<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, 2000
-------------------------------------------------
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)
(440) 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, $1.00 par value: 73,274,664 outstanding at July 31, 2000
<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, 2000 1999 % Change 2000 1999 % Change
-------------------------------------------------------------------------------------- -----------------------------------------
(millions - except per share amounts)
<S> <C> <C> <C> <C> <C> <C>
NET PREMIUMS WRITTEN $ 1,674.0 $ 1,608.4 4 $ 3,313.7 $ 3,162.1 5
======================== ========================
REVENUES
Premiums earned $ 1,579.9 $ 1,404.6 12 $ 3,100.9 $ 2,726.7 14
Investment income 94.1 86.0 9 184.8 160.7 15
Net realized gains (losses) on security sales (26.2) 16.7 NM (41.6) 18.7 NM
Service revenues 5.0 12.2 (59) 10.2 23.4 (56)
Other income -- 5.2 NM -- 5.2 NM
------------------------ ------------------------
Total revenues 1,652.8 1,524.7 8 3,254.3 2,934.7 11
------------------------ ------------------------
EXPENSES
Losses and loss adjustment expenses 1,332.1 1,004.7 33 2,653.8 1,918.6 38
Policy acquisition costs 197.2 186.4 6 388.7 361.4 8
Other underwriting expenses 129.4 140.3 (8) 272.4 282.0 (3)
Investment expenses 2.2 2.5 (12) 3.9 4.6 (15)
Service expenses 5.3 10.0 (47) 10.8 20.0 (46)
Interest expense 20.0 20.1 -- 39.9 36.9 8
------------------------ ------------------------
Total expenses 1,686.2 1,364.0 24 3,369.5 2,623.5 28
------------------------ ------------------------
NET INCOME (LOSS)
Income (loss) before income taxes (33.4) 160.7 NM (115.2) 311.2 NM
Provision (benefit) for income taxes (19.3) 48.6 NM (54.5) 93.8 NM
------------------------ ------------------------
Net income (loss) ($14.1) $ 112.1 NM ($60.7) $ 217.4 NM
======================== ========================
COMPUTATION OF EARNINGS PER SHARE
Basic:
Average shares outstanding 73.1 72.9 -- 73.1 72.8 --
======================== ========================
Per share ($.19) $ 1.54 NM ($.83) $ 2.99 NM
======================== ========================
Diluted:
Average shares outstanding 73.1 72.9 -- 73.1 72.8 --
Net effect of dilutive stock options 1.2 1.9 (37) 1.0 1.9 (47)
======================== ========================
Total equivalent shares 74.3 74.8 (1) 74.1 74.7 (1)
======================== ========================
Per share(1) ($.19) $ 1.50 NM ($.83) $ 2.91 NM
======================== ========================
</TABLE>
NM = Not Meaningful
(1)Since the Company reported a net loss for the three months and six months
ended June 30, 2000, the calculated diluted earnings per share was
antidilutive; therefore, basic earnings per share is disclosed.
See notes to consolidated financial statements.
