<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, 1996
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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
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(Exact name of registrant as specified in its charter)
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)
(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
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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: 71,442,510 outstanding at October 31, 1996
<PAGE> 2
PART I - FINANCIAL INFORMATION
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ITEM 1. Financial Statements.
The Progressive Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
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Periods Ended September 30, 1996 1995 % Change 1996 1995 % Change
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(millions - except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
NET PREMIUMS WRITTEN $878.1 $733.8 20 $2,563.4 $2,175.1 18
===================== =======================
REVENUES
Premiums earned $827.5 $709.3 17 $2,344.0 $2,011.0 17
Investment income 57.0 51.4 11 163.2 146.2 12
Net realized gains (losses) on security sales (3.4) 5.3 -- 1.2 42.8 (97)
Service revenues 12.8 9.7 32 32.6 29.0 12
--------------------- -----------------------
Total revenues 893.9 775.7 15 2,541.0 2,229.0 14
--------------------- -----------------------
EXPENSES
Losses and loss adjustment expenses 572.7 503.9 14 1,636.7 1,435.4 14
Policy acquisition costs 120.0 119.2 1 359.5 339.8 6
Other underwriting expenses 61.6 43.9 40 153.9 128.7 20
Investment expenses 1.4 1.7 (18) 4.6 6.3 (27)
Service expenses 9.2 5.2 77 30.8 22.4 38
Interest expense 16.1 14.3 13 45.4 42.8 6
--------------------- -----------------------
Total expenses 781.0 688.2 13 2,230.9 1,975.4 13
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NET INCOME
Income before income taxes 112.9 87.5 29 310.1 253.6 22
Provision for income taxes 32.6 25.0 30 88.1 69.5 27
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Net income $ 80.3 $ 62.5 28 $ 222.0 $ 184.1 21
===================== =======================
PER SHARE
Primary $ 1.08 $ .81 33 $ 2.91 $2.40 21
Fully diluted 1.08 .81 33 2.89 2.39 21
WEIGHTED NUMBER AVERAGE EQUIVALENT SHARES
Primary 74.0 74.3 -- 74.1 74.1 --
Fully diluted 74.2 74.4 -- 74.5 74.4 --
</TABLE>
See notes to consolidated financial statements.
2
<PAGE> 3
The Progressive Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
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1996 1995 1995
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(millions)
<S> <C> <C> <C>
ASSETS
Investments:
Held-to-maturity:
Fixed maturities, at amortized cost
(market: $310.7) $ -- $ 301.1 $ --
Available-for-sale:
Fixed maturities, at market (amortized cost:
$3,348.5, $2,615.0 and $2,729.5) 3,350.0 2,624.2 2,772.9
Equity securities, at market
Preferred stocks (cost: $279.9, $335.4 and $379.4) 282.6 339.1 382.3
Common stocks (cost: $438.3, $227.7 and $277.6) 491.7 253.7 310.0
Short-term investments, at amortized cost (market: $124.7, $191.1
and $302.8) 124.7 191.1 302.8
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Total investments 4,249.0 3,709.2 3,768.0
Cash 9.3 18.0 16.2
Accrued investment income 41.9 47.8 39.8
Premiums receivable, net of allowance for doubtful accounts of
$22.4, $18.0 and $19.2 801.2 635.7 649.9
Reinsurance recoverables 319.3 361.4 338.1
Prepaid reinsurance premiums 90.9 75.7 70.5
Deferred acquisition costs 196.9 183.7 181.9
Income taxes 71.8 64.7 58.3
Property and equipment, net of accumulated depreciation of
$122.3, $124.0 and $128.7 165.6 155.1 159.2
Other assets 41.3 24.4 70.6
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Total assets $5,987.2 $5,275.7 $5,352.5
================================== ================
LIABILITIES AND SHAREHOLDERS' EQUITY
Unearned premiums $1,449.4 $1,193.3 $1,209.6
Loss and loss adjustment expense reserves 1,764.1 1,604.9 1,610.5
Policy cancellation reserve 42.9 37.9 40.8
Accounts payable and accrued expenses 405.4 371.3 339.9
Funded debt 775.6 675.7 675.9
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Total liabilities 4,437.4 3,883.1 3,876.7
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Shareholders' equity:
9 3/8% Serial Preferred Shares, Series A (shares issued and
outstanding: 0, 3.5 and 3.4) -- 85.0 83.6
Common Shares, $1.00 par value
(net of treasury shares of 11.7, 11.0 and 11.0) 71.4 72.1 72.1
Paid-in capital 378.2 374.4 374.8
Net unrealized appreciation on investment securities 37.3 25.3 51.1
Retained earnings 1,062.9 835.8 894.2
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Total shareholders' equity 1,549.8 1,392.6 1,475.8
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Total liabilities and shareholders' equity $5,987.2 $5,275.7 $5,352.5
================================== ================
</TABLE>
See notes to consolidated financial statements.
