<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 1O-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the quarterly period ended SEPTEMBER 30, 1994
-----------------------------------------------
or
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________________ to ______________________
Commission File Number 1-9518
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THE PROGRESSIVE CORPORATION
- - ------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
OHIO 34-0963169
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6300 WILSON MILLS ROAD, MAYFIELD VILLAGE, OHIO 44143
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(Address of principal executive offices) (Zip Code)
</TABLE>
(216) 461-5000
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(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
------ ------
Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date.
Common Shares, $1 par value: 71,297,488 outstanding at September 30, 1994
<PAGE> 2
PART I - FINANCIAL INFORMATION
------------------------------
ITEM 1. Financial Statements.
<TABLE>
The Progressive Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
<CAPTION>
Three Months Nine Months
------------------------------- ----------------------------------
Periods Ended September 30, 1994 1993 % Change 1994 1993 % Change
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(millions - except per share amounts)
NET PREMIUMS WRITTEN $633.6 $476.7 33 $1,814.4 $1,357.2 34
================= ====================
REVENUES
Premiums earned $572.3 $431.9 33 $1,587.6 $1,215.4 31
Investment income 40.4 30.6 32 115.2 98.0 18
Net realized gains on security sales 11.4 42.2 (73) 17.7 98.2 (82)
Service revenues 10.0 10.9 (8) 30.0 33.5 (10)
----------------- --------------------
Total revenues 634.1 515.6 23 1,750.5 1,445.1 21
----------------- --------------------
EXPENSES
Losses and loss adjustment expenses 384.1 262.3 46 1,047.5 747.3 40
Policy acquisition costs 99.8 81.9 22 284.5 229.1 24
Other underwriting expenses 38.1 33.9 12 111.7 102.8 9
Investment expenses 2.0 2.8 (29) 6.4 7.2 (11)
Service expenses 6.5 8.8 (26) 24.1 29.1 (17)
Interest expense 13.8 9.1 52 41.1 28.4 45
----------------- --------------------
Total expenses 544.3 398.8 36 1,515.3 1,143.9 32
----------------- --------------------
NET INCOME
Income before Federal income taxes 89.8 116.8 (23) 235.2 301.2 (22)
Provision for Federal income taxes 25.0 34.2 (27) 61.8 87.3 (29)
----------------- --------------------
Net income $ 64.8 $ 82.6 (22) $ 173.4 $ 213.9 (19)
================= ====================
PER SHARE
Primary $ .85 $ 1.10 (23) $2.25 $ 2.92 (23)
Fully diluted .85 1.09 (22) 2.25 2.91 (23)
WEIGHTED NUMBER EQUIVALENT SHARES
Primary 73.9 73.3 1 74.1 70.8 5
Fully diluted 73.9 73.5 1 74.2 71.2 4
<FN>
See notes to consolidated financial statements.
</TABLE>
2
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<TABLE>
The Progressive Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(unaudited)
<CAPTION>
September 30, December 31,
-------------------------- ----------------
1994 1993 1993
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<S> <C> <C> <C>
(millions)
ASSETS
Investments:
Held-to-maturity:
Fixed maturities, at amortized cost
(market: $349.0, $271.0 and $327.4) $339.4 $ 250.0 $ 309.1
Available-for-sale:
Fixed maturities, at market (amortized cost:
$2,025.4, $1,698.9 and $1,761.9) 2,017.1 1,734.9 1,792.6
Equity securities, at market (cost: $456.5, $336.7 and $433.2) 458.6 351.8 453.9
Short-term investments, at amortized cost (market: $382.6,
$538.7 and $231.3) 382.5 538.3 230.8
------- -------- ---------
Total investments 3,197.6 2,875.0 2,786.4
Cash 11.9 12.3 8.7
Accrued investment income 39.6 30.7 33.7
Premiums receivable, net of allowance for doubtful accounts of
$14.6, $9.2 and $8.7 509.5 364.3 380.6
Reinsurance recoverables 387.1 387.3 380.9
Prepaid reinsurance premiums 91.0 83.0 84.6
Deferred acquisition costs 160.4 129.7 124.6
Federal income taxes 99.2 70.5 78.5
Property and equipment, net of accumulated depreciation of $114.0,
$103.8 and $107.1 139.4 86.0 106.7
Other assets 26.2 25.4 26.6
--------- --------- ----------
Total assets $4,661.9 $4,064.2 $4,011.3
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Unearned premiums $1,005.2 $ 761.6 $ 772.0
Loss and loss adjustment expense reserves 1,475.2 1,332.3 1,348.6
Policy cancellation reserve 50.8 55.0 60.1
Accounts payable and accrued expenses 365.7 393.2 355.6
Funded debt 675.6 568.6 477.1
--------- -------- ----------
Total liabilities 3,572.5 3,110.7 3,013.4
-------- -------- ---------
Shareholders' equity:
9 3/8% Serial Preferred Shares, Series A (shares issued and
outstanding 3.6, 3.8 and 3.6) 87.0 91.7 87.9
Common Shares, $1.00 par value
(net of treasury shares of 11.0, 10.0 and 10.1) 71.3 72.1 72.1
Paid-in capital 355.5 353.4 357.6
Net unrealized appreciation (depreciation) on investment
securities (4.0) 33.2 33.5
Retained earnings 579.6 403.1 446.8
--------- -------- ---------
Total shareholders' equity 1,089.4 953.5 997.9
-------- -------- ---------
Total liabilities and shareholders' equity $4,661.9 $4,064.2 $4,011.3
======== ======== ========
<FN>
See notes to consolidated financial statements.