2
<PAGE> 3
The Progressive Corporation and Subsidiaries
CONSOLIDATED BALANCE SHEETS
(unaudited)
<TABLE>
<CAPTION>
June 30, December 31,
------------------------------ -----------------
2000 1999 1999
------------------------------------------------------------------------------------------------------------------------------------
(millions)
ASSETS
<S> <C> <C> <C>
Investments:
Available-for-sale:
Fixed maturities, at market (amortized cost:
$4,609.3, $4,816.9 and $4,650.9) $4,518.6 $4,763.2 $4,532.7
Equity securities, at market
Preferred stocks (cost: $618.1, $393.1 and $425.4) 619.1 389.6 422.4
Common stocks (cost: $1,051.2, $882.9 and $1,127.8) 1,206.8 1,074.2 1,243.6
Short-term investments, at amortized cost
(market: $711.9, $153.1 and $229.0) 711.9 153.1 229.0
------------------------------ -----------------
Total investments 7,056.4 6,380.1 6,427.7
Cash 8.9 20.8 14.2
Accrued investment income 48.6 54.7 54.0
Premiums receivable, net of allowance for doubtful accounts of
$39.8, $34.7 and $42.9 1,898.0 1,766.5 1,760.8
Reinsurance recoverables 247.3 270.4 254.7
Prepaid reinsurance premiums 99.4 81.4 88.3
Deferred acquisition costs 361.4 355.4 343.4
Income taxes 309.3 203.6 273.7
Property and equipment, net of accumulated depreciation of
$277.2, $216.8 and $243.8 479.4 420.1 447.7
Other assets 44.1 57.3 40.2
------------------------------ -----------------
Total assets $10,552.8 $9,610.3 $9,704.7
============================== =================
LIABILITIES AND SHAREHOLDERS' EQUITY
Unearned premiums $3,005.3 $2,768.8 $2,781.4
Loss and loss adjustment expense reserves 2,773.1 2,242.0 2,416.2
Policy cancellation reserve 15.5 20.1 17.8
Accounts payable and accrued expenses 979.7 775.5 687.9
Debt 1,048.9 1,040.6 1,048.6
------------------------------ -----------------
Total liabilities 7,822.5 6,847.0 6,951.9
------------------------------ -----------------
Shareholders' equity:
Common Shares, $1.00 par value
(treasury shares of 9.9, 10.2 and 10.0) 73.2 72.9 73.1
Paid-in capital 497.6 471.2 481.6
Accumulated comprehensive income:
Net unrealized appreciation (depreciation) on investment securities 42.9 87.2 (3.4)
Other (9.0) (9.0) (9.0)
Retained earnings 2,125.6 2,141.0 2,210.5
------------------------------ -----------------
Total shareholders' equity 2,730.3 2,763.3 2,752.8
------------------------------ -----------------
Total liabilities and shareholders' equity $10,552.8 $9,610.3 $9,704.7
============================== =================
</TABLE>
See notes to consolidated financial statements.
3
<PAGE> 4
The Progressive Corporation and Subsidiaries
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<TABLE>
<CAPTION>
Six Months Ended June 30, 2000 1999
----------------------------------------------------------------------------------------------------
(millions)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) ($ 60.7) $ 217.4
Adjustments to reconcile net income (loss) to net cash provided
by operating activities:
Depreciation and amortization 37.8 30.5
Net realized (gains) losses on security sales 41.6 (18.7)
Gain on sale of property and equipment -- (5.2)
Changes in:
Unearned premiums 223.9 439.1
Loss and loss adjustment expense reserves 356.9 53.4
Accounts payable and accrued expenses 30.1 128.5
Policy cancellation reserve (2.3) (9.0)
Prepaid reinsurance premiums (11.1) (3.7)
Reinsurance recoverables 7.4 10.6
Premiums receivable (137.2) (310.3)
Deferred acquisition costs (18.0) (56.3)
Income taxes (60.6) 3.9
Other, net 4.2 (.3)
-------------------------
Net cash provided by operating activities 412.0 479.9
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases:
Available-for-sale: fixed maturities (1,676.1) (4,199.5)
equity securities (510.7) (591.0)
Sales:
Available-for-sale: fixed maturities 1,469.4 3,354.8
equity securities 361.6 231.2
Maturities, paydowns, calls and other:
Available-for-sale: fixed maturities 206.9 169.5
equity securities 27.1 2.4
Net (purchases) sales of short-term investments (482.9) 296.9
Payable on securities 261.7 53.1
Purchases of property and equipment (66.9) (78.8)
Sale of property and equipment -- 12.1
Purchase of subsidiary, net of cash acquired -- (5.7)
-------------------------
Net cash used in investing activities (409.9) (755.0)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from exercise of stock options 10.3 8.7
Tax benefit from exercise of stock options 6.8 14.1
Proceeds from debt -- 293.7
Payments on debt -- (30.0)
Dividends paid to shareholders (9.5) (9.4)
Acquisition of treasury shares (16.1) (.3)
Other, net 1.1 .5
-------------------------
Net cash provided by (used in) financing activities (7.4) 277.3
-------------------------
Increase (decrease) in cash (5.3) 2.2
Cash, January 1 14.2 18.6
-------------------------
Cash, June 30 $ 8.9 $ 20.8
=========================
</TABLE>
See notes to consolidated financial statements.