3
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The Progressive Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30, 1996 1995
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(millions)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 222.0 $ 184.1
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 17.9 15.1
Net realized gains on security sales (1.2) (42.8)
Changes in:
Unearned premiums 239.8 156.6
Loss and loss adjustment expense reserves 153.6 170.5
Accounts payable and accrued expenses 65.5 32.0
Policy cancellation reserve 2.1 (9.4)
Prepaid reinsurance (20.4) 7.5
Reinsurance recoverables 18.8 18.3
Premiums receivable (151.3) (93.3)
Deferred acquisition costs (15.0) (22.1)
Income taxes (6.2) 8.2
Other, net 15.1 10.8
------------ --------------
Net cash provided by operating activities 540.7 435.5
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases:
Held-to-maturity: fixed maturities -- (.2)
Available-for-sale: fixed maturities (3,289.3) (2,175.1)
equity securities (520.2) (567.5)
Sales:
Available-for-sale: fixed maturities 2,280.6 1,366.7
equity securities 426.4 485.9
Maturities, paydowns, calls and other:
Held-to-maturity: fixed maturities -- 34.7
Available-for-sale: fixed maturities 371.1 345.8
equity securities 40.1 10.4
Net sales of short-term investments 178.1 88.0
Payable on securities 26.6 10.1
Purchases of property and equipment (25.7) (28.6)
------------ --------------
Net cash used in investing activities (512.3) (429.8)
CASH FLOWS FROM FINANCING ACTIVITIES
Redemption of preferred shares (80.8) --
Proceeds from exercise of stock options 5.2 9.9
Tax benefit of stock options exercised 3.8 8.3
Proceeds from funded debt 99.6 --
Payments on funded debt (.3) (.3)
Dividends paid to shareholders (15.3) (18.1)
Acquisition of treasury shares (47.5) (.9)
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Net cash used in financing activities (35.3) (1.1)
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Increase (decrease) in cash (6.9) 4.6
Cash, January 1 16.2 13.4
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Cash, September 30 $ 9.3 $ 18.0
============ ==============
</TABLE>
See notes to consolidated financial statements.
4
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The Progressive Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1 SUPPLEMENTAL CASH FLOW INFORMATION. The Company paid income taxes
of $75.4 million and $45.5 million for the nine months ended September 30, 1996
and 1995, respectively. Total interest paid was $34.9 million for each of the
nine months ended September 30, 1996 and 1995.
NOTE 2 On May 31, 1996, the Company redeemed all of its remaining outstanding
9 3/8% Serial Preferred Shares, Series A (Cumulative, Liquidation Preference
$25.00 per share) ("Preferred Shares") at a total cost of $82.1 million,
including accrued but unpaid dividends through the redemption date. The
redemption was funded through the sale on May 28, 1996, of $100 million of the
Company's 7.30% Notes due 2006 at par in an underwritten public offering. The
remaining proceeds of the offering were added to the investment portfolios of
the Company's subsidiaries and will be available for general corporate purposes,
which may include supporting premium growth.
NOTE 3 Funded debt at September 30 consisted of:
<TABLE>
<CAPTION>
1996 1995
--------------------------------- --------------------------------
Market Market
Cost Value Cost Value
-------------- --------------- -------------- ---------------
<S> <C> <C> <C> <C>
7.30% Notes $ 99.6 $ 99.9 $ -- $ --
6.60% Notes 198.8 193.5 198.6 197.1
7% Notes 148.3 140.2 148.3 145.1
8 3/4% Notes 29.4 31.6 29.2 32.2
10% Notes 149.5 167.0 149.4 172.4
10 1/8% Subordinated Notes 149.5 167.6 149.3 172.4
Other funded debt .5 .5 .9 .9
-------------- --------------- -------------- ---------------
$ 775.6 $ 800.3 $ 675.7 $ 720.1
============== =============== ============== ===============
</TABLE>
NOTE 4 On September 30, 1996, the Company paid a quarterly dividend of $.06 per
Common Share to shareholders of record as of the close of business on September
13, 1996. The dividend was declared by the Board of Directors on July 26, 1996.
