<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 June 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: 72,090,243 outstanding at July 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 Six Months
---------------------------------- -----------------------------------
Periods Ended June 30, 1997 1996 % Change 1997 1996 % Change
- --------------------------------------------------------------------------------------- -----------------------------------
(millions - except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
NET PREMIUMS WRITTEN $ 1,197.2 $875.1 37 $ 2,248.8 $1,685.3 33
==================== ======================
REVENUES
Premiums earned $ 1,009.8 $784.5 29 $ 1,904.1 $1,516.5 26
Investment income 68.3 53.4 28 132.5 106.2 25
Net realized gains (losses) on security sales 29.6 (.2) -- 26.3 4.7 460
Service revenues 11.1 10.4 7 22.4 19.8 13
-------------------- ----------------------
Total revenues 1,118.8 848.1 32 2,085.3 1,647.2 27
-------------------- ----------------------
EXPENSES
Losses and loss adjustment expenses 724.8 538.6 35 1,360.0 1,064.1 28
Policy acquisition costs 147.6 119.4 24 276.2 239.5 15
Other underwriting expenses 67.8 51.3 32 133.5 92.2 45
Investment expenses 1.7 1.4 21 3.2 3.2 --
Service expenses 12.0 12.3 (2) 23.2 21.6 7
Interest expense 16.1 15.0 7 32.3 29.3 10
-------------------- ----------------------
Total expenses 970.0 738.0 31 1,828.4 1,449.9 26
-------------------- ----------------------
NET INCOME
Income before income taxes 148.8 110.1 35 256.9 197.3 30
Provision for income taxes 46.7 31.7 47 78.3 55.5 41
-------------------- ----------------------
Net income $ 102.1 $ 78.4 30 $ 178.6 $ 141.8 26
==================== ======================
PER SHARE
Primary $ 1.36 $ 1.01 35 $ 2.39 $ 1.83 31
Fully diluted 1.36 1.01 35 2.37 1.83 30
WEIGHTED NUMBER AVERAGE EQUIVALENT SHARES
Primary 75.0 73.6 2 74.8 74.1 1
Fully diluted 75.3 73.7 2 75.3 74.1 2
</TABLE>
See notes to consolidated financial statements.
2
<PAGE> 3
The Progressive Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
------------------------ ---------------
1997 1996 1996
- -------------------------------------------------------------------------------------------------------------------------
(millions)
<S> <C> <C> <C>
ASSETS
Investments:
Available-for-sale:
Fixed maturities, at market (amortized cost:
$3,293.5, $3,098.5 and $3,384.1) $3,335.7 $3,091.2 $3,409.2
Equity securities, at market
Preferred stocks (cost: $376.9, $298.2 and $333.8) 384.0 298.2 341.6
Common stocks (cost: $488.3, $335.8 and $458.9) 609.8 381.9 540.1
Short-term investments, at amortized cost (market $640.0, $297.7 and
$159.7) 640.0 297.7 159.7
------------------------ ---------------
Total investments 4,969.5 4,069.0 4,450.6
Cash 18.6 11.2 15.4
Accrued investment income 44.2 50.1 46.9
Premiums receivable, net of allowance for doubtful accounts of
$24.4, $20.4 , and $23.2 1,086.1 794.1 820.8
Reinsurance recoverables 362.1 315.8 310.0
Prepaid reinsurance premiums 94.0 91.5 85.8
Deferred acquisition costs 255.9 193.9 200.1
Income taxes 74.1 77.8 62.1
Property and equipment, net of accumulated depreciation of
$139.6, $138.5 and $126.7 195.8 166.9 169.9
Other assets 37.9 23.4 22.3
------------------------ ---------------
Total assets $7,138.2 $5,793.7 $6,183.9
======================== ===============
LIABILITIES AND SHAREHOLDERS' EQUITY