4
<PAGE> 5
The Progressive Corporation and Subsidiaries
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
NOTE 1 Basis of Presentation -- These financial statements and the
notes thereto should be read in conjunction with the Company's audited financial
statements and accompanying notes included in its Annual Report on Form 10-K for
the year ended December 31, 1999.
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 June 30, 2000, are not necessarily indicative of the results expected for
the full year.
NOTE 2 Supplemental Cash Flow Information -- The Company paid income
taxes of $0 and $75.9 million for the six months ended June 30, 2000 and 1999,
respectively. Total interest paid was $40.7 million and $31.9 million for the
six months ended June 30, 2000 and 1999, respectively.
NOTE 3 Debt -- Debt at June 30 consisted of:
<TABLE>
<CAPTION>
2000 1999
--------------------------------- --------------------------------
Market Market
Cost Value Cost Value
-------------- --------------- -------------- -------------
<S> <C> <C> <C> <C>
6 5/8% Senior Notes $ 293.8 $238.9 $ 293.7 $ 272.4
7.30% Notes 99.7 97.0 99.7 100.8
6.60% Notes 199.3 189.4 199.1 198.5
7% Notes 148.6 133.9 148.5 146.3
10% Notes 149.9 152.0 149.8 158.2
10 1/8% Subordinated Notes 149.9 152.1 149.8 158.5
Other Debt 7.7 7.7 -- --
-------------- --------------- -------------- --------------
$1,048.9 $971.0 $1,040.6 $1,034.7
============== =============== ============== ==============
</TABLE>
NOTE 4 Comprehensive Income/Loss -- Total comprehensive income (loss)
was $.3 million and $76.5 million for the quarters ended June 30, 2000 and 1999,
respectively, and $(14.4) million and $191.9 million for the six months ended
June 30, 2000 and 1999, respectively.
NOTE 5 Dividends -- On June 30, 2000, the Company paid a quarterly
dividend of $.065 per Common Share to shareholders of record as of the close of
business on June 9, 2000. The dividend was declared by the Board of Directors on
April 21, 2000.
5
<PAGE> 6
NOTE 6 Segment Information -- The Company's Personal Lines business
units write insurance for private passenger automobiles and recreation vehicles.
The other lines of business include writing insurance for small fleets of
commercial vehicles, lenders' collateral protection and directors' and officers'
liability, and providing related services. All revenues are generated from
external customers.
<TABLE>
<CAPTION>
Periods ended June 30,
(millions)
Three Months Six Months
---------------------------------------------- ------------------------------------------------
2000 1999 2000 1999
--------------------- ------------------------ ------------------------ -----------------------
Pretax Pretax Pretax Pretax
Profit Profit Profit Profit
Revenues (Loss) Revenues (Loss) Revenues (Loss) Revenues (Loss)
--------- ---------- ----------- ----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Personal Lines $1,464.2 ($82.6) $1,310.0 $59.3 $2,878.2 ($225.6) $2,537.8 $141.5
Other 120.7 3.5 112.0 21.3 232.9 11.0 217.5 31.8
Investments(1) 67.9 65.7 102.7 100.2 143.2 139.3 179.4 174.8
Interest Expense -- (20.0) -- (20.1) -- (39.9) -- (36.9)
--------- ---------- ----------- ----------- ----------- ----------- ----------- -----------
$1,652.8 ($ 33.4) $1,524.7 $160.7 $3,254.3 ($115.2) $2,934.7 $311.2
========= ========== =========== =========== =========== =========== =========== ===========
</TABLE>
1 Revenues represent recurring investment income and net realized gains on
security sales; pretax profit is net of investment expenses.
NOTE 7 Reclassifications -- Certain amounts in the financial statements
for prior periods were reclassified to conform with the 2000 presentation.