On October 25, 1996, the Board of Directors declared a quarterly dividend of
$.06 per Common Share. The dividend is payable December 31, 1996, to
shareholders of record as of the close of business on December 13, 1996.
5
<PAGE> 6
NOTE 5 Certain amounts in the financial statements for 1995 were reclassified to
conform with the presentation used for 1996. 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, 1996, are not necessarily indicative of the results expected for
the full year.
NOTE 7 SUBSEQUENT EVENT. On November 6, 1996, the Company signed a definitive
agreement to acquire Midland Financial Group, Inc. Under the agreement, the
Company will acquire all of Midland's outstanding stock, or approximately 5.5
million shares, at a price of $9.00 per share in cash. The transaction is
expected to be completed during the first quarter 1997, subject to regulatory
approval and other customary conditions. Midland Financial Group underwrites
and markets nonstandard private passenger automobile insurance through
approximately 8,500 independent agents across 20 states, primarily in the
southern and western United States. For the first half of 1996, Midland wrote
$76 million of net premiums written.
6
<PAGE> 7
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
RESULTS OF OPERATIONS
For the third quarter 1996, operating income, which excludes net realized
gains/losses on security sales, was $82.5 million, or $1.11 per share, compared
to $59.0 million, or $.76 per share, last year. The combined ratio was 91.2,
compared to 94.0 for the third quarter 1995. For the nine months ended September
30, 1996, operating income was $221.2 million, or $2.92 per share, compared to
$156.2 million, or $2.02 per share, in 1995. The year-to-date combined ratio was
91.7, compared to 94.7 last year.
Net premiums written increased 20% over the third quarter 1995 and 18%
year-to-date, primarily reflecting an increase in unit sales. Premiums earned,
which are a function of the amount of premiums written in the current and prior
periods, increased 17% for both the quarter and the first nine months. Service
revenues increased 32% to $12.8 million for the quarter and 12% to $32.6 million
for the first nine months, primarily driven by the newly acquired vehicle
inspection services company.
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 and costs to settle these claims,
decreased as a percentage of premiums earned to 69% for the quarter, compared to
71% in 1995, and 70% for the first nine months, compared to 71% last year.
Policy acquisition costs and other underwriting expenses as a percentage of
premiums earned decreased to 22% for the third quarter and for the first nine
months, compared to 23% for the third quarter and for the first nine months in
1995. Service expenses increased 77% for the quarter and 38% for the first nine
months. Excluding current and prior year loss adjustment expense reserve changes
and acquisition costs associated with the vehicle inspection services company,
the increase in service expenses is consistent with the increase in revenues.
Recurring investment income (interest and dividends) increased 11% for the
quarter and 12% for the first nine months, reflecting an increase in the average
investment portfolio, partially offset by a decrease in the pretax yields and a
shift in the portfolio to common stocks. The Company had net realized losses on
security sales of $3.4 million for the quarter and net realized gains on
security sales of $1.2 million for the first nine months, compared to net
realized gains on security sales of $5.3 million and $42.8 million,
respectively, in 1995. On September 30, 1996, the Company's portfolio had $57.6
million in total unrealized gains, compared to $78.7 million at December 31,
1995, primarily reflecting an increase in interest rate levels as evidenced by
the 3-year treasury note yield increasing from 5.2% to 6.3% during the first
nine months.
The Company continues to invest in fixed-maturity, short-term and equity
securities. The majority of the portfolio was in short-term and
intermediate-term, investment-grade fixed-maturity securities ($3,335.9 million,
or 78.5%, at September 30, 1996, and $3,055.6 million, or 82.4%, at September
30, 1995). Long-term investment-grade fixed-maturity securities represented
$75.4 million, or $1.8%, and $44.8 million, or 1.2%, of the total investment
portfolio
7
<PAGE> 8
at September 30, 1996 and 1995, respectively. As of September 30, 1996 and 1995,
the non-investment-grade fixed-maturity portfolio of the Company was $63.4
million, or 1.5%, and $16.0 million, or .4%, respectively, of the total
investment portfolio. The duration of the fixed-income portfolio was 3.1 years
at September 30, 1996, compared to 1.9 years at September 30, 1995.
