<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, 1997
--------------------------------------------
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
-------------------------------------------
THE PROGRESSIVE CORPORATION
- --------------------------------------------------------------------------------
(Exact name of registrant as specified in its charter)
Ohio 34-0963169
- --------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
6300 Wilson Mills Road, Mayfield Village, Ohio 44143
- --------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
(216) 461-5000
- --------------------------------------------------------------------------------
(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: 72,250,457 outstanding at October 31, 1997.
<PAGE> 2
PART I - FINANCIAL INFORMATION
- ------------------------------
Item 1. Financial Statements.
The Progressive Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF INCOME
(unaudited)
<TABLE>
<CAPTION>
Three Months Nine Months
----------------------------------- ------------------------------------
Periods Ended September 30, 1997 1996 % Change 1997 1996 % Change
------------------------------------------------------------------------------------------------------------------------
(millions - except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
NET PREMIUMS WRITTEN $ 1,199.9 $ 878.1 37 $ 3,448.7 $ 2,563.4 35
======================= =======================
REVENUES
Premiums earned $ 1,078.0 $ 827.5 30 $ 2,982.2 $ 2,344.0 27
Investment income 71.8 57.0 26 204.3 163.2 25
Net realized gains (losses) on security sales 41.4 (3.4) -- 67.7 1.2 NM
Service revenues 12.1 12.8 (5) 34.5 32.6 6
----------------------- -----------------------
Total revenues 1,203.3 893.9 35 3,288.7 2,541.0 29
----------------------- -----------------------
EXPENSES
Losses and loss adjustment expenses 756.9 572.7 32 2,116.9 1,636.7 29
Policy acquisition costs 157.4 120.0 31 433.6 359.5 21
Other underwriting expenses 89.4 61.6 45 223.0 153.9 45
Investment expenses 2.6 1.4 86 5.9 4.6 28
Service expenses 11.1 9.2 21 34.3 30.8 11
Interest expense 16.2 16.1 1 48.4 45.4 7
----------------------- -----------------------
Total expenses 1,033.6 781.0 32 2,862.1 2,230.9 28
----------------------- -----------------------
NET INCOME
Income before income taxes 169.7 112.9 50 426.6 310.1 38
Provision for income taxes 53.5 32.6 64 131.8 88.1 50
----------------------- -----------------------
Net income $ 116.2 $ 80.3 45 $ 294.8 $ 222.0 33
======================= =======================
PER SHARE
Primary $ 1.54 $ 1.08 43 $ 3.92 $ 2.91 35
Fully diluted 1.54 1.08 43 3.89 2.89 35
WEIGHTED NUMBER AVERAGE EQUIVALENT SHARES
Primary 75.6 74.0 2 75.2 74.1 1
Fully diluted 75.7 74.2 2 75.7 74.5 2
</TABLE>
NM - Not Meaningful
See notes to consolidated financial statements.
2
<PAGE> 3
The Progressive Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(unaudited)
<TABLE>
<CAPTION>
September 30, December 31,
--------------------- ------------
1997 1996 1996
------------------------------------------------------------------------------------------------------------
(millions)
<S> <C> <C> <C>
ASSETS
Investments:
Available-for-sale:
Fixed maturities, at market (amortized cost:
$3,446.3, $3,348.5 and $3,384.1) $3,509.0 $3,350.0 $3,409.2
Equity securities, at market
Preferred stocks (cost: $392.3, $279.9 and $333.8) 406.0 282.6 341.6
Common stocks (cost: $516.0 , $438.3 and $458.9) 673.3 491.7 540.1
Short-term investments, at amortized cost (market: $693.0, $124.7
and $159.7) 693.0 124.7 159.7
--------------------- --------
Total investments 5,281.3 4,249.0 4,450.6
Cash 20.7 9.3 15.4
Accrued investment income 41.9 41.9 46.9
Premiums receivable, net of allowance for doubtful accounts of
$27.5, $22.4 and $23.2 1,157.6 801.2 820.8
