection of PwC. If shareholders do not ratify the appointment of PwC, the selection of the independent registered public accounting firm will be reconsidered by the Audit Committee, but the Committee may decide to continue the engagement of PwC for 2014, due to difficulties in making such a transition after the year has begun. In such a case, we would again consider such a vote in connection with the selection of the independent registered public accounting firm for 2015.

Vote Required for Approval

The affirmative vote of a majority of the votes cast on this proposal is required for approval. Abstentions and unvoted shares will not be taken into account.

The Board of Directors recommends that you vote FOR this proposal.

OTHER INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM INFORMATION

Approval of Audit and Non-Audit Services

The Audit Committee of the Board of Directors requires that each engagement of PwC to perform any audit or non-audit services, including the fees and terms of the engagement, must be approved by the Committee, or by the Chairman of the Committee (who has authority to approve engagements not to exceed $50,000 in the aggregate between Committee meetings), before we engage PwC for the particular service. In addition, the Audit Committee has pre-approved a budget for specific audit and non-audit services of up to $25,000 per quarter for the following services:

 

•

Services associated with SEC registration statements, periodic reports, and other documents filed with the SEC, such as research and advice regarding the accounting or disclosure treatment of certain transactions;

 

•

Consultations with the company’s management as to the accounting or disclosure treatment of transactions or impact of final or proposed rules, standards, or interpretations by the SEC, Financial Accounting Standards Board, or other regulatory or standard setting bodies;

 

•

Expanded audit procedures related to accounting records required to respond to or comply with financial, accounting, or regulatory reporting matters;

 

•

Assistance in connection with financial or market conduct reviews conducted by state insurance regulatory authorities; and

 

•

Advice regarding tax and accounting treatment related to executive and employee stock or other compensation plans.

The Committee has not adopted any other policies or procedures that would permit us to engage PwC for non-audit services without the specific prior approval of the Committee or its Chairman.

Independent Registered Public Accounting Firm Fees

Following are the aggregate fees billed for the fiscal years ended December 31, 2013 and 2012, by PwC:

 

Fees		2013				2012
Audit			$2,046,247			$	1,952,546
Audit-related			42,793				9,740
Tax			34,216				9,492
Total		$	2,123,256			$	1,971,778

Audit fees. Amounts include professional services rendered for the audit of Progressive’s consolidated financial statements, statutory audits, and the audit of our internal control over financial reporting.

 

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Audit-related fees. Amounts include various non-audit research and consultation as well as assistance with S-8 share registrations for our 401(k) and Executive Deferred Compensation Plans and our insurance department examinations.

Tax fees. Amounts include fees for tax compliance, planning, consultation, and advice which may vary from year to year.

All of these fees were either pre-approved by the Audit Committee, or by its Chairman pursuant to the limited delegated authority, as described above.

Representatives of PwC are expected to be present at the Annual Meeting with the opportunity to make a statement about Progressive’s financial condition, if they desire to do so, and to respond to appropriate questions.

SHAREHOLDER PROPOSALS

Any shareholder who intends to present a proposal at the 2015 Annual Meeting of Shareholders for inclusion in the Proxy Statement and form of proxy relating to that meeting may do so in accordance with Securities and Exchange Commission Rule 14a-8 and is advised that the proposal must be received by the Secretary at our principal executive offices located at 6300 Wilson Mills Road, Mayfield Village, OH 44143, not later than November 28, 2014. Shareholder proposals which are not submitted in accordance with Rule 14a-8 must be submitted to us between February 15, 2015 and March 17, 2015, together with appropriate supporting information, to ensure that they will be considered at our Annual Meeting of Shareholders in 2015. If a shareholder submits such a proposal after March 17, 2015, the presiding officer at the Annual Meeting may refuse to acknowledge the proposal. However, if the presiding officer allows the consideration of a proposal submitted after March 17, 2015, the proxies designated by the Board may exercise their discretionary voting authority, without discussion of the proposal in our proxy materials, with respect to any such proposal.

HOUSEHOLDING

Securities and Exchange Commission regulations permit a single set of the Annual Report and Proxy Statement to be sent to any household at which two or more shareholders reside if they appear to be members of the same family. Each shareholder will continue to receive a separate proxy card. This procedure, referred to as householding, reduces the volume of duplicate information shareholders receive and reduces our mailing and printing costs. A number of brokerage firms have also instituted householding procedures. In accordance with a notice sent to certain beneficial shareholders who share a single address, only one copy of this Proxy Statement and the attached Annual Report will be sent to that address, unless any shareholder residing at that address gives contrary instructions.