Equity investments are comprised of preferred stocks ($282.6 million, or 6.6%,
in 1996 and $339.1 million, or 9.2%, in 1995) and common stocks ($491.7 million,
or 11.6%, in 1996 and $253.7 million, or 6.8%, in 1995). The increase in common
stocks reflects the Company's objectives to increase its position in common
stock investments to 15% of the entire portfolio and to optimize returns and
further diversify the portfolio through foreign equity investments.
The Company's financial instruments with off-balance-sheet risk had net
unrealized losses of $1.4 million as of September 30, 1996, compared to losses
of $4.5 million as of September 30, 1995.
The weighted average annualized fully taxable equivalent book yield of the
portfolio was 6.6% and 6.9% for the nine months ended September 30, 1996 and
1995, 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, 1996, operations generated a positive cash
flow of $540.7 million. During the first nine months, the Company repurchased
997,105 Common Shares at an average cost of $41.59 per share. During the third
quarter, the Company repurchased 3,545 Common Shares at an average cost of
$52.59 per share, pursuant to an oddlot tender offer.
RECENT DEVELOPMENTS
The Company has previously reported that it entered into a Settlement
Stipulation with the California Department of Insurance to settle Pro-West
Insurance Company's Proposition 103 rollback obligation for the sum of
$1,750,000. The Settlement Stipulation has been approved by the administrative
law judge and signed by the California Commissioner of Insurance and became
final on September 16, 1996. The Company sought indemnification for this
liability from the sellers from whom Pro-West was acquired in October 1990, but
the sellers disputed the obligation. A settlement was reached, and, in
September, the Company accepted the sellers' payment in the amount of
$1,040,000 in full satisfaction of their indemnity obligation. The Company has
begun the process of locating eligible policyholders so that the rollback
refunds can be distributed.
8
<PAGE> 9
PART II - OTHER INFORMATION
---------------------------
ITEM 5. Other Information
The Board of Directors on October 25, 1996, elected Charles A.
Davis to fill the vacancy on the Company's Board. Mr. Davis is a
limited partner with Goldman Sachs Group L.P.
On November 6, 1996, the Company signed a definitive agreement
to acquire Midland Financial Group, Inc. Under the agreement,
the Company will acquire all of Midland's outstanding stock, or
approximately 5.5 million shares, at a price of $9.00 per share
in cash. The transaction is expected to be completed during the
first quarter 1997, subject to regulatory approval and other
customary conditions. Midland Financial Group underwrites and
markets nonstandard private passenger automobile insurance
through approximately 8,500 independent agents across 20 states,
primarily in the southern and western United States. For the
first half of 1996, Midland wrote $76 million of net premiums
written.
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
See exhibit index on page 11.
(b) Reports on Form 8-K filed during the quarter ended September
30, 1996: None
9
<PAGE> 10
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 13, 1996 BY: /s/ DAVID M. SCHNEIDER
--------------------- ----------------------
David M. Schneider
Secretary
Date: November 13, 1996 BY: /s/ CHARLES B. CHOKEL
--------------------- ---------------------
Charles B. Chokel
Chief Financial Officer
10
<PAGE> 11
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
Exhibit No. Form 1O-Q
Under Reg. Exhibit
S-K, Item 601 No. Description of Exhibit
------------- --------- ----------------------
<S> <C> <C>
10 10 The Progressive Corporation Directors Deferral
Plan (Amendment and Restatement), as further
amended on October 25, 1996
11 11 Computation of Earnings Per Share
12 12 Computation of Ratio of Earnings to
Fixed Charges
27 27 Financial Data Schedule
</TABLE>
11
<PAGE> 1
EXHIBIT NO. 10
--------------
THE PROGRESSIVE CORPORATION DIRECTORS
DEFERRAL PLAN (AMENDMENT AND
RESTATEMENT), AS FURTHER AMENDED
ON OCTOBER 25, 1996
<PAGE> 2
THE PROGRESSIVE CORPORATION
DIRECTORS DEFERRAL PLAN
(Amendment and Restatement)
1. PURPOSES OF THE PLAN.
The purposes of this Plan are to attract and retain qualified
Directors and to provide incentives to these Directors through the
ability to defer their receipt of Director Fees and by providing
Directors with the opportunity to participate in the Company's growth.
2. DEFINITIONS.
(a) "Board" means the Board of Directors of the Company.