Reinsurance recoverables 362.2 319.3 310.0
Prepaid reinsurance premiums 88.6 90.9 85.8
Deferred acquisition costs 268.2 196.9 200.1
Income taxes 93.0 71.8 62.1
Property and equipment, net of accumulated depreciation of
$148.0, $122.3 and $126.7 227.6 165.6 169.9
Other assets 32.9 41.3 22.3
--------------------- --------
Total assets $7,574.0 $5,987.2 $6,183.9
===================== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Unearned premiums $1,979.8 $1,449.4 $1,467.3
Loss and loss adjustment expense reserves 2,140.9 1,764.1 1,800.6
Policy cancellation reserve 40.0 42.9 43.3
Accounts payable and accrued expenses 573.6 405.4 420.1
Debt 775.9 775.6 775.7
--------------------- --------
Total liabilities 5,510.2 4,437.4 4,507.0
--------------------- --------
Shareholders' equity
Common Shares, $1.00 par value
(net of treasury shares of 10.9, 11.7 and 11.6) 72.2 71.4 71.5
Paid-in capital 409.9 378.2 381.8
Net unrealized appreciation on investment securities 151.8 37.3 74.0
Retained earnings 1,429.9 1,062.9 1,149.6
--------------------- --------
Total shareholders' equity 2,063.8 1,549.8 1,676.9
--------------------- --------
Total liabilities and shareholders' equity $7,574.0 $5,987.2 $6,183.9
===================== ========
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 4
The Progressive Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Nine Months Ended September 30, 1997 1996
----------------------------------------------------------------------------------------------
(millions)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 294.8 $ 222.0
Adjustments to reconcile net income to net cash provided
by operating activities:
Depreciation and amortization 24.9 17.9
Net realized gains on security sales (67.7) (1.2)
Changes in:
Unearned premiums 442.0 239.8
Loss and loss adjustment expense reserves 198.9 153.6
Accounts payable and accrued expenses 99.8 65.5
Policy cancellation reserve (3.3) 2.1
Prepaid reinsurance 24.5 (20.4)
Reinsurance recoverables 18.0 18.8
Premiums receivable (307.7) (151.3)
Deferred acquisition costs (61.3) (15.0)
Income taxes (60.1) (6.2)
Other, net 35.2 15.1
-------- --------
Net cash provided by operating activities 638.0 540.7
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases:
Available-for-sale:
fixed maturities (5,050.6) (3,289.3)
equity securities (519.7) (520.2)
Sales:
Available-for-sale:
fixed maturities 4,607.1 2,280.6
equity securities 402.4 426.4
Maturities, paydowns, calls and other:
Available-for-sale:
fixed maturities 472.0 371.1
equity securities 85.9 40.1
Net sales of short-term investments (532.2) 178.1
Payable on securities 35.3 26.6
Purchases of property and equipment (77.7) (25.7)
Purchase of Midland, net of cash acquired (48.0) --
-------- --------
Net cash used in investing activities (625.5) (512.3)
CASH FLOWS FROM FINANCING ACTIVITIES
Redemption of Preferred Shares -- (80.8)
Proceeds from exercise of stock options 13.2 5.2
Tax benefit of stock options exercised 15.5 3.8
Proceeds from funded debt -- 99.6
Payments on funded debt (20.3) (.3)
Dividends paid to shareholders (13.0) (15.3)
Acquisition of treasury shares (2.6) (47.5)
-------- --------
Net cash used in financing activities (7.2) (35.3)
-------- --------
Increase (decrease) in cash 5.3 (6.9)
Cash, January 1 15.4 16.2
-------- --------
Cash, September 30 $ 20.7 $ 9.3
======== ========
</TABLE>
See notes to consolidated financial statements
<PAGE> 5
The Progressive Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1 SUPPLEMENTAL CASH FLOW INFORMATION. The Company paid income taxes of
$118.9 million and $75.4 million for the nine months ended September 30, 1997
and 1996, respectively. Total interest paid was $38.5 million and $34.9 million
for the nine months ended September 30, 1997 and 1996.
