1. 1 Risk Management at Progressive Insurance How we got started Getting corporate support Capital Management Examples of deliverables The value risk management brings to the firm

2. 2 Getting Started: Began in 2001 after a year of poor results Intended to respond to capital needs for foreseeable risks not in our pricing structure Viewed by Sr. Management as an opportunity to take a good look at Risk Management practices and firm’s overall risk appetite The leader must understand the business and the competition Our biggest challenge was with risk identification; keeping the scope narrow. Initially focus on measuring and managing extreme risks; risks that could put you out of business Getting Support: A top down driven process is key Drive awareness throughout the organization. Get on the Board of Directors agenda. Identify all risks into one document; they must be easy to understand Be clear on your deliverable, value to the firm

3. 3 Capital Management Tools Operational Leverage (Modeled) 3:1 Capital Financial Leverage (Modeled) <30% Dividend Policy Portfolio Asset Allocation (Modeled) 85%/15% Product Mix Risk Transfer Policy (Insurance/Reinsurance)

4. 4 Our Financial Policies Support efforts to grow as fast as possible below a 96 Combined Ratio Progressive balances risk in underwriting with risk of investing and financing activities in order to have sufficient capital to support all the insurance we can profitably underwrite and service. We expect to earn a return on equity greater than its cost.

5. 5 Premium Receivable Fixed Income Portfolio Equity Portfolio PP&E Other Assets Payables Unearned Premium Loss Reserves Debt Shareholders’ Equity Progressive’s Balance Sheet Assets Liabilities & Equity Operating Liabilities Capital Portfolio 1-2 Balance Sheet Management The high frequency, low severity auto insurance business has a relatively short underwriting “tail” which limits our willingness to take interest rate credit, prepayment or concentration risk. Progressive’s fixed income constraints reinforce our total return approach to portfolio management and mitigate the risk that sudden movements in investment markets could impair our ability to write insurance.

6. 6 Capital Adequacy Note: values illustrated are for presentation purposes only

7. 7 Taxonomy of Progressive’s Business Risks UnderwritingFinancingInvesting Rate and Trade Practice Regulation Litigation/Mass Tort Litigation Loss Reserve Estimation Error Information Technology Systems Failure Process Innovation Pricing Estimation Error Product Innovation Catastrophic Claims Events Brand Compliance and Regulatory Risk Business Continuity Customer Service Risk People Corporate Governance Environment Growth and Profitability Billing and Cash Collection Interruption Third Party Solvency SEC Enforcement Action Litigation Regulatory Denial of Upstream Dividends Rating Downgrades P&C Industry Falls out of investor favor Investment Return Investment Controls Mergers and Acquisitions Asset-Liability Management Fiduciary Liability Classifications of Business Risks

8. 8 Maintain Locations of Our Major Regional Cities

9. 9 Liquidity Risk What Happened on 9/11? Exchange Closed until 9/17 Our Fixed Income Custodian was Down Our cash needs average $40M per day Pre 9/11 Sources of Cash Lockbox (ACH) Fixed Income Custodian Lockbox (ACH) Fixed Income Custodian Equity Custodian Local Emergency Facility Post 9/11 Sources of Cash Equity Custodian Additional Source of Cash Helps Protect Against: Payment System Interruption Interruption in Trade Settlement Process (Investments) Lack of access to daily cash receipts but daily distributions can be made without interruption.

10. 10 Mapping Portfolio Credit Risk with Business Risks Note: values illustrated are for presentation purposes only

11. 11 What has Risk Management Done for Us ? Produces a systematic listing of issues and events and prioritizes risks Evaluates existing controls in management system to mitigate high priority risks Identifies business risks and assesses their potential impact and likelihood of occurrence Used as an essential element to identify future need for capital or excess capital position. Eliminates excess credit exposure to any one company when combine business risks with investment portfolio risks. Assists with Regulatory and Rating Agency discussions and disclosures Provides basis for formalizing risk management tools: Accept, Prevent, Hedge, Diversify, Transfer