(b) "Common Shares" means units equivalent in value and
dividend rights to Common Shares, $1.00 par value, of the Company.
(c) "Company" means The Progressive Corporation.
(d) "Deferred Account" means the account established by the
Company for each Director who elects to defer the Fees payable to him as
a Director.
(e) "Director" means any director of the Company who is not an
employee of the Company.
(f) "Election Agreement" means the written election to defer
Director Fees signed by the Director and in the form provided by the
Chief Financial Officer of the Company.
<PAGE> 3
(g) "Fees" means the fees payable to a Director by reason of
his serving on the Board either (i) as a retainer (without regard to
attendance at meetings) or (ii) on a per meeting basis. "Retainer Fees"
means those Fees which are payable to a Director by reason of his serving
on the Board as a retainer (without regard to attendance at meetings),
and "Meeting Fees" means those Fees which are payable to a Director by
reason of his attendance at meetings of the Board or any committee
thereof.
(h) "Market Price" means the average of the high and low price
at which a share of the Company's Common Stock, $1.00 par value, is
traded on the NYSE on a given date.
(i) "Member" means any Director who has at any time deferred
the receipt of Director Fees in accordance with this Plan.
(j) "Plan" means The Progressive Corporation Directors
Deferral Plan.
(k) "Term" means the duration of the term for which a Director
is elected.
(l) "Year" means the calendar year.
(m) Whenever appropriate, words used herein in the singular
may be read as the plural and the plural may be read as the singular.
(n) Masculine pronouns used herein shall be deemed to refer to
both women and men.
3. ELECTION TO DEFER DIRECTOR FEES.
(a) ELIGIBILITY.
A Director may elect to defer receipt of all or a portion of
his Fees for any Year in accordance with Paragraph 3(b) hereof.
<PAGE> 4
(b) TIME OF ELECTION.
A Director desiring to defer all or a portion of his Fees for
the upcoming Year must submit an Election Agreement to the Chief
Financial Officer of the Company no later than the last day of the Year
prior to the Year for which the election is to be effective.
Any Director who was not a Director during the previous Year
may make an election to defer all or a portion of the Fees for the Year
in which the Director is elected to the Board by delivering an Election
Agreement to the Chief Financial Officer of the Company within thirty
(30) days of such election to the Board. A Director fulfilling the above
requirements shall be considered a "Member" for purposes of this Plan.
(c) DURATION AND NATURE OF ELECTION.
Subject to the following sentence, a Member's election to
defer Fees shall continue in effect from Year to Year unless modified or
revoked by the Member through written notice to the Chief Financial
Officer of the Company prior to the beginning of the Year for which the
revocation or modification is to apply. Modifications or revocations
shall not apply retroactively, and once a Member has made, or is deemed
to have made, an election to defer all or a portion of his Fees for a
given Year, such election may not be modified or revoked.
<PAGE> 5
4. THE AMOUNT AND DATE OF DEFERRAL.
The Election Agreement of the Member shall indicate the amount
of Fees to be deferred and the date to which the Fees are to be
deferred. The deferral of Retainer Fees shall be subject to Paragraph 7
hereof; the deferral of Meeting Fees shall be to the earlier of (1) the
date selected by the Member in an Election Agreement, which date shall
not be earlier than six months and one day after the date on which such
Fees are credited to the Member's Deferred Account or (2) the date of
the death of the Member. Subject to the preceding sentence, a Member
may (i) select a lump-sum distribution or a series of distributions or
installments and (ii) choose the date on which the lump sum shall be
paid or the installments shall commence. The installments may not be
more frequent than quarterly and may not consist of more than forty
(40) quarterly or ten (10) annual installments. All payments will be
made on the first business day of a calendar quarter. In the case of
the death of the Member, distribution of the deferred Fees shall be
made in accordance with Paragraph 8.
5. DEFERRAL ACCOUNTS.
(a) ACCOUNTS.
The Company shall establish and preserve one or more accounts
for each Member. A Member shall designate on the Election Agreement
whether to have the account valued on the basis of the Common Shares of
the Company in accordance with Paragraph 5(b) hereof or on the basis of
cash in accordance with Paragraph 5(c) hereof. A Member may defer a
portion of his Fees into each type of account. The Company may
establish separate accounts for a Member to properly account for
amounts deferred under the two alternatives or during different years.
An account valued on the basis of the Company's
<PAGE> 6
Common Shares shall be known as a "Stock Account" and an account
valued on the basis of cash shall be known as a "Cash Account."