</TABLE>
3
<PAGE> 4
<TABLE>
The Progressive Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<CAPTION>
Nine Months Ended September 30, 1994 1993
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<S> <C> <C>
(millions)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $173.4 $213.9
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization 14.2 12.3
Net realized gains on security sales (17.7) (98.2)
Changes in:
Unearned premiums 233.2 146.8
Loss and loss adjustment expense reserves 126.6 58.1
Accounts payable and accrued expenses 38.7 20.8
Policy cancellation reserve (9.3) 2.9
Prepaid reinsurance (6.4) (5.0)
Reinsurance recoverables (6.2) (29.5)
Premiums receivable (128.9) (52.3)
Deferred acquisition costs (35.8) (28.4)
Federal income taxes (.6) 10.0
Other, net 12.1 17.9
------- -------
Net cash provided by operating activities 393.3 269.3
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase:
Held-to-maturity: fixed maturities (71.5) (37.5)
Available-for-sale: fixed maturities (1,027.9) (794.2)
equity securities (228.4) (221.3)
Sales:
Available-for-sale: fixed maturities 507.1 96.7
equity securities 219.3 282.8
Maturities, paydowns, calls and other:
Held-to-maturity: fixed maturities 39.5 37.9
Available-for-sale: fixed maturities 245.2 396.2
Net purchases of short-term investments (151.7) (238.3)
(Receivable) payable on securities (28.6) 78.9
Purchase of property and equipment (45.9) (35.5)
------- -------
Net cash used in investing activities (542.9) (434.3)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from exercise of stock options 1.7 .4
Proceeds from issuance of Common Shares -- 177.0
Proceeds from funded debt 198.4 170.0
Payments on funded debt (.3) (170.2)
Dividends paid to shareholders (17.5) (17.4)
Acquisition of treasury shares (29.5) (5.4)
------ -------
Net cash provided by financing activities 152.8 154.4
------ ------
Increase (decrease) in cash 3.2 (10.6)
Cash, January 1 8.7 22.9
------- -------
Cash, September 30 $ 11.9 $ 12.3
======= =======
<FN>
See notes to consolidated financial statements.
</TABLE>
4
<PAGE> 5
The Progressive Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1 SUPPLEMENTAL CASH FLOW INFORMATION. The Company paid Federal income
taxes of $59.3 million and $71.6 million for the nine months ended September
30, 1994 and 1993, respectively. Total interest paid was $33.5 million and
$22.7 million for the nine months ended September 30, 1994 and 1993,
respectively.
NOTE 2 In the second quarter, the Company settled the dispute arising out of
its 1985 acquisition of American Star Insurance Company over the seller's
refusal to pay certain losses on pre-sale business written by American Star.
NOTE 3 During the third quarter 1993, investment income was reduced $4.6
million as required under Statement of Financial Accounting Standards No. 91.
NOTE 4 On September 30, 1994, the Company paid a quarterly dividend of $.055
per Common Share and a regular quarterly dividend of approximately $.59 per
share on the 9 3/8% Serial Preferred Shares, Series A, to shareholders of
record as of the close of business on September 9, 1994. Both dividends were
declared by the Board of Directors on August 5, 1994.
On October 21, 1994, the Board of Directors declared a quarterly dividend of
$.055 per Common Share and a regular quarterly dividend of approximately $.59
per share on the 9 3/8% Serial Preferred Shares, Series A. Both are payable
December 31, 1994, to shareholders of record as of the close of business on
December 9, 1994.
NOTE 5 Certain amounts in the financial statements for 1993 were reclassified
to conform with the presentation used for 1994. These reclassifications had no
effect on net income.
NOTE 6 The financial statements reflect all normal recurring adjustments which
were, in the opinion of management, necessary to present a fair statement of
the results for the interim periods. The results of operations for the period
ended September 30, 1994 are not necessarily indicative of the results expected
for the full year.