NOTE 2 Debt at September 30 consisted of:
<TABLE>
<CAPTION>
1997 1996
--------------------------------- --------------------------------
Market Market
Cost Value Cost Value
-------------- --------------- -------------- --------------
<S> <C> <C> <C> <C>
7.30% Notes $ 99.7 $103.4 $ 99.6 $ 99.9
6.60% Notes 198.9 199.4 198.8 193.5
7% Notes 148.4 149.4 148.3 140.2
8 3/4% Notes 29.6 31.2 29.4 31.6
10% Notes 149.6 165.8 149.5 167.0
10 1/8% Subordinated Notes 149.5 166.2 149.5 167.6
Other debt .2 .2 .5 .5
------ ------ ------ ------
$775.9 $815.6 $775.6 $800.3
====== ====== ====== ======
</TABLE>
NOTE 3 On September 30, 1997, the Company paid a quarterly dividend of $.06 per
Common Share to shareholders of record as of the close of business on September
12, 1997. The dividend was declared by the Board of Directors on July 25, 1997.
On October 29, 1997, the Board of Directors declared a quarterly dividend of
$.06 per Common Share. The dividend is payable December 31, 1997, to
shareholders of record as of the close of business on December 12, 1997.
NOTE 4 The consolidated 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, 1997, 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 1997, operating income, which excludes net realized
gains/losses on security sales and one-time items, was $89.3 million, or $1.18
per share, compared to $82.5 million, or $1.11 per share, last year. The
combined ratio was 93.1, compared to 91.2 for the third quarter 1996. For the
nine months ended September 30, 1997, operating income was $250.8 million, or
$3.31 per share, compared to $221.2 million, or $2.92 per share, in 1996. The
year-to-date combined ratio was 93.0, compared to 91.7 last year.
Net premiums written increased 37% over the third quarter 1996 and 35%
year-to-date, reflecting an increase in unit sales driven by the Company's
competitive rates. Premiums earned, which are a function of the amount of
premiums written in the current and prior periods, increased 30% for the quarter
and 27% for the first nine months. Service revenues, which primarily consist of
processing business for involuntary plans, decreased 5% to $12.1 million for the
quarter due to the shrinking Commercial Automobile Insurance Procedures market,
and increased 6% to $34.5 million for the first nine months, driven by new
service products started during 1996.
Claim costs, which represent actual and estimated future payments to or for our
policyholders, as well as loss estimates for assignments under state-mandated
assigned risk programs and costs to settle these claims, increased slightly as a
percentage of premiums earned to 70% for the quarter, compared to 69% in 1996.
Year-to-date claim costs were 71%, compared to 70% last year.
Policy acquisition costs and other underwriting expenses were 23% of premiums
earned for the third quarter, compared to 22% in 1996, and 22% for the first
nine months of both 1997 and 1996. Other underwriting expenses include
additional advertising expenses as well as costs to support the Company's
infrastructure. Service expenses increased 21% for the quarter and 11% for the
first nine months over the corresponding periods in 1996. Third quarter 1996
service expenses were effected by reductions to the loss adjustment expense
reserves; excluding these adjustments, the change in service expenses is
consistent with the change in revenues.
Recurring investment income (interest and dividends) increased 26% for the
quarter and 25% for the first nine months, reflecting an increase in the average
investment portfolio and the pretax investment yields. The Company had net
realized gains (losses) on security sales of $41.4 million and $67.7 million for
the third quarter and first nine months, respectively, compared to $(3.4)
million and $1.2 million in 1996. On September 30, 1997, the Company's portfolio
had $233.7 million in total unrealized gains, compared to $114.1 million at
December 31, 1996, primarily reflecting an upward trend in the stock market.
The Company continues to invest in fixed-maturity, equity and short-term
securities. The majority of the portfolio was in short-term and
intermediate-term, investment-grade fixed-income
6
<PAGE> 7
securities ($3,824.3 million, or 72.4%, at September 30, 1997, and $3,335.9
million, or 78.5%, at September 30, 1996). Long-term investment-grade
fixed-income securities represented $118.9 million, or 2.2%, and $75.4 million,
or 1.8%, of the total investment portfolio at September 30, 1997 and 1996,
respectively. Non-investment-grade fixed-maturity securities were $258.8
million, or 4.9% in 1997, and $63.4 million, or 1.5%, in 1996 and offer the
Company high returns and added diversification without a significant adverse
effect on the stability and quality of the investment portfolio as a whole. The
duration of the fixed-income portfolio was 2.7 years at September 30, 1997,
compared to 3.1 years at September 30, 1996.