Amounts held in a Stock Account may not be transferred to a Cash
Account and vice versa.
(b) STOCK ACCOUNT.
There shall be credited to a Member's Stock Account, on the
last day of each quarter, the number of Common Shares (whole or
fractional, rounded to the nearest thousandth of a share) equal to the
quotient obtained by dividing (i) the sum of the Fees he elects to
defer to his Stock Account which otherwise would have been paid to him
during the quarter and the dividends payable during such quarter on the
Common Shares held in his Stock Account on the first day of such
quarter, by (ii) the Market Price of the Common Shares on the last
business day of such quarter.
(c) CASH ACCOUNT.
If a Member elects to have a portion of his Fees deferred into
a Cash Account, there will be credited to his Cash Account, on the last
day of each quarter, an amount equal to the sum of (i) the Fees he
elects to defer to his Cash Account which otherwise would have been
paid to him during the quarter and (ii) interest on the balance in the
Cash Account on the first day of such quarter at a rate based on the
rate of interest offered by National City Bank, Cleveland, Ohio, on the
last business day of such quarter on new three-month certificates of
deposit.
<PAGE> 7
(d) CLAIMS OF GENERAL CREDITORS.
All compensation deferred and amounts credited to the Cash and
Stock Accounts under this Plan shall remain a part of the general
assets of the Company. Accordingly, the compensation deferred under
this Plan is subject to the claims of the Company's general creditors.
6. PAYMENT OF ACCOUNTS.
The accounts established and maintained for each Member shall
be distributed in a lump sum or installments. The selection of the
distribution date(s) and the method of distribution are to be indicated
on the Election Agreement to be submitted by the Member. The election
as to the method of and time for payment of the amount of an account
relating to Fees deferred for a particular Year may not be altered with
respect to that particular Year once the election has been made.
Changes in the method of and time for payment of the amount of an
account may be effected for future Years by notifying the Chief
Financial Officer in writing prior to the beginning of the Year for
which the modification is to apply in accordance with Paragraph 3
above.
With respect to all distributions to be made under the Plan,
the following rules shall apply:
(i) All distributions, whether from a Stock Account or a Cash
Account, shall be paid in cash subject to withholding or deduction by
the Company of any taxes, contributions, payments and assessments which
the Company is now or may hereafter be required or authorized by law to
withhold or deduct from distributions;
<PAGE> 8
(ii) The amount of the distribution from the Stock Account
shall be valued based on the Market Price of the Company's Common
Shares, $1.00 par value, on the last business day of the calendar
quarter immediately preceding the distribution date; and
(iii) The amount of the distribution from the Cash Account
shall be valued based on the value of the Cash Account on the last
business day of the calendar quarter immediately preceding the
distribution date.
In the event a Member elects to receive installment payments,
the following rules shall apply:
(i) The balance of the Stock Account shall be credited,
pursuant to Paragraph 5(b) above, with additional Common Shares upon
the payment of dividends until the Stock Account is completely
distributed;
(ii) The balance of the Cash Account shall be credited,
pursuant to Paragraph 5(c) above, with interest quarterly until the
Cash Account is completely distributed; and
(iii) The amount of each installment shall be determined by
dividing the value of the Stock Account, the Cash Account, or both, by
the number of installments remaining to be paid to the Member.
7. MINIMUM DEFERRAL.
Retainer Fees shall be deferred as provided in this Paragraph
7. Absent the filing by a Director of an Election Agreement deferring
into a Stock Account all Retainer Fees which are payable to such
Director until a date which is on or after the Retainer Fee Minimum
Deferral Date (as herein defined), the Director shall be deemed to have
filed an election deferring such Fees until the Retainer Fee Minimum
Deferral Date, electing to have such Fees deposited to a Stock Account
and indicating that such Fees shall be
<PAGE> 9
distributed in a lump sum on the first day of the calendar quarter
immediately following the Retainer Fee Minimum Deferral Date. For
purposes hereof, the Retainer Fee Minimum Deferral Date shall be the
later of (a) the date which is six (6) months and one day after the
date upon which the Retainer Fees are credited to a Stock Account or
(b) the date of the expiration of the Director's then current Term.