6
<PAGE> 7
ITEM 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
RESULTS OF OPERATIONS
On a companywide basis, for the second quarter 2000, operating income, which
excludes net realized gains and losses on security sales and nonrecurring items,
was $4.0 million, or $.06 per share, compared to $98.5 million, or $1.32 per
share, last year. Nonrecurring items in 2000 consist of $1.7 million, or $.02
per share, of severance costs primarily incurred due to the restructuring of the
Company's organization at the general manager level. Nonrecurring items last
year consisted of a $5.2 million, or $.05 per share, gain from the sale of the
corporate aircraft and a $1.2 million, or $.01 per share, reserve for the
wind-down of the Company's Canadian operations. The combined ratio was 105.0 for
the second quarter 2000, compared to 94.8 for the second quarter 1999. Second
quarter results include .7 points of catastrophe losses. For the six months
ended June 30, 2000, operating loss was $32.6 million, or $.45 per share,
compared to operating income of $202.5 million, or $2.71 per share, in 1999. The
year-to-date combined ratio was 106.9, compared to 94.0 last year. The
deterioration in results was due to several factors as discussed below.
The Company's Personal Lines business units write insurance for private
passenger automobiles and recreation vehicles and represent 92% of the Company's
total year-to-date net premiums written. The Personal Lines business is
generated either by an agent or written directly by the Company. The Agent
channel includes business written by our network of 30,000 Independent Insurance
Agencies and through Strategic Alliance business relationships (other insurance
companies, financial institutions, employers and national brokerage agencies).
Direct business includes business written through 1-800-AUTO- PRO(R), the
Internet and the Strategic Alliances business unit on behalf of affinity groups.
In addition to its Personal Lines business, the Company's other lines of
business include writing insurance for small fleets of commercial vehicles,
lenders' collateral protection, and directors' and officers' liability, and
providing related services.
7
<PAGE> 8
Underwriting results for the Company's Personal Lines, including its channel
components, and the other lines of business for the periods ended June 30, were
(dollars in millions):
<TABLE>
<CAPTION>
------------------------------------- -------------------------------------
THREE MONTHS SIX MONTHS
------------------------------------- -------------------------------------
2000 1999 Change 2000 1999 Change
---------- --------- ----------- --------- --------- ----------
NET PREMIUMS WRITTEN
<S> <C> <C> <C> <C> <C> <C>
Personal Lines - Agency $1,192.5 $1,275.6 (7)% $2,384.4 $2,521.3 (5)%
Personal Lines - Direct 333.6 221.1 51% 658.3 426.6 54%
---------- --------- --------- ---------
Total Personal Lines 1,526.1 1,496.7 2% 3,042.7 2,947.9 3%
Other Lines 147.9 111.7 32% 271.0 214.2 27%
---------- --------- --------- ---------
Companywide $1,674.0 $1,608.4 4% $3,313.7 $3,162.1 5%
========== ========= ========= =========
NET PREMIUMS EARNED
Personal Lines - Agency $1,171.5 $1,138.8 3% $2,327.9 $2,218.9 5%
Personal Lines - Direct 292.7 171.2 71% 550.3 318.9 73%
---------- --------- --------- ---------
Total Personal Lines 1,464.2 1,310.0 12% 2,878.2 2,537.8 13%
Other Lines 115.7 94.6 22% 222.7 188.9 18%
---------- --------- --------- ---------
Companywide $1,579.9 $1,404.6 12% $3,100.9 $2,726.7 14%
========== ========= ========= =========
STANDARD/PREFERRED SALES AS
A % OF PERSONAL LINES NPW 52% 45% -- 52% 43% --
========== ========= ========= =========
INTERNET SALES AS % OF DIRECT
BUSINESS NPW 14% 7% -- 13% 6% --
========== ========= ========= =========
PERSONAL LINES - AGENCY CR
Loss & loss adjustment expense ratio 86.1 72.7 (13.4) pts. 87.6 71.2 (16.4) pts.