5
<PAGE> 6
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
RESULTS OF OPERATIONS
For the third quarter 1994, operating income, which excludes net realized gains
on security sales, was $57.4 million, or $.75 per share, compared to $54.7
million, or $.71 per share, last year. The combined ratio was 91.2, compared
to 87.5 for the third quarter 1994. For the nine months ended September 30,
1994, operating income was $161.9 million, or $2.10 per share, compared to
$148.0 million, or $1.98 per share, in 1993. The year-to-date combined ratio
was 90.9 compared to 88.8 last year.
Net premiums written increased 33% over the third quarter 1993 and 34%
year-to-date reflecting unit growth in the core automobile insurance business.
This growth resulted from the Company's rates becoming more competitive due to
cost control efforts. Premiums earned, which are a function of the amount of
premiums written in the current and prior periods, increased 33% for the
quarter and 31% for the first nine months. Service revenue decreased 8% to
$10.0 million for the quarter and 10% to $30.0 million for the first nine
months, primarily reflecting the decrease in the size of the CAIP market.
Claim costs, which represent actual and estimated future payments to or for our
policyholders, as well as loss estimates for future assignments and assessments
under state-mandated assigned risk programs, increased as a percentage of
premiums earned to 67% for the quarter, compared to 61% in 1993, and 66% for
the first nine months, compared to 61% last year. During the year, the Company
has continued to keep rates flat despite rising loss costs. Policy acquisition
costs and other underwriting expenses as a percentage of premiums earned
decreased to 24% for the third quarter and 25% for the first nine months,
compared to 27% for both periods in 1993. Service expenses decreased 26% for
the quarter and 17% for the first nine months, primarily reflecting decreased
service revenues.
Recurring investment income (interest and dividends) increased 32% for the
quarter and 18% for the first nine months, reflecting an increase in the
average investment portfolio, partially offset by a mix shift to tax-free
securities. During the third quarter 1993, interest income was reduced $4.6
million as required under Statement of Accounting Standards No. 91. The
Company had net realized gains on security sales of $11.4 million and $17.7
million for the quarter and first nine months, respectively, compared to $42.2
million and $98.2 million in 1993. A significant portion of the 1993 realized
gains resulted from the sale of certain equity securities held in the Company's
investment portfolio. On September 30, 1994, the Company's portfolio had $3.5
million in total unrealized gains, compared to $70.2 million at December 31,
1993, primarily reflecting the general decline in the financial markets.
The provision for Federal income taxes was $25.0 million, compared to $34.2
million for the quarter and $61.8 million, compared to $87.3 million for the
first nine months, reflecting less realized gains in the current year.
The Company continues to invest in fixed maturity, short-term and equity
securities. The majority of the portfolio ($2,504.2 million, or 78.3%, at
September 30, 1994 and $2,296.3 million, or 80.0%, at September 30, 1993) was
in short-term and intermediate-term, investment-grade fixed-income securities.
6
<PAGE> 7
As of September 30, 1994 and 1993, the equity portfolio of the Company was
$458.6 million, or 14.3%, and $351.8 million, or 12.2%, respectively, of the
total investment portfolio. The marketable equity portfolio consists of
standard adjustable rate preferreds ($12.2 million in 1994 and $99.9 million in
1993), perpetual preferreds with mechanisms that may provide an opportunity to
liquidate at par ($338.9 million in 1994 and $180.7 million in 1993), and
common stocks ($107.5 million in 1994 and $71.2 million in 1993).
The Company had forward and future positions offset by short forward, future or
interest rate swap positions and unmatched positions, with a net market value
of $4.6 million and $3.7 million as of September 30, 1994 and 1993,
respectively.
The weighted average fully taxable equivalent book yield of the portfolio was
6.6% and 6.9% at September 30, 1994 and 1993, respectively.
FINANCIAL CONDITION
Progressive's insurance operations create liquidity by collecting and investing
premiums written from new and renewal business in advance of paying claims.
For the nine months ended September 30, 1994, operations generated a positive
cash flow of $393.3 million. During the first nine months, 917,000 Common
Shares were repurchased at an average cost of $31.01 per share and 40,000 9
3/8% Serial Preferred Shares, Series A, were repurchased at an average cost of
$27.05 per share. No shares were purchased during the third quarter 1994.
PART II - OTHER INFORMATION
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
See exhibit index on page 9.