Unearned premiums $1,863.4 $1,399.4 $1,467.3
Loss and loss adjustment expense reserves 2,082.0 1,693.3 1,800.6
Policy cancellation reserve 39.9 39.8 43.3
Accounts payable and accrued expenses 475.0 426.1 420.1
Debt 775.9 775.6 775.7
------------------------ ---------------
Total liabilities 5,236.2 4,334.2 4,507.0
------------------------ ---------------
Shareholders' equity:
Common Shares, $1.00 par value
(treasury shares of 11.1, 11.8 and 11.6) 72.0 71.3 71.5
Paid-in capital 398.9 376.3 381.8
Net unrealized appreciation on investment securities 110.9 25.2 74.0
Retained earnings 1,320.2 986.7 1,149.6
------------------------ ---------------
Total shareholders' equity 1,902.0 1,459.5 1,676.9
------------------------ ---------------
Total liabilities and shareholders' equity $7,138.2 $5,793.7 $6,183.9
======================== ===============
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 4
<TABLE>
<CAPTION>
The Progressive Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
Six Months Ended June 30, 1997 1996
- -------------------------------------------------------------------------------------------------
<S> <C> <C>
(millions)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 178.6 $ 141.8
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization 15.1 12.8
Net realized gains on security sales (26.3) (4.7)
Changes in:
Unearned premiums 325.6 189.8
Loss and loss adjustment expense reserves 140.0 82.8
Accounts payable and accrued expenses 30.9 55.6
Policy cancellation reserve (3.4) (1.0)
Prepaid reinsurance 19.1 (21.0)
Reinsurance recoverables 18.1 22.3
Premiums receivable (236.2) (144.2)
Deferred acquisition costs (49.0) (12.0)
Income taxes (19.2) (5.5)
Other, net 21.6 (3.9)
---------------------------------
Net cash provided by operating activities 414.9 312.8
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases:
Available-for-sale: fixed maturities (2,700.8) (2,233.4)
equity securities (315.4) (280.0)
Sales:
Available-for-sale: fixed maturities 2,633.2 1,649.6
equity securities 256.7 287.2
Maturities, paydowns, calls and other:
Available-for-sale: fixed maturities 246.9 202.2
equity securities 37.5 25.6
Net (purchases) sales of short-term investments (479.2) 5.1
Payable on securities 5.6 76.8
Purchases of property and equipment (37.0) (18.1)
Purchase of Midland, net of cash acquired (48.0) --
---------------------------------
Net cash used in investing activities (400.5) (285.0)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from exercise of stock options 9.8 4.1
Tax benefits from exercise of stock options 7.8 2.9
Proceeds from funded debt -- 99.6
Payments on funded debt (20.2) (.2)
Redemption of Preferred Shares -- (80.8)
Dividends paid to shareholders (8.6) (11.1)
Acquisition of treasury shares -- (47.3)
---------------------------------
Net cash used in financing activities (11.2) (32.8)
---------------------------------
Increase (decrease) in cash 3.2 (5.0)
Cash, January 1 15.4 16.2
---------------------------------
Cash, June 30 $ 18.6 $ 11.2
=================================
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 income taxes of
$84.9 million and $52.4 million for the six months ended June 30, 1997 and 1996,
respectively. Total interest paid was $31.9 million and $28.3 million for the
six months ended June 30, 1997 and 1996, respectively.
NOTE 2 Debt at June 30 consisted of:
<TABLE>
<CAPTION>
1997 1996
-------------------------- --------------------------
Market Market
Cost Value Cost Value
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
7.30% Notes $ 99.7 $100.7 $ 99.6 $ 99.6
6.60% Notes 198.9 195.9 198.8 192.9
7% Notes 148.4 143.7 148.3 141.0
8 3/4% Notes 29.6 31.2 29.4 31.6
10% Notes 149.6 165.1 149.5 167.6
10 1/8% Subordinated Notes 149.5 165.6 149.4 168.0
Other debt 0.2 0.2 .6 .6
------------ ------------ ------------ ------------
$775.9 $802.4 $775.6 $801.3
============ ============ ============ ============
</TABLE>
NOTE 3 On June 30, 1997, the Company paid a quarterly dividend of $.06 per
Common Share to shareholders of record as of the close of business on June 13,
1997. The dividend was declared by the Board of Directors on April 25, 1997.
On July 25, 1997, the Board of Directors declared a quarterly dividend of $.06
per Common Share, payable September 30, 1997, to shareholders of record as of
the close of business on September 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 periods ended June 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 second quarter 1997, operating income, which excludes net realized gains
(losses) on security sales and one-time items, was $82.8 million, or $1.10 per
share, compared to $78.5 million, or $1.05 per share, last year. The combined
ratio was 93.1, compared to 90.4 for the second quarter 1996. For the six months
ended June 30, 1997, operating income was $161.5 million, or $2.14 per share,
compared to $138.7 million, or $1.83 per share, in 1996. The year-to-date
combined ratio was 92.9, compared to 92.0 last year.
Net premiums written increased 37% over the second quarter 1996 and 33% over the
first six months of 1996, 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 29% for the
quarter and 26% for the first six months. Service revenue increased 7% to $11.1
million for the quarter and 13% to $22.4 million for the first six 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 future assignments and assessments
under state-mandated assigned risk programs, and costs to settle these claims,
increased as a percentage of premiums earned to 72% 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 21% of premiums
earned for the second quarter, compared to 22% in 1996, and 22% for the first
six months of both 1997 and 1996. Service expenses decreased 2% for the quarter
and increased 7% for the first six months. Second quarter 1996 expenses included
costs associated with acquiring a company which provides vehicle inspection
services.
Recurring investment income (interest and dividends) increased 28% for the
quarter and 25% for the first six 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 $29.6 million and $26.3 million for
the quarter and first six months, respectively, compared to $(.2) million and
$4.7 million in 1996. On June 30, 1997, the Company's portfolio had $170.8
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 securities ($3,685.9 million,
or 74.2%, at June 30, 1997, and $3,304.5 million, or 81.2%, at June 30, 1996).
6
<PAGE> 7
Long-term investment-grade fixed-income securities represented $115.2 million,
or 2.2%, and $69.8 million, or 1.7%, of the total investment portfolio at June
30, 1997 and 1996, respectively. Non-investment-grade fixed-maturity securities
were $174.6 million, or 3.6%, in 1997, and $14.6 million, or .4%, 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 2.9 years at June 30,
1997, compared to 2.8 years at June 30, 1996.
Equity investments are comprised of preferred stocks ($384.0 million, or 7.7%,
in 1997 and $298.2 million, or 7.3%, in 1996) and common stocks ($609.8 million,
or 12.3%, in 1997 and $381.9 million, or 9.4%, in 1996). The increase in common
stocks reflects the Company's objective to increase its position in common stock
and similar investments to approximately 15% of the entire portfolio.
Derivative financial instruments are used to manage the risks and enhance the
yields. These financial instruments had a net market value of $.7 million as of
June 30, 1997, compared to $3.4 million as of June 30, 1996.
The weighted average annualized fully taxable equivalent book yield of the
portfolio was 6.7% and 6.6% for the six months ended June 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. For
the six months ended June 30, 1997, operations generated a positive cash flow of
$414.9 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 5. Other Information.
Effective after the close of trading on August 1, 1997,
Progressive was added to the Standard & Poor's 500 Index.
Progressive, which was previously a component of the S&P Mid
Cap 400, will be added to the S&P 500 Insurance
(Property-Casualty) industry group.
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
See exhibit index on page 10.