Underwriting expense ratio 18.4 20.4 2.0 pts. 19.2 20.9 1.7 pts.
---------- --------- --------- ---------
104.5 93.1 (11.4) pts. 106.8 92.1 (14.7) pts.
========== ========= ========= =========
PERSONAL LINES - DIRECT CR
Loss & loss adjustment expense ratio 81.4 71.0 (10.4) pts. 82.4 70.8 (11.6) pts.
Underwriting expense ratio 28.8 39.9 11.1 pts. 29.8 39.7 9.9 pts.
---------- --------- --------- ---------
110.2 110.9 .7 pts. 112.2 110.5 (1.7) pts.
========== ========= ========= =========
PERSONAL LINES - TOTAL CR
Loss & loss adjustment expense ratio 85.1 72.5 (12.6) pts. 86.6 71.1 (15.5) pts.
Underwriting expense ratio 20.5 23.0 2.5 pts. 21.2 23.3 2.1 pts.
---------- --------- --------- ---------
105.6 95.5 (10.1) pts. 107.8 94.4 (13.4) pts.
========== ========= ========= =========
OTHER LINES - CR
Loss & loss adjustment expense ratio 73.3 58.2 (15.1) pts. 71.9 60.0 (11.9) pts.
Underwriting expense ratio 23.4 27.0 3.6 pts. 22.9 27.7 4.8 pts.
---------- --------- --------- ---------
96.7 85.2 (11.5) pts. 94.8 87.7 (7.1) pts.
========== ========= ========= =========
COMPANYWIDE GAAP CR
Loss & loss adjustment expense ratio 84.3 71.5 (12.8) pts. 85.6 70.4 (15.2) pts.
Underwriting expense ratio 20.7 23.3 2.6 pts. 21.3 23.6 2.3 pts.
---------- --------- --------- ---------
105.0 94.8 (10.2) pts. 106.9 94.0 (12.9) pts.
========== ========= ======== ========
COMPANYWIDE ACCIDENT YEAR
Loss & loss adjustment expense ratio 84.0 73.8 (10.2) pts. 81.9 72.5 (9.4) pts.
========== ========= ======== ========
</TABLE>
8
<PAGE> 9
The Agent channel net premiums written decreased primarily as a result of the
rate increases filed by the Company in almost every state during the last 12
months. The Company's Direct channel net written premiums increased, albeit at a
decreased rate. The conversion rate on direct quotes has declined very little,
despite the rate increases taken. Brand awareness appears to have produced a
relatively stable conversion rate. In addition, the Company continues to see an
increase in the number of quotes generated via the Internet. Premiums earned are
a function of the premiums written in the current and prior periods.
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 for both the second
quarter and first six months of 2000 in the Agent and Direct channel. These
percentage increases were driven primarily by rate inadequacy, trend and loss
reserves.
It appears that many of the rate increases taken by the Company during the last
12 months were insufficient. In many states, the rate increases raised new
business rate levels more than renewal rate levels, leaving renewal rates
relatively inadequate, thus requiring the Company to take further rate increases
in a number of states. As noted in the following table, 61% of auto policies
written in June 2000 are annual policies and, therefore, the Company will have
rate inadequacy on future earned premium in some states for up to an additional
six to nine months. The Company has plans currently in place to ensure that a
majority of its new and renewal policies have six-month terms.
<TABLE>
<CAPTION>
% OF NEW AUTO POLICIES WRITTEN IN JUNE WHICH ARE JUNE 2000 JUNE 1999
ANNUAL
<S> <C> <C>
Agency 58% 66%
Direct 68% 81%
Total 61% 69%
</TABLE>
The second factor contributing to the increase in claims costs is the increase
in severity trend that the Company is experiencing. Based on industry data from
the National Association of Independent Insurers and review of other insurance
company filings, it appears that the escalation in loss costs this year is
impacting many other carriers as well. Although the Company's loss costs are
increasing at a slower rate than earlier this year, the Company does not see
these costs leveling off in the near future.