We will deliver promptly, upon written or oral request, a separate copy of this Proxy Statement and the attached Annual Report to a shareholder at a shared address to which a single copy of the documents was delivered. A shareholder who wishes to receive a separate copy of the Proxy Statement and Annual Report, now or in the future, should submit this request by calling toll-free 1-800-542-1061, by writing to: The Progressive Corporation, Investor Relations, 6300 Wilson Mills Road, Box W33, Mayfield Village, OH 44143, or by email: investor_relations@progressive.com. Shareholders sharing an address who are receiving multiple copies of these materials may request to receive a single copy of such materials in the future by contacting us at the phone number or addresses provided above.

CHARITABLE CONTRIBUTIONS

Within the preceding three years, Progressive has not made a contribution to any charitable organization in which any of our directors serves as a director, trustee, or executive officer. The Progressive Insurance Foundation, which is a charitable foundation that receives contributions from Progressive, contributes to the Insurance Institute for Highway Safety and qualified tax-exempt organizations that are financially supported by our employees. These contributions are made on a matching basis, and for 2013 did not exceed $2,500 for each employee in the aggregate. In matching an employee’s gift, the Foundation may have contributed to charitable organizations in which one or more of our directors may be affiliated as an executive officer, director, or trustee.

OTHER MATTERS

The cost of this solicitation, including the reasonable expenses of brokerage firms and other record holders for forwarding these proxy materials to beneficial owners, will be paid by Progressive. In addition to solicitation by mail, proxies may be solicited by telephone, facsimile, other electronic means, or in person. We have engaged the firm of Morrow & Co., LLC, 470 West Ave., Stamford, CT 06902 to assist us in the solicitation of proxies at an estimated fee of $15,000 plus expenses. Proxies may also be solicited by our directors, officers, and employees without additional compensation.

 

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If any other matters properly come before the meeting, the persons named in the proxy, or their substitutes, will vote thereon in accordance with their judgment. The Board of Directors does not know at this time of any other matters that will be presented for action at the meeting.

AVAILABLE INFORMATION

Progressive’s Corporate Governance Guidelines, Board of Director Committee Charters, and Code of Business Conduct and Ethics for directors, officers, and employees 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, OH 44143.

We will furnish, without charge, to each person to whom a Proxy Statement is delivered, upon oral or written request, a copy of our Annual Report on Form 10-K for 2013 (other than certain exhibits). Requests for such documents should be submitted in writing to Jeffrey W. Basch, Chief Accounting Officer, The Progressive Corporation, 6300 Wilson Mills Road, Box W33, Mayfield Village, OH 44143, by telephone at (440) 395-2222 or email at investor_relations@progressive.com.

By Order of the Board of Directors.

Charles E. Jarrett, Secretary

March 21, 2014

 

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THE PROGRESSIVE CORPORATION

Proxy Solicited on Behalf of the Board of Directors for the 2014 Annual Meeting of Shareholders

The undersigned hereby appoints Brian C. Domeck, Charles E. Jarrett, and David M. Coffey, and each of them, with full power of substitution, as proxies for the undersigned to attend the Annual Meeting of Shareholders of The Progressive Corporation, to be held at Studio 96, 6671 Beta Drive, Mayfield Village, Ohio, at 10:00 a.m., local time, on May 16, 2014, and at that meeting, and at any adjournment or postponement of that meeting, to vote and act with respect to all of The Progressive Corporation common shares, $1.00 par value, represented by this proxy, which the undersigned would be entitled to vote, with all power the undersigned would possess if present in person, as follows:

 

				FOR		AGAINST		ABSTAIN
1.		Elect as directors the nominees listed below, each to serve for a term of one year:
		Stuart B. Burgdoerfer		¨		¨		¨
		Charles A. Davis		¨		¨		¨
		Lawton W. Fitt		¨		¨		¨
		Jeffrey D. Kelly		¨		¨		¨
		Heidi G. Miller, Ph.D.		¨		¨		¨
		Patrick H. Nettles, Ph.D.		¨		¨		¨
		Glenn M. Renwick;		¨		¨		¨
2.		Cast an advisory vote to approve our executive compensation program;		¨		¨		¨
3.		Ratify the appointment of PricewaterhouseCoopers LLP as our independent registered public accounting firm for 2014; and		¨		¨		¨
		In their discretion, to vote upon such other business as may properly come before the meeting.

This proxy, when properly executed, will be voted as specified by the shareholder. If no votes are specified, this proxy will be voted FOR the election as director of the seven nominees identified in Item 1 and FOR each of the proposals described in Item 2 and Item 3.

Receipt of the Notice of Annual Meeting of Shareholders and the related Proxy Statement dated March 21, 2014, is hereby acknowledged.

 

						Date:                                     , 2014
						Signature of Shareholder(s)
				Please sign as your name or names appear hereon. If shares are held jointly, all holders must sign. When signing as attorney, executor, administrator, trustee, or guardian, please give your full title. If a corporation, please sign in full corporate name by the president or other authorized officer. If a partnership, please sign in partnership name by an authorized person.