(b) Reports on Form 8-K during the quarter ended June 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: August 8, 1997 BY: /s/ David M. Schneider
---------------- ---------------------------------------
David M. Schneider
Secretary
Date: August 8, 1997 BY: /s/ Charles B. Chokel
---------------- ---------------------------------------
Charles B. Chokel
Treasurer and Chief Financial Officer
9
<PAGE> 10
EXHIBIT INDEX
-------------
<TABLE>
<CAPTION>
Exhibit No. Form 10-Q
Under Reg. Exhibit
S-K. Item 601 No. Description of Exhibit
------------- ---------- ----------------------
<S> <C> <C> <C>
(11) 11 Computation of Earnings Per Share
(27) 27 Financial Data Schedule
</TABLE>
10
<PAGE> 1
EXHIBIT 11
THE PROGRESSIVE CORPORATION AND SUBSIDIARIES
COMPUTATION OF EARNINGS PER SHARE
(millions - except per share amounts)
(unaudited)
<TABLE>
<CAPTION>
Three Months Six Months
---------------------------------------- ----------------------------------------
Periods Ended June 30, 1997 1996 1997 1996
-------------------- ------------------- -------------------- ------------------
Per Per Per Per
Amount Share Amount Share Amount Share Amount Share
-------------------- ------------------- -------------------- ------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
PRIMARY:
Net income $102.1 $ 78.4 $178.6 $141.8
Less: Preferred stock dividends -- (1.2) -- (3.5)
Excess of preferred stock
liquidation price over
carrying value -- (2.9) -- (2.9)
------------ ---------- ----------- ----------
Income available to common
shareholders $102.1 $1.36 $ 74.3 $1.01 $178.6 $2.39 $135.4 $1.83
==================== =================== ==================== ==================
Average shares outstanding 71.9 71.4 71.8 71.8
Net effect of dilutive stock options 3.1 2.2 3.0 2.3
------------ ---------- ----------- ----------
Total 75.0 73.6 74.8 74.1
============ ========== =========== ==========
FULLY DILUTED:
Net income $102.1 $78.4 $178.6 $141.8
Less: Preferred stock dividends -- (1.2) -- (3.5)
Excess of preferred stock
liquidation price over
carrying value -- (2.9) -- (2.9)
------------ ---------- ----------- ----------
Income available to common
shareholders $102.1 $1.36 $74.3 $1.01 $178.6 $2.37 $135.4 $1.83
==================== =================== ==================== ==================
Average shares outstanding 71.9 71.4 71.8 71.8
Net effect of dilutive stock options 3.4 2.3 3.5 2.3
------------ ---------- ----------- ----------
Total 75.3 73.7 75.3 74.1
============ ========== =========== ==========
</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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-START> JAN-01-1997
<PERIOD-END> JUN-30-1997
<DEBT-HELD-FOR-SALE> 3,335,700
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 993,800
<MORTGAGE> 0
<REAL-ESTATE> 0
<TOTAL-INVEST> 4,969,500
<CASH> 18,600
<RECOVER-REINSURE> 362,100
<DEFERRED-ACQUISITION> 255,900
<TOTAL-ASSETS> 7,138,200
<POLICY-LOSSES> 2,082,000
<UNEARNED-PREMIUMS> 1,863,400
<POLICY-OTHER> 0
<POLICY-HOLDER-FUNDS> 0
<NOTES-PAYABLE> 775,900
<COMMON> 72,000
0
0
<OTHER-SE> 1,830,000
<TOTAL-LIABILITY-AND-EQUITY> 7,138,200
1,904,100
<INVESTMENT-INCOME> 129,300
<INVESTMENT-GAINS> 26,300
<OTHER-INCOME> 22,400
<BENEFITS> 1,360,000
<UNDERWRITING-AMORTIZATION> 276,200
<UNDERWRITING-OTHER> 133,500
<INCOME-PRETAX> 256,900
<INCOME-TAX> 78,300
<INCOME-CONTINUING> 178,600
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 178,600
<EPS-PRIMARY> 2.39
<EPS-DILUTED> 2.37
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