The third factor facing the Company is loss reserving. During the second quarter
2000, the Company experienced $5.3 million, or .3 points, of adverse loss
reserve development relating to prior accidents years, compared to $31.9
million, or 2.3 points, of favorable development in the second quarter 1999. For
the six months ended June 30, 2000, the Company experienced $113.1 million, or
3.7 points, of adverse loss reserve development relating to prior accident
years, compared to $58.1 million, or 2.1 points, of favorable development for
the same period last year. The Company conducts extensive quarterly reviews to
help ensure that the Company is meeting its objective of maintaining adequate
loss reserves.
Policy acquisition costs and other underwriting expenses were 20.7% and 23.3% of
premiums earned for the second quarter 2000 and 1999, respectively, and 21.3%
for the first six months of 2000, compared to 23.6% in 1999. The decrease in the
Agent channel expenses was due to lower
9
<PAGE> 10
gainsharing costs and lower commission expenses as a result of our mix of
business shifting toward more renewals, which has lower commission expenses
associated with it. For the Direct business, the decrease was driven by higher
productivity in our Direct sales call centers, more efficient purchases of
television media and a greater percentage of renewal business, which has lower
expenses associated with it.
Recurring investment income (interest and dividends) increased 9% for the
quarter and 15% for the first six months, primarily reflecting an increase in
the average investment portfolio. The weighted average annualized fully taxable
equivalent book yield of the portfolio was 6.4% for both of the quarters ended
June 30, 2000 and 1999 and 6.3% for the first six months of both 2000 and 1999.
The Company had net realized losses on security sales of $26.2 million for the
second quarter and $41.6 million for the first six months of 2000, compared to
net realized gains of $16.7 million and $18.7 million, respectively, last year.
During the second quarter 2000, the Company wrote down $9.8 million in one
security that was determined to have an other than temporary decline in market
value. At June 30, 2000, the Company's portfolio had $65.9 million in total
unrealized gains, compared to $5.4 million in unrealized losses at December 31,
1999.
The Company continues to invest in fixed maturity, equity and short-term
securities. The market value of the portfolio is as follows (dollars in
millions):
<TABLE>
<CAPTION>
----------------------------------- --------------------------------
June 30, 2000 June 30, 1999
----------------------------------- --------------------------------
<S> <C> <C> <C> <C>
Fixed Maturities:
Investment-Grade:
Short/Intermediate Term $4,766.6 67.5% $4,302.1 67.5%
Long Term 245.7 3.5% 409.2 6.4%
Non-Investment-Grade 218.2 3.1% 205.0 3.2%
Equity Securities:
Common Stocks 1,206.8 17.1% 1,074.2 16.8%
Preferred Stocks 619.1 8.8% 389.6 6.1%
------------------- --------------- --------------- ---------------
Total Portfolio $7,056.4 100.0% $6,380.1 100.0%
=================== =============== =============== ===============
</TABLE>
The non-investment-grade fixed-maturity securities 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, 2000,
compared to 3.2 years at June 30, 1999.
The majority of the common stock portfolio is invested in domestic equities
traded on nationally recognized securities exchanges. Common stock investments
also include partnership investments ($121.1 million in 2000, compared to $85.2
million in 1999), equity investments in term trust certificates, the common
shares of closed-end bond funds, which have the risk/reward characteristics of
the underlying bonds ($237.0 million in 2000, compared to $181.0 million in
1999), and foreign equities ($0 in 2000, compared to $74.9 million in 1999).
10
<PAGE> 11
Derivative instruments held or issued for purposes "other than trading" are used
to manage the risks and enhance the returns of the available-for-sale portfolio.
At June 30, 2000, the Company had no open other-than-trading derivative
instruments, compared to other-than-trading derivative instruments with net
market values of $(2.9) million (notional value of $136.8 million) at June 30,
1999.
Derivative instruments are also used for trading purposes. At June 30, 2000, the
Company had a long trading position in futures with a market value of $0 million
(notional value of $100 million) offset by comparably matched short futures
position. In addition, the Company had short trading positions in forwards and
puts with net market values of $(1.4) million (notional values of $648 million).