8. DEATH OF MEMBER.
A Member may, in the Election Agreement described in Paragraph
3 above, provide that, in the event of his death prior to the date or
dates on which his account balance is distributable, the account
balance shall be distributed to his estate or designated beneficiary in
a single distribution or in the installments contemplated by Paragraph
6 above. This election shall be made at the time of the election
contemplated by Paragraph 3 above. If no such election is made, the
account balance shall be distributed to the estate of the deceased
Member in a single distribution six months after the Member's death.
9. VALUATION OF ACCOUNTS.
Each account shall be valued as of the last day of each
calendar quarter until payment of the account in full to the Member in
accordance with Paragraph 6. Each Member shall receive a statement of
his accounts not less than annually.
10. CAPITAL CHANGES.
In the event of any change in the number of outstanding Common
Shares, $1.00 par value, of the Company by reason of any stock dividend
or split, recapitalization, merger, consolidation, spin-off,
reorganization, combination or exchange of shares or a similar
corporate change, the Board shall determine, in its sole discretion,
the extent to which such change equitably requires an adjustment in the
number of Common Shares
<PAGE> 10
held in the Stock Accounts and such adjustment shall be made by the
Company and shall be conclusive and binding on all Members of the Plan.
11. DEFERRED VESTING OF COMMON SHARES.
Retainer Fees credited to a Member's Stock Account (whether as
a result of filing an election under Paragraph 3(b) or a deemed
election under Paragraph 7) shall not vest upon their being credited to
the Member's Stock Account, but shall become vested only upon the
expiration of the Term of such Director to which the Fees relate or
upon such Director's earlier death, resignation due to disability or
removal without cause. If a Director ceases to be a Director for any
reason other than death, resignation due to disability or removal
without cause, the Director shall forfeit all Retainer Fees credited to
his Stock Account during his unexpired Term, along with any dividends
attributable thereto, and the Member's Stock Account shall be reduced
accordingly.
12. ADMINISTRATION.
This Plan shall be administered by the Board or by an
appropriate Committee of Directors selected by the Board. The Board or
the appropriate Committee shall have the sole right and authority to
interpret and construe the provisions of this Plan, and its decisions
on any matter or dispute arising under the Plan shall be binding and
conclusive upon the Members. If a Member is part of the Board or
Committee that administers this Plan, he shall not participate in any
deliberations or actions of the Board or such Committee relating
exclusively to his membership or participation in this Plan.
<PAGE> 11
13. TERMINATION OR MODIFICATION OF PLAN.
This Plan may be terminated, modified, or amended at the sole
discretion of the Board. If this Plan is terminated, the remaining
Deferred Account balances will be distributed pursuant to the terms of
this Plan and no additional deferrals will be permitted.
14. NON-ALIENATION.
The amounts credited to any accounts maintained under the Plan
may not be pledged, assigned, or transferred by the Director for whom
such account is maintained or by any other individual, and any
purported pledge, assignment, or transfer shall be void and
unenforceable.
15. CLAIMS OF OTHER PERSONS.
The provisions of the Plan shall in no event be construed as
giving any person, firm or corporation any legal or equitable right as
against the Company or any subsidiary, or the officers, employees, or
directors of the Company or any subsidiary, except any such rights as
are specifically provided for in the Plan or are hereafter created in
accordance with the terms and provisions of the Plan.
16. SEVERABILITY.
The invalidity and unenforceability of any particular
provision of the Plan shall not affect any other provision hereof, and
the Plan shall be construed in all respects as if such invalid or
unenforceable provisions were omitted herefrom.
17. GOVERNING LAW.
The provisions of the Plan shall be governed by and construed
in accordance with the laws of the State of Ohio.
<PAGE> 12
AMENDMENT NO. 1
TO
THE PROGRESSIVE CORPORATION
DIRECTORS DEFERRAL PLAN
(AMENDMENT AND RESTATEMENT)
The Progressive Corporation Directors Deferral Plan (Amendment and
Restatement) (the "Plan") is hereby amended as follows:
1. Section 2(g) of the Plan is hereby amended to read as follows:
(g) "Fees" means the fees payable to a Director by reason of
his or her serving on the Board and includes both "Retainer
Fees" and "Meeting and Service Fees." "Retainer Fees" means
those Fees which are payable to a Director by reason of his or
her serving on the Board (without regard to attendance at
meetings). "Meeting and Service Fees" means those Fees which
are payable to a Director (i) by reason of his or her
attendance at meetings of the Board or any committee thereof,
or (ii) for participation in meetings of the Company's
management, or other Board-related activities, for which such
Director is entitled to receive compensation, as determined in
the sole discretion of the Chairman of the Board.
