Progressive Corporation Harvard Case Solution & Analysis

Progressive Corporation deals in insurance of property and casualty with typical policies for individuals cover risk related with owning and operating auto-mobiles, motorcycles, boats and other vehicles. The industry in which the company operates is widely considered as recurrent and enjoys intense market competition. Progressive has been the 3rd largest auto insurance provider in the United States and has two wholly-owned subsidiaries Progressive Drive Insurance and Progressive Direct.
Progressive Corporation prominently stands with its competitors State farm, Allstate, GECO, farmers’ Insurance Group and USAA. Its competitive features include the ability to match prices between various insurance companies to show the value saved by purchasing Progressive’s policy. It is rated as A+ superior by an insurance company which makes it best in terms of financial stability and claims paying facility.
CEO of Progressive has recently announced a new dividend policy which is to take effect in 2007. Now the dividend will be paid yearly instead of quarterly payments and would be variable depending on the three components which are used to calculate the payout. The main purpose of the new policy is to improve the capital management within the insurance business. In past few years the company has experienced good growth and profitability and repurchased its stock and still expects to continue stock repurchases in union with the new variable dividend policy.
Proposed variable dividend calculation: dividend would be varied according to this formula:
Total Dividend payout=target percentage X gain share factor x post-tax underwriting income.
Where the target percentage is expected to be 20% and the gain share factor is taken as 1.4 which is average for preceding 20 years.
For the purpose of calculating pre-tax underwriting income for years 2007-2014,a forecast has been prepared following the data of 2005.
Due to repurchasing of stock there is an average decline of 4.6% in the number of shares outstanding.
Tax rate for the year is 35%.
Progressive Corporation Harvard Case Solution & Analysis

1. Factors’ contribution towards the dividend payout
The first factor in finding out the dividend payable is the target percentage which will be applied to the pre-tax underwriting income which would be suggested by the board of directors at the start of each financial year and the company expects it to be 20%. If the expected target percentage would rise, it may result in difficulty to pay the dividends as it needs sufficient cash reserves of company. High payout ratio gives signal to the market investors that the company is doing well and is financially stable but paying dividends above the optimal level would result in inability to cope up with the payments and marking an adverse impact on the market. While deciding on the target percentage, factors like current assets position, profitability position, earnings per share, price to earnings ratio and competitor’s dividend policy and pattern of market should be kept in view.
The second factor in finding out the dividend payable is growth share which is an internally generated performance parameter between 0 and 2. Growth share is designed to measure the performance of the company and its subsidiaries in commercial auto insurance business.........

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