At June 30, 1999, the Company had short trading positions in calls with a market
value of $0 million (notional value of $9.5 million).
As of June 30, 2000, the Company had open investment funding commitments of
$30.9 million.
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, 2000, operations generated a positive cash flow of
$412.0 million. During the first six months of 2000, 272,500 Common Shares were
repurchased at an average cost of $58.09 per share. In addition, in connection
with the share repurchase program, the Company sold put options during the first
six months and received $1.1 million in net proceeds.
The Company has substantial capital resources and believes it has sufficient
borrowing capacity and other capital resources to support current and
anticipated growth.
The Company is currently constructing a corporate office complex in Mayfield
Village, Ohio at an estimated cost of $130.7 million, of which $87.4 million has
been paid through June 30, 2000, including $14.4 million paid in the second
quarter 2000. The first building was completed in May 1999. The next two
buildings were completed in the first quarter of 2000. The parking garage and
fourth building are scheduled to be completed in October 2000. The fifth
building is scheduled to be completed in the first quarter of 2001. The project
is being funded through operating cash flows.
SAFE HARBOR STATEMENT UNDER THE PRIVATE SECURITIES LITIGATION REFORM ACT OF
1995: CERTAIN MATTERS IN THIS QUARTERLY REPORT ON FORM 10-Q MAY BE CONSIDERED
FORWARD-LOOKING STATEMENTS THAT ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES
THAT COULD CAUSE ACTUAL EVENTS AND RESULTS TO DIFFER MATERIALLY FROM THOSE
DISCUSSED HEREIN. THESE RISKS AND UNCERTAINTIES INCLUDE, WITHOUT LIMITATION,
UNCERTAINTIES RELATED TO ESTIMATES, ASSUMPTIONS AND PROJECTIONS GENERALLY;
CHANGES IN ECONOMIC CONDITIONS (INCLUDING CHANGES IN INTEREST RATES AND
FINANCIAL MARKETS); PRICING COMPETITION AND OTHER INITIATIVES BY COMPETITORS;
LEGISLATIVE AND REGULATORY DEVELOPMENTS; WEATHER CONDITIONS (INCLUDING THE
SEVERITY AND FREQUENCY OF STORMS, HURRICANES, SNOWFALLS, HAIL AND WINTER
CONDITIONS); CHANGES IN DRIVING PATTERNS AND LOSS TRENDS; COURT DECISIONS AND
TRENDS IN LITIGATION AND HEALTH CARE COSTS; AND OTHER MATTERS DESCRIBED FROM
TIME TO TIME BY THE COMPANY IN OTHER DOCUMENTS FILED WITH THE UNITED STATES
SECURITIES AND EXCHANGE COMMISSION. THE COMPANY ASSUMES NO OBLIGATION TO UPDATE
THE INFORMATION IN THIS QUARTERLY REPORT.
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ITEM 3. Quantitative and Qualitative Disclosures About Market Risk.
At June 30, 2000, the duration of the financial instruments subject to interest
rate risk was 2.9 years, compared to 3.0 years at December 31, 1999. At June 30,
2000, the weighted average beta of the equity portfolio was .98, compared to .89
at December 31, 1999. Although components of the portfolio have changed, no
material changes have occurred in the total market risk since reported in the
Annual Report on Form 10-K for the year ended December 31, 1999.
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PART II - OTHER INFORMATION
---------------------------
ITEM 6. Exhibits and Reports on Form 8-K.
(a) Exhibits:
See exhibit index on page 15.
(b) Reports on Form 8-K during the quarter ended
June 30, 2000: None
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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 14, 2000 BY: /s/ W. Thomas Forrester
----------------- ----------------------------------------
W. Thomas Forrester
Treasurer and Chief Financial Officer
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EXHIBIT INDEX
-------------
Exhibit No. Form 10-Q
Under Reg. Exhibit
S-K. Item 601 No. Description of Exhibit
------------- ---------- ----------------------
(27) 27 Financial Data Schedule for the six
months ended June 30, 2000
15