2. All references to "Meeting Fees" contained in the Plan are hereby
amended to read "Meeting and Service Fees."
The foregoing amendments will be effective as of October 25, 1996, and will be
applicable to all Plan years beginning on or after January 1, 1997.
/s/ David M. Schneider
----------------------
David M. Schneider
Secretary
<PAGE> 1
EXHIBIT NO. 11
--------------
COMPUTATION OF
EARNINGS PER SHARE
<PAGE> 2
THE PROGRESSIVE CORPORATION AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
(millions - except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
-------------------------------------------- --------------------------------------------
Periods Ended September 30, 1996 1995 1996 1995
-------------------------------------------- --------------------------------------------
Per Per Per Per
Amount Share Amount Share Amount Share Amount Share
-------------------------------------------- --------------------------------------------
<S> <C> <C> <C> <C>
PRIMARY:
Net income $80.3 $62.5 $222.0 $184.1
Less: Preferred stock dividends -- (2.1) (3.5) (6.3)
Excess of Preferred Stock
liquidation price over
carrying value -- -- (2.9) --
---------- ---------- ------------ ----------
Income available to common
shareholders $80.3 $1.08 $60.4 $.81 $215.6 $2.91 $177.8 $2.40
============================================ ============================================
Average shares outstanding 71.4 72.0 71.6 71.8
Net effect of dilutive stock
options 2.6 2.3 2.5 2.3
---------- ---------- ------------ ----------
Total 74.0 74.3 74.1 74.1
========== ========== ============ ==========
FULLY DILUTED:
Net income $80.3 $62.5 $222.0 $184.1
Less: Preferred stock dividends -- (2.1) (3.5) (6.3)
Excess of Preferred Stock
liquidation price over
carrying value -- -- (2.9) --
---------- ---------- ------------ ----------
Income available to common
shareholders $80.3 $1.08 $60.4 $.81 $215.6 $2.89 $177.8 $2.39
============================================ ============================================
Average shares outstanding 71.4 72.0 71.6 71.8
Net effect of dilutive stock
options 2.8 2.4 2.9 2.6
---------- ---------- ------------ ----------
Total 74.2 74.4 74.5 74.4
========== ========== ============ ==========
</TABLE>
<PAGE> 1
EXHIBIT NO. 12
--------------
COMPUTATION OF RATIO OF EARNINGS TO
FIXED CHARGES
<PAGE> 2
EXHIBIT 12
THE PROGRESSIVE CORPORATION
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(millions)
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30,
-------------------------------------
1996 1995
----------- ---------
<S> <C> <C>
Income before income taxes $310.1 $253.6
----------- ---------
Fixed Charges:
Interest and amortization on indebtedness 45.4 42.8
Portion of rents representative of the interest factor 3.3 3.1
----------- ---------
Total fixed charges 48.7 45.9
----------- ---------
Total income available for fixed charges $358.8 $299.5
=========== =========
Ratio of earnings to fixed charges 7.4 6.5
=========== =========
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 7
<LEGEND>
This schedule contains summary financial information extracted from the
consolidated balance sheet and statements of income and is qualified in its
entirety by reference to such financial statements.
</LEGEND>
<MULTIPLIER> 1,000
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<EXCHANGE-RATE> 1
<DEBT-HELD-FOR-SALE> 3,350,000
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 774,300
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 4,249,000
<CASH> 9,300
<RECOVER-REINSURE> 319,300
<DEFERRED-ACQUISITION> 196,900
<TOTAL-ASSETS> 5,987,200
<POLICY-LOSSES> 1,764,100
<UNEARNED-PREMIUMS> 1,449,400
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 775,600
<COMMON> 71,400
0
0
<OTHER-SE> 1,478,400
<TOTAL-LIABILITY-AND-EQUITY> 5,987,200
2,344,000
<INVESTMENT-INCOME> 158,600
<INVESTMENT-GAINS> 1,200
<OTHER-INCOME> 32,600
<BENEFITS> 1,636,700
<UNDERWRITING-AMORTIZATION> 359,500
<UNDERWRITING-OTHER> 153,900
<INCOME-PRETAX> 310,100
<INCOME-TAX> 88,100
<INCOME-CONTINUING> 222,000
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 222,000
<EPS-PRIMARY> 2.91
<EPS-DILUTED> 2.89
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