(b) Reports on Form 8-K filed during the quarter ended
September 30, 1994: None
7
<PAGE> 8
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
THE PROGRESSIVE CORPORATION
-------------------------------
(Registrant)
Date: NOVEMBER 4, 1994 BY: /S/ DAVID M. SCHNEIDER
-------------------- --------------------------
David M. Schneider
Secretary of the Registrant
Date: NOVEMBER 4, 1994 BY: /S/ CHARLES B. CHOKEL
-------------------- ---------------------------
Charles B. Chokel
Chief Financial Officer of
the Registrant
8
<PAGE> 9
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
Exhibit No. Form 1O-Q
Under Reg. Exhibit
S-K, ITEM 601 NO. DESCRIPTION OF EXHIBIT
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<S> <C> <C>
(11) 11 Computation of Earnings Per Share
(27) 27 Financial Data Schedule
(99) 99 Computation of Premiums Earned
</TABLE>
9
<PAGE> 1
EXHIBIT NO. 11
---------------
COMPUTATION OF
EARNINGS PER SHARE
<PAGE> 2
<TABLE>
THE PROGRESSIVE CORPORATION AND
SUBSIDIARIES COMPUTATION OF
EARNINGS PER SHARE
(millions - except per share amounts)
(unaudited)
<CAPTION>
Three Months Nine Months
---------------------------------- ---------------------------------
Periods Ended September 30, 1994 1993 1994 1993
---------------------------------- ---------------------------------
Per Per Per Per
Amount Share Amount Share Amount Share Amount Share
---------------------------------- ----------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PRIMARY:
Net income $64.8 $82.6 $173.4 $213.9
Less: Preferred stock dividends (2.1) (2.3) (6.5) (7.0)
----- ----- ------ -------
$62.7 $.85 $80.3 $1.10 $166.9 $2.25 $206.9 $2.92
================================== ==================================
Average shares outstanding 71.3 70.6 71.7 68.3
Net effect of dilutive stock
options 2.6 2.7 2.4 2.5
----- ----- ------ -------
Total 73.9 73.3 74.1 70.8
===== ===== ===== =======
FULLY DILUTED:
Net income $64.8 $82.6 $173.4 $213.9
Less: Preferred stock dividends (2.1) (2.3) (6.5) (7.0)
----- ----- ------ ------
$62.7 $.85 $80.3 $1.09 $166.9 $2.25 $206.9 $2.91
=================================== ==================================
Average shares outstanding 71.3 70.6 71.7 68.3
Net effect of dilutive stock
options 2.6 2.9 2.5 2.9
----- ----- ------ -------
Total 73.9 73.5 74.2 71.2
===== ===== ====== =======
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from the
Consolidated Balance Sheets and Statements of Income and is qualified in its
entirety by reference to such Financial Statements.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> US DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1994
<PERIOD-START> JAN-01-1994
<PERIOD-END> SEP-30-1994
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 2,017,100
<DEBT-CARRYING-VALUE> 339,400
<DEBT-MARKET-VALUE> 349,000
<EQUITIES> 458,600
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 3,197,600
<CASH> 11,900
<RECOVER-REINSURE> 387,100
<DEFERRED-ACQUISITION> 160,400
<TOTAL-ASSETS> 4,661,900
<POLICY-LOSSES> 1,475,200
<UNEARNED-PREMIUMS> 1,005,200
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 675,600
<COMMON> 71,300
0
87,000
<OTHER-SE> 931,100
<TOTAL-LIABILITY-AND-EQUITY> 4,661,900
1,587,600
<INVESTMENT-INCOME> 108,800
<INVESTMENT-GAINS> 17,700
<OTHER-INCOME> 30,000
<BENEFITS> 1,047,500
<UNDERWRITING-AMORTIZATION> 284,500
<UNDERWRITING-OTHER> 111,700
<INCOME-PRETAX> 235,200
<INCOME-TAX> 61,800
<INCOME-CONTINUING> 173,400
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 173,400
<EPS-PRIMARY> 2.25
<EPS-DILUTED> 2.25
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
<PAGE> 1
EXHIBIT NO. 99
--------------
COMPUTATION OF PREMIUMS EARNED
<PAGE> 2
<TABLE>
THE PROGRESSIVE CORPORATION AND SUBSIDIARIES
COMPUTATION OF PREMIUMS EARNED
(millions)
(unaudited)
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------------------------------
1994 1993 % CHANGE
-------- ------- --------
<S> <C>
Total direct premiums written $1,960.9 $1,458.8 34
Reinsurance ceded, net (146.5) (101.6) 44
------- -------
Net premiums written 1,814.4 1,357.2 34
Change in unearned premiums(1) (226.8) (141.8) 60
------- --------
Premiums earned $1,587.6 $1,215.4 31
======== ========
<FN>
(1) Represents change in unearned premiums net of prepaid reinsurance premiums.
</TABLE>