Derivative financial instruments are used to manage the risks and enhance the
yields of the available-for-sale portfolio. These financial instruments had a
net market value of $(.2) million as of September 30, 1997, compared to $.8
million as of September 30, 1996.
The weighted average annualized fully taxable equivalent book yield of the
portfolio was 6.7% and 6.6% for the nine months ended September 30, 1997 and
1996, 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.
During the first nine months, the Company repurchased 26,926 Common Shares to
satisfy obligations under various employee benefit plans. For the nine months
ended September 30, 1997, operations generated a positive cash flow of $638.0
million.
The Company has substantial capital resources and is unaware of any trends,
events, or circumstances that are reasonably likely to affect its capital
resources in a material way. The Company believes it has sufficient borrowing
capacity and other capital resources to support current and anticipated growth.
7
<PAGE> 8
PART II - OTHER INFORMATION
---------------------------
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
See exhibit index on page 10.
(b) Reports on Form 8-K filed during the quarter ended
September 30, 1997:
None
8
<PAGE> 9
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 10, 1997 BY: /s/ DAVID M. SCHNEIDER
--------------------- ----------------------
David M. Schneider
Secretary
Date: November 10, 1997 BY: /s/ CHARLES B. CHOKEL
----------------------- ---------------------
Charles B. Chokel
Chief Financial Officer
9
<PAGE> 10
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Form 1O-Q
Under Reg. Exhibit
S-K, Item 601 No. Description of Exhibit
------------- --------- ----------------------
<S> <C> <C>
11 11 Computation of Earnings Per Share
27 27 Financial Data Schedule
</TABLE>
10
<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, 1997 1996 1997 1996
-------------------------------------------- --------------------------------------------
Per Per Per Per
Amount Share Amount Share Amount Share Amount Share
-------------------------------------------- --------------------------------------------
PRIMARY:
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net income $116.2 $80.3 $294.8 $222.0
Less: Preferred stock dividends -- -- -- (3.5)
Excess of Preferred Stock
liquidation price over
carrying value -- -- -- (2.9)
--------- --------- ----------- ---------
Income available to common
shareholders $116.2 $1.54 $80.3 $1.08 $294.8 $3.92 $215.6 $2.91
============================================ ============================================
Average shares outstanding 72.1 71.4 71.9 71.6
Net effect of dilutive stock
options 3.5 2.6 3.3 2.5
--------- --------- ----------- ---------
Total 75.6 74.0 75.2 74.1
========= ========= =========== =========
FULLY DILUTED:
Net income $116.2 $ 80.3 $294.8 $222.0
Less: Preferred stock dividends -- -- -- (3.5)
Excess of Preferred Stock
liquidation price over
carrying value -- -- -- (2.9)
--------- --------- ----------- ---------
Income available to common
shareholders $116.2 $1.54 $ 80.3 $1.08 $294.8 $3.89 $215.6 $2.89
============================================ ============================================
Average shares outstanding 72.1 71.4 71.9 71.6
Net effect of dilutive stock
options 3.6 2.8 3.8 2.9
--------- --------- ----------- ---------
Total 75.7 74.2 75.7 74.5
========= ========= =========== =========
</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
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> SEP-30-1997
<DEBT-HELD-FOR-SALE> 3,509,000
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 1,079,300
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 5,281,300
<CASH> 20,700
<RECOVER-REINSURE> 362,200
<DEFERRED-ACQUISITION> 268,200
<TOTAL-ASSETS> 7,574,000
<POLICY-LOSSES> 2,140,900
<UNEARNED-PREMIUMS> 1,979,800
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 775,900
0
0
<COMMON> 72,200
<OTHER-SE> 1,991,600
<TOTAL-LIABILITY-AND-EQUITY> 7,574,000
2,982,200
<INVESTMENT-INCOME> 198,400
<INVESTMENT-GAINS> 67,700
<OTHER-INCOME> 34,500
<BENEFITS> 2,116,900
<UNDERWRITING-AMORTIZATION> 433,600
<UNDERWRITING-OTHER> 223,000
<INCOME-PRETAX> 426,600
<INCOME-TAX> 131,800
<INCOME-CONTINUING> 294,800
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 294,800
<EPS-PRIMARY> 3.92
<EPS-DILUTED> 3.89